Irish pay picking up as labour market tightens

It may come as a surprise to many but according to the Department of Finance the Irish economy is operating well above capacity. The economy’s potential output is determined by the available labour force and the productivity of that labour but output in the economy can be below that potential (a negative output gap, which can be large in a recession) or above it ( a positive output gap, which will lead to inflationary pressures ). The output gap is not observable and estimates can vary widely, particularly for Ireland given that migration has such a significant impact on the labour force, but the official view , from Finance, is that the gap turned positive in 2014 and rose to 2.3% in 2015 with a further increase forecast  in 2016, to 2.5%.

The corollary is that unemployment is now deemed to be below the rate consistent with stable inflation, again not a view one often hears articulated from official circles; that  unemployment rate ,of 10.3%, compares with the latest  actual reading of 8.9%. Consumer prices are flat and Ireland’s Balance of Payments position is not deteriorating, neither of which is consistent with a large  positive output gap, but the tightening of the labour market is beginning to have an impact on pay pressures in the economy.

The CSO had just published data on average weekly earnings, showing an annual increase of 2.7% in the third quarter and a more rapid increase of 3.6% for the private sector. The quarterly figures can be volatile but the average rise year to date is also strongly positive, supporting the view that labour is in higher demand , with a resultant upward pressure on earnings as the pool of unemployed workers shrinks.

That demand/ supply balance differs across industries of course and as a result there is a wide variation in earnings growth across sectors. Pay is rising very strongly in some industries, including Transport (5.6%), Information and Communication (4.6%), Administration (7.6%) and Finance (4.0%), while in others the increase is modest , such as Hotels and restaurants (1.9%) and Manufacturing (0.6%).  A  few are still experiencing falling pay, including Construction (-1.2%) although that sector did experience strong earnings growth in the early years of the recovery.

Price inflation is around zero so the pick up in earnings equates to  a strong rise in real incomes, which in turn is likely to support household spending. The consensus forecast envisages further strong employment growth over the next few years and a concomitant fall in unemployment. It will be interesting to see the kind of pay growth that results  as a feature of labour markets elsewhere , such as the UK and the US,  is that falling unemployment rates have been associated with unusually weak wage growth  in this recovery.

Irish wages reflect market economy at work

There are two official sources of information on Irish wages and salaries, both published by the CSO.  One is an aggregate figure for the total paid out to employees and is published annually as part of the National Accounts . That series shows a modest increase in average pay over the past few years ( dividing total pay by annual employment ) which is at variance with the other data source,  a quarterly survey of employers across 13 industry sectors, which is also used to calculate total labour costs i.e. adding items such as employers’ PRSI.  The quarterly figures are also used to compile an annual data set and the CSO recently released the 2014 results.

Average  earnings came in at €35,768 per annum , marginally (0.2%) down on the previous year which in turn had seen another modest fall of 0.7%.  Pay peaked in 2009 at over €36,800 so the past five years has seen a fall in excess of €1,000  or 3%. Remember this is gross pay and takes no account of changes in tax and PRSI, and the average tax rate has risen over that period. Consumer prices are also higher, by 4%, so real gross pay has  fallen by almost 7% with a larger fall evident in real take-home pay.

The average  earnings figure for the whole economy masks  divergence across sectors, as one might imagine in a market economy with no central bargaining mechanism. Earnings in industry, for example, rose by 3.6% last year and continued to rise through the recession, with the result  that pay in that sector is now 5.7% above the 2009 figure. Pay in Information and Communication has risen  at an even faster pace over the past five years, by 10.7%, with the financial sector also seeing a strong increase of 8.3%, although that was strongly influenced by a 4% rise in 2014. Employees in the retail sector have also experienced a rise in gross earnings since 2009, of 4.8%.  Pay is down across all other areas  of the private sector, however,  and the public sector has seen notable  falls, including 11.5% in Health, 10.6% in Education and 7.3% in Public Administration.

The 2016 Budget may deliver an increase in public sector pay but the general pick up in domestic economic  activity since 2013  is  already having a discernible impact on private sector earnings. Construction output has rebounded  and 2014 saw a 4.6% increase in average pay in the sector, following a  2.1% rise in 2013. Similarly, the upturn in tourism is beginning to benefit employees in the Food and Accommodation sector, with pay there rising by 3.4% last year. Indeed, total pay in the private sector as a whole rose by 0.6% in the year to the first quarter of 2015 (   one should note that the quarterly data is prone to substantial revisions) and the consensus view is that the next few years is likely to see average earnings on a rising trend given the pattern of employment growth and the steady decline in the unemployment rate, which is now under 10% from a high of over 15%. Some sectors are likely to do better than others, as is inevitable in  a market economy with a  flexible labour market, although  the  recent experience of the US and the UK  suggests that  the pace of growth in average pay is  likely to be  subdued by historical standards.