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Central Bank predicting boon for workers as wage rises catch up with inflation

Regulator is forecasting that real wages for the average employee will rise by almost 9 per cent over the next three years

What’s different now is that nominal pay growth is coinciding with a softer inflation outlook

Eoin Burke-Kennedy's face
Eoin Burke-Kennedy
Tue Mar 12 2024 - 17:07

What is the Central Bank saying about wages?

In a good news story for workers, the Central Bank is predicting that real wages for the average employee here will rise by almost 9 per cent over the next three years.

The word “real” is important. For the past two years, nominal wage increases have been cancelled out by inflation. In other words, while salaries have been growing, the purchasing power of workers has been eroded by higher prices, making them worse off in real terms.

That’s about to change as we move into a period of what the Central Bank calls “real wage catch-up”. In its latest quarterly bulletin, the bank predicts “compensation per employee” will increase annually by an average of 2.9 per cent in real terms between 2024 and 2026. That’s an 8.7 per cent increase over three years.

The “compensation of employees” measure is made up of gross wages before tax plus employer contributions such as Pay Related Social Insurance (PRSI) and employee pension contributions. It usually increases because the number of people working increases or because those who are working are paid more on average.

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[ Workers in Ireland in line for biggest pay hike in a decade, Central Bank says ]

What’s driving the increase?

Average wages across the economy have been rising at around 3 to 4 per cent per annum and are expected to continue to rise with the labour market remaining tight.

What’s different now is that pay growth is coinciding with a softer inflation outlook. Average “compensation per employee” is forecast to rise (in nominal terms) by 5.3 per cent, 4.6 per cent and 4.1 per cent in 2024, 2025 and 2026 while inflation is projected to fall to 2 per cent this year, 1.8 per cent next year and 1.4 per cent in 2026.

The gap between those two sets of figures is the real boost to wages and living standards. The Central Bank says its projections are informed by a number of developments.

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“These include some expected real wage catch-up following recent declines in real wages due to high inflation; the effects of the public sector pay agreement and minimum wage adjustments,” it says.

Will certain sectors benefit more than others?

The measure the Central Bank uses as a proxy for wages (compensation per employee) is an average figure compiled by adding up all the wages paid by employers and dividing by the number of workers so it doesn’t specify which sectors or which employees are likely to benefit the most.

In theory some workers might see bigger wage hikes while others might see little or no change in their salaries. “Wage growth typically tends to be strongest in sectors experiencing the strongest levels of labour demand and highest vacancy rates,” the Central Bank said.

In recent quarters, the sectors with the strongest wage growth, according to the Central Statistics Office’s latest earnings data, have been administration and support services; accommodation and food services; and Arts, entertainment and recreation. Information and technology workers tend to be the best paid followed by those in finance, insurance and real estate.

Where does the recently agreed public sector pay deal fit in?

The Central Bank noted that the recently announced public sector pay deal, which provides for pay increases of 10.25 per cent over a 2½-year period, was broadly in line with previous expectations, and consequently did not contribute in any significant way to changes in the latest forecast.

“Given the sizeable share of the public sector and the potential for private firms to use the publicly announced figures as a benchmark for their own wage adjustments, this lends to the front-loading of wage increases over the forecast period,” it says. On the recent increase to the national minimum wage (NMW), which rose to €12.70 per hour in January, it notes that approximately 7 per cent of workers earn the NMW or less and are predominantly employed in sectors such as retail services and accommodation and food services.

“An upward adjustment to earnings for this cohort would have a relatively limited effect on national wage developments,” it says

Are there risks to the Central Bank’s forecast?

Typically, lower levels of unemployment, which we have now, signal a tight labour market and tend to increase the bargaining power of workers, putting upward pressure on wages.

The Central Bank notes that the unemployment rate is projected to remain low out to 2026, “which could generate additional wage pressures above current projections as labour supply becomes relatively more scarce,” it says. In theory, this could mean better-than-forecast pay hikes. The main negative threat to the forecast is, however, a renewed bout of inflation, which would once again eat into real earnings.

This includes another energy price spike due to ongoing geopolitical tensions in the Middle East; a prolonged slump in the global economy, which would damage exports; and increases in labour costs above productivity, which would “generate excessive inflationary pressures”.

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