How much will your wage package increase this year?

Wages are on the rise. Is this a general rise in wages across the economy, or something applying only to certain sectors? And is it a temporary jump caused by Covid-19 factors or something more permanent?

Of all the questions relating to inflation, this is probably the most important. If people start to expect wage hikes and rising prices, it makes it more likely that inflation is here to stay. But what does the evidence show us about the market today and how wages are rising ?

1. Higher wages – the story so far:

Talk to any employer and you will get the same story. It is hard to attract staff and difficult to retain them. And pressure on earnings has been rising for some time, due to a combination of strong growth in sectors which have kept going through the pandemic and shortages in areas that are now reopening, notably hospitality. Both have been affected by people moving between sectors and by a pandemic-related shortage in foreign nationals.

The official CSO earnings data have been affected by the pandemic. A lot of lower-paid people lost work through much of the pandemic, meaning the wages of those remaining in employment were, on average, higher. Some still in work were supported by wage subsidies.

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Still, the data show wage pressure building. In the third quarter of last year, weekly earnings were 5.4 per cent up on a year earlier. Hourly earnings were up 3.8 per cent and people were working more hours as well. Clear wage pressure is shown in some sectors, notably ICT where annual earnings were up 11.9 per cent and construction where there was an 8.4 per cent rise.

An interesting analysis by the CSO shows that, for people in the same jobs in the third quarter of last year as they were in a year earlier, earnings were up 11 per cent on average. Around on in six of these jobs were supported by wage subsidies, but the figure is still striking.

The figures show public sector earnings up, on average, 6.3 per cent last year and private sector earnings pup 5.5 per cent. Wage pressures have been building.

2. Higher wages – where next.

The anecdotal evidence from businesses across the board is that there is a tightness in the jobs market not seen for years. This applies at all levels from the higher paid tech sectors to professional services to jobs in personal services like hairdressing and right across hospitality.

This is not unique to Ireland, but the relatively strong growth in many sectors is adding to wage pressures. Despite Omicron, Indeed, the jobs website reported that jobs postings in Ireland on January 7th, 2022, were up 43 per cent on levels just before the pandemic hit.

Each sector is facing its own staffing challenges. Those in hospitality are facing particular pressures as many have left the sector. Thousands of foreign nationals have gone home through the pandemic and, in many cases, students and temporary staff are filling the gap.

Meanwhile at the far end of earnings spectrum, there are huge shortages in a whole range of highly paid roles in areas like tech, pharma and digital and professional services. Stories are rife of staff – and in some cases whole teams – being poached, of jobs lying unfilled and of huge efforts by management to hold on to staff.

3. So how much will earnings rise this year?

The 5 per cent benchmark shown in the CSO figures for the third quarter of last year will probably be a floor in many sectors for 2022. But in many cases, increases will be higher. Restaurants report, for example, huge difficulties in recruiting kitchen staff, with wages being bid up.

And recruiter Morgan McKinley forecasts that, for many of the sectors where it is active, earnings are likely to jump by 5 per cent to 10 per cent this year, and by 15 per cent to 20 per cent in certain key in demand sectors.

A lack of international movement has led to a bump in salaries, it says, forecasting that, in time, a return to more “ normal” increases of 2 per cent to 5 per cent may occur.

Its survey of 62 companies and more than 4,000 professionals showed what company director Trayc Keevans called a misalignment in the market between the supply and demand for employment.

So where are the 15 per cent plus increases appearing? Among the key areas in demand, it finds, are data analytics and software engineers in the tech sector,and jobs related to cybersecurity, boosted by the pandemic. In pharma, there is particularly high demand in the areas of biopharma, gene therapy and validating process specialists for manufacturing.

In engineering, Morgan McKinley says the jobs in most demand relate to the expansion of areas like data centres, pharma, food and energy investments, while in financial services the big move of operations to the IFSC after Brexit and increased regulation is creating big demand for key management jobs.

High demand is also in evidence across professional services in accountancy, legal, consulting, HR and support roles while job shortages continue in many areas of freight management and logistics, driven again by the pandemic.

In other words, a range of once-off and ongoing factors is leading to wages rising quite sharply in many sectors. In some cases, it is likely a once-off adjustment until things settle after the Omicron wave.

Much beyond that will depend on the general rate of price inflation, now 5.5 per cent. This is expected to ease, but there are fears that the rate could remain relatively high if energy prices do not fall back. The latest data showed that, while energy was a key factor, there are also wider price pressures in the economy.

The other key issue will be public sector wages, with a new wage deal due to be negotiated by the autumn and ongoing moves to roll back austerity era cuts in areas like working hours before this happens.

4. Flexible working

There is no doubt that the labour shortage is going to add pressure on employers to allow flexible working. A CSO survey this week showed that almost 9 out of 10 people who can work remotely want to do so after the pandemic, with most favouring a mix of office and home working. Many companies are adjusting their working model to hybrid or fully remote as a key measure to attract and hold on to talent, according to Keevans of Morgan McKinley. Whether this in some cases leads to a trade-off in relation to salary remains to be seen.

5. The wider impact

Labour shortages are now a crucial economic issue. While some pandemic- related pressures may ease in the short term, employers’ group Ibec says that “the significant tightness in the labour market remains the greatest permanent threat to competitiveness”.

It estimates that 60,000 additional employees could be needed across the economy each year to 2025 and, adding up the numbers, sees a significant shortfall. In turn, this puts on pressure on companies to increase productivity. So for now, and perhaps for some time, employees have significant power in the jobs market in many sectors of the economy.

Higher wages and more flexible working looks likely to be the result. Wage increases of 5 per cent may well be a baseline in many parts of the economy this year and in many areas people moving jobs or in sectors in demand will get more. How this pans out will be vital in the wider story of inflation in Ireland.