Pay Prospects For 2023 - Updated Guidance from Stratis
As we head to year end 2022, Stratis Consulting has received requests from clients for our updated assessment on likely developments in pay for 2023. While much uncertainty remains about the precise economic conditions that will obtain in 2023 we are setting out our updated guidance as we approach year end.
The ongoing tightness in the labour market, the expectations for continued economic growth, albeit at a lower level than previously projected, the impact of the war in Ukraine, the continuing effects of inflation and the specific market conditions and business challenges faced by individual employers and sectors will combine to inform pay prospects for 2023.
Labour Market Tightness Expected To Continue
Practically every employer can bear witness to the tightness in our labour market. The rate of unemployment at 4.4% in October (lowest level since 2005) speaks to the ongoing pressures being felt to attract and retain staff. On the upside we now have a labour force of 2.67m with some 2.55 million people in employment in Q3,2022, which is an increase of 83,100 jobs or 3.4% over Q3, 2021 and is almost 200,000 more than in 2019.
Most analysts are predicting that the annual average unemployment rate will stay under 5% for the year as a whole, while job vacancy rates will remain high despite a moderation in labour demand over more recent months. In looking at key cohorts, the numbers show continuing improvements in youth employment, female employment and indeed older workers remaining employed:
The female unemployment rate in October was 4.6% (unchanged from September).
In looking at youth unemployment, for persons aged 15-24 years, the rate is 12.0% slightly down from 12.2 % in September 2022.
Finally, for those aged 25-74 years of age the rate is 3.4%.
The tightening of the labour market has been compounded by the departure of many non-Irish nationals during Covid. Their return, amongst others, as part of Irelands ‘brain gain’ in large numbers is being severely impacted by cost of living, housing and for some, childcare costs. It seems that a lack of labour availability will be with us for some time and is reflective of the experience of many other countries as they emerge from the pandemic.
Inflation Remains a Moving Target
The Department of Finance outlook for inflation is for an average of 8.5% for 2022, peaking at 10.4% at the end of this year. It forecasts that inflation will remain high into 2023, averaging 7.1% and returning to more normal levels of c2.4% in 2024.
The ESRI Quarterly Economic Commentary (Autumn 2022) says “Inflationary pressures are however, set to continue with some moderation in the inflation rate expected in 2023. We now forecast inflation of 8.1% in 2022 and 6.8% in 2023.”
The latest Central Bank Quarterly Bulletin (Q4, 2022) is predicting an inflation rate of 6.3% for 2023 moderating to 2.8% in 2024.
Meanwhile the IMF has revised up its 2022 forecasts for several countries, including Ireland, and has forecast that inflation in Ireland will be an average of 8.4% for 2022 moderating to 6.5% in 2023 with unemployment staying near historic lows of below 5%. The latest EU Commission forecasts are for inflation in Ireland to peak at 8.3% this year and to remain high at 6.0% in 2023 before moderating to 2.8% in 2024. Meanwhile, Ibec has forecast an annual inflation rate of 8.1% for 2023 easing to 5.0% for 2024.
The annual inflation rate in Ireland increased to 9.2% in October, up from 8.2% in September and 8.7% in August having previously peaked at 9.1% in June 2022.
Predicting the expected level of inflation is a real challenge, but clearly inflation will be higher than expected, for longer than expected, and will continue to feed into pay expectations for 2023.
Pay 2022 – We Have Avoided A Pay/Inflation Spiral
As the rate of inflation accelerated in Q1 2022 pressure on the 2.5% ‘norm’ was evident with pay deals which arrived through collective bargaining quickly shifting into the 3.0-3.5% arena (annualised cost). The further acceleration in inflation in Q2 has led to new pay settlements in H2, 2022 through collective bargaining trending towards the 3.5-4% arena (annualised cost).
Some employers are making pay adjustments to attract and retain staff, particularly if they are operating marginally above the Minimum Wage or even the Living Wage. The Minimum Wage will increase by c 7.6% to €11.30 per hour from the 1st January 2023 and Government is to phase in the Living Wage over four years between 2023 and 2026 when it will become mandatory. The indicative National Living Wage for 2023 will be €13.10 per hour (60% of median earnings).
In summary, pay settlements in the private sector have been increasing over the course of 2022. Settlements in H1 which were in the 2.5-3.5% range have moved into the 3.5-4% range over H2. Despite this gradual increase, the general range of settlements remain well short of the predicted inflation rate for 2022 as a whole.
Pay Prospects For 2023
While employers have not generally been pressurised to match inflation in 2022, we would expect that this pressure will intensify as we move into 2023. We may see some outlier pay settlements at higher levels if inflation remains as high as is projected. We would expect trade unions to seek greater inflation proofing into 2023 as one of their core tenets is to protect the living standards of their members.
At Stratis, we anticipate that likely developments on pay in the private sector for 2023 will include:
1. The general level of increases is less likely to be concentrated around a norm compared to recent years and will more likely be within a wider range of c 3.0%-4.5.%, with sector variations, before moderating in 2024. Some employers who continue to face competitiveness challenges, across certain domestic sectors, may be faced with an inability to pay any wage increase.
2. Pay increases may be tiered to earnings to address the greater inflation impact for lower paid categories, e.g. X% on first 30,000, Y% on 30,001 – 50,000, Z% on > 50,001.
3. Pay increases may also be expressed in monetary amounts to provide higher increases to lower paid workers while ‘hard to fill’ roles are more likely to merit ‘market’ reviews as part of overall pay determination.
4. Lump sum or non-consolidated payments may be used to avoid embedding or consolidating pay increases. (This may include recourse to the higher limits to €1000 now available under the Small Benefits Exemption scheme).
5. Some employers may make unilateral ‘economic adjustments’ either in the form of once off lump sum payments or ongoing increases in part recognition of the ‘cost of living’ issues for workers.
6. A higher incidence of review clauses based on what happens to inflation in 2023/24.
7. Pay outcomes may only be sustainable for an employer where they are accompanied with suitable changes in work practices and/or improvements in labour productivity to justify those outcomes. These may be above and beyond commitments to ‘normal ongoing change’.
8. Government will again face pressure to provide further supports and reliefs to workers into 2023 to alleviate pressure on employers to match ‘cost of living’.
9. Employers who are looking to conclude pay deals for 2023 and 2024 will need to ensure that the expected moderation of inflation is taken fully into account.
Employers will have to carefully reflect on their pay positioning for 2023. This will be based on a range of factors including profitability, the impact on local site or business competitiveness, the capacity to pass on cost increases in the marketplace, external and internal equity issues, the capacity to attract and retain staff, pay developments generally in the sector, regionally and nationally, Labour Court Recommendations on pay and finally the general level of settlements within other key EU Member States.
This may require a level of agility in the normal timing of final decisions on pay/reward strategies to deliver sustainable outcomes and to ensure that all factors are fully captured. We again encourage employers to be mindful of the wider impact of decisions on pay to avoid creating a headline increase that could be used against other employers.
Organisations must also ensure that communications and feedback processes are effective to ensure there is a full understanding of both the concerns of staff and the rationale for any proposed wage increases by management.
If you would like to talk to us about any of the above issues, please get in touch with us or any of our Partners.
Brendan McGinty | Managing Partner and Liam Doherty PhD | Senior Partner
‘Strategic Employment Relations’
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Disclaimer: The information in this article is for general guidance only and does not constitute legal or specific case advice. The answers to specific situations will vary depending on the circumstances of each case. This is not a substitute for specific professional advice relevant to individual circumstances facing your business.