Unsurprisingly, wages are struggling to keep up with inflation. Despite pay rises over the last year, inflation is running so high that, after inflation, wages are falling. This is called real wages – the real meaning ‘after inflation’.
Between the last quarter of 2020 and the last quarter of 2021, hourly wages rose by 2.6 percent. However, inflation during this period ran at 5.4 percent. This means that, in real terms, wages fell by 2.8 percent.
Wage rises differ from sector to sector. Average real hourly wages fell by nearly 11 percent in the utilities sector (electricity, gas, water and waste) while mining workers managed a marginal increase. However, sectoral breakdowns have to be treated cautiously.
- Utility workers didn’t’ actually receive real wage cuts of 11 percent. More likely the composition between highly paid energy workers and low-paid waste workers changed.
- Public Administration workers saw their nominal wages (before inflation) rise by nearly 5 percent. Again, we may be seeing compositional changes at work within higher and lower paid workers.
- Hospitality wages could still be impacted by pandemic volatility.
Despite the caveats at sectoral level, at national level the differences should wash out. And that shows, on average, a real wage cut of 2.8 percent.
Another way of measuring the impact of inflation on wage income is to look at weekly earnings.
This tells a similar story. On average, real weekly wages fell by 3.4 percent in real terms, indicating a marginal fall in the hours worked per week. Arts & Recreation along with Administrative Services experienced a real wage increase but this was due to an increase in hours worked.
Back in January the Tánaiste stated that workers should receive pay rises from companies to help deal with the rising cost of living, calling it ‘part of the solution’. This is welcomed. However, others have warned against wage increases feeding into a price spiral. The Central Bank is apparently looking out for 'damaging wage increases’.
Is there a risk that wage increases could fuel inflation? Not for the most part. There are two reasons:
First, we have supply-side inflation, caused by interruptions in production and supply chains throughout the world, now exacerbated by the war in Ukraine. Increasing or cutting wages won’t produce more oil or wind (energy), steel (construction), fertilizer (agriculture), or reduce shipping costs. The main drivers of inflation are not due to domestic demand. That’s why inflation is going up everywhere.
Second, we have been here before. Back in 2000 the ‘social partners’ negotiated the Programme for Prosperity and Fairness (PPF) which provided a pay increase of 5.5 percent in 2000 and again in 2001, followed by a 4 percent increase the following year. However, inflation unexpectedly spiked at nearly 7 percent in October 2000. Unions demanded a re-negotiation and received an additional 2 percent in 2001 and a further 1 percent in 2002. Did this ‘fuel’ inflation? No.
In October 2001 inflation fell to 4.3 percent and by October 2003 it fell to a normal 2.3 percent. The combined additional 3 percent pay rises didn’t fuel inflation. Inflation fell regardless of the pay increases. This doesn’t mean that the same thing would happen today. Inflationary experiences are different. However, there is no automatic relationship between a pay rise and inflation.
Heavy Lifting
Wage increases can do the heavy lifting in terms of protecting people from inflation. A one percent increase for an employee on median earnings (approximately €40,500) will net a single worker €206 after tax. For an employee with an adult dependent, this would rise to €286. Let’s compare that to the impact of tax cuts. Note: the tax cuts are based on average energy consumption for Electric Ireland, calculated from Bonkers.ie
An additional 1 percent pay increase would be of far more benefit than reducing the VAT rate on electricity or suspending the entire carbon tax on gas bills (some parties referring to carbon tax are only calling for the increase this year to be suspended, not the entire amount).
For low-paid workers (2/3 of median earnings), the pay increase would equal €190. A VAT cut would save €35 while suspending all carbon tax would save €50 (assuming consumption at 75 percent of average).
One could include the impact of VAT and Carbon Tax cuts on petrol though there are, for many, substitution goods (e.g. public transport, use reduction), unlike domestic energy. And there is the impact on oil-based heating; though why prices should vary so much – between €560 and €880 per 500 litres of oil – is worth asking.
Increasing pay would allow the Government to focus on those not in work such as pensioners. It would raise revenue for the Government through higher tax receipts. It would also raise business income as low-average income earners would likely spend the additional income.
The Government could take the lead on this, and call for a 5 percent pay increase across the economy. This would incorporate any pay increases that were coming in any event. Or it could call for a 2 percent increase above what was already planned by businesses. This is what is described as a ‘pay norm’. This would, of course, be easier to negotiate for workers under collective bargaining.
Many companies would not be able to afford this hike, but could manage some of it. In such circumstances the Government could call for low and average-paid workers to get most of whatever benefit is available.
And if the Government fails to do this, it is always up to the opposition parties in the Dail to combine behind a private members’ motion stating that it is the will of parliament that wages rise to help alleviate the currently inflation emergency.
Increasing wages, increasing workers’ portion of the value-added that they generate, is just one way to help get us through this crisis. It, therefore, requires an official policy to promote it.
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