Irish workers experience sharp dip in living standards as inflation erodes pay rises — OECD

Irish households experienced a significant drop in living standards last year as wages failed to keep pace with soaring inflation, a new report from the Organisation for Economic Co-operation and Development (OECD) indicates.

The Paris-based agency’s Taxing Wages report for 2022 found that while the average pretax wage in the Republic rose by 4.8 per cent to €54,649 last year, real earnings — how much money an individual makes after adjusting for inflation — still fell because of the high rate of inflation.

With inflation averaging 8.4 per cent last year, real wages were estimated to have decreased by 3.3 per cent, representing one of the biggest erosion in living standards here since the 2008 financial crisis.

With the average amount of income tax paid rising by 0.8 per cent, Irish workers also ended up paying more tax on lower real income in what the OECD described as a “double blow for workers”.

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The agency said the purpose of the report was “to illustrate how personal income taxes, social security contributions and payroll taxes are calculated and to examine how these levies and family benefits impact on net household incomes”.

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It found the personal tax wedge — the amount in taxes a worker and their employer pay as a proportion of total labour costs — for a single worker earning the average wage in Ireland was 34.7 per cent last year, up 0.19 per cent on the previous year, and almost on a par with the OECD average of 34.6 per cent.

That includes their income tax, universal social charge and both their PRSI and the PRSI paid by the employer, minus any cash payments, such as child benefit.

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The tax wedge for a one-earner couple with children here was found to be lower at 20.8 per cent compared to the OECD average of 25.6 per cent.

The reduction in the tax wedge for families with children compared to single workers was 13.9 per cent compared to the OECD average of 8.9 per cent.

The highest tax wedge internationally was observed in Belgium (53 per cent) and the lowest in Colombia (0 per cent). In Colombia, the single worker at the average wage level did not pay personal income taxes in 2022, it said.

The OECD’s report highlighted that 17 countries within the bloc automatically adjusted income tax systems in line with inflation, while the remaining 21, including Ireland, did so on a discretionary basis.

“In Ireland, however, the current Programme for Government includes a commitment to index income tax credits and bands at the start of each tax year to avoid fiscal drag provided that incomes are rising and the economy is recovering,” it said.

The report noted that low-income households with children are most vulnerable to increases in their effective tax rates when tax and benefit systems are not fully adjusted for inflation.