You can forget about that inflation-beating payrise, it isn’t going to happen
Across the world paypackets are being hollowed out by rapidly rising prices and while inflation has hit an annual 7.4pc in the eurozone, there are few signs that workers are anywhere near making up the shortfall.
This appears to be the case in Ireland, where union-represented staff at AIB, the country’s biggest bank, have agreed a nominal 10pc deal spread over three years, just as much as it is in Germany, where a headline-grabbing claim for 8.2pc by the IG Metall union may at best see a settlement at half that level.
The problem appears to be that while workers are swallowing a bout of 1970s-style price rises they are still negotiating in a 2000s-style world of shrunken unions and jobs offshoring in which automatic price-to-wage indexation links have been severed.
In Ireland, and across the eurozone, unemployment has fallen to its lowest recorded levels while vacancy rates have hit all-time highs amid a rapid rebound from the Covid lockdowns – surely a recipe for higher pay.
The European Commission reckons unemployment is now below the so-called ‘natural rate’ below which wage growth rises. You can certainly see the impact of tight labour markets in the US, where the unemployment rate is just 3.6pc and hourly earnings gains are running at 5.5pc – still below the inflation rate, but a lot closer than here.
While the data we do have is not as up-to-date as that in the US, in Ireland average hourly earnings rose by 2.5pc in 2021, a year in which average annual inflation measured using the Eurostat standard came in at 2.4pc and by December that reading was 5.7pc above that of end-2020. In Germany the same measure showed collective wages rose by just 1.6pc, or exactly half the rate of inflation.
Since the end of last year, those inflationary pressures have only accelerated, with HICP inflation running at 6.9pc in Ireland and more energy price rises in the pipeline as Europe moves to ban imports of Russian oil. At the same time, rising eurozone interest rates could add €1,000 to the average annual mortgage repayment for a first-time buyer in Ireland this year.
That AIB deal, for example, falls slightly short of the Central Bank of Ireland’s inflation forecasts out to the end of 2024, which, like most other central banks, is forecasting a dramatic cooling of inflation back down to 2pc. AIB is cutting staff numbers at the same time.
Investment bank ING reckons that inflation leads wage growth by two quarters historically, and while in what it terms the “current extreme situation” the relationship may be strained, its economists believe there will be upward pressure on wages from higher prices.
Given that inflation in the eurozone really started to take off from August last year, you might have expected to see some impact by now.
So far however, there are no signs that workers are being compensated for higher prices, according to the European Central Bank which has constructed a forward-looking tracker for wage trends.
“The overall tracker indicates only sideways movement in aggregate wage growth at around an annual two percent rate,” ECB chief economist Philip Lane said last week.
The former head of the Irish central bank noted that if you looked only at agreements that have been concluded since the start of this year: “these indicate higher wage growth at around 3pc in 2022 and 2.5pc in 2023”.
With inflation in the eurozone set to average 5.1pc this year, according to the ECB’s forecasts, workers look set to swallow a huge cut in disposable incomes.
The ECB’s tracker covers Germany, Italy, Spain and the Netherlands, but there’s a similar pattern here where the Central Bank of Ireland’s latest forecasts show aggregate earnings this year will fall in real terms for the first time since 2013 with expected pay rises of 2.3pc versus forecast inflation of 6.5pc – a shortfall of 4.2 percentage points.
That real terms loss this year turns into small wage gains in 2023 and 2024 as inflation falls, but given that our labour market is red hot at the moment and more people are working here than ever before, there’s a risk that an economic hit from the war in Ukraine and a decline in global growth will feed through into weaker demand for workers.
Data from jobs website Indeed shows postings growth in Europe fizzled out in late February as Russia’a armies invaded Ukraine. Athough it remains very high by historical standards it is now eight percentage points below its pre-invasion trend.
The biggest impact on postings is being felt by countries that trade heavily with Russia – and Ireland is probably the least exposed European nation. But some of the froth has gone here as well.
A separate Indeed study showed that while April job postings in Ireland were 53pc above pre-levels, that number is down from a post-pandemic peak of 65pc recorded in mid-February.
“Employers appear to have taken their foot off the accelerator with regards to hiring, as downside risks to the economy have built in recent weeks. Notably, the inflow of new job postings has slowed recently,” wrote Indeed’s Jack Kennedy.
If workers aren’t even getting close to cost-of-living pay rises even in the current tight labour market, it begs the question of whether they ever will.
It hasn’t been so great for a while as in Ireland hourly earnings rose by 7.9pc between 2013 and 2019, or not much more than 1pc a year according to Ciarán Nugent of the Nevin Economic Research Institute.
“For wage growth to outstrip inflation and productivity developments for any length of time, economies and labour markets will need to operate above their potential output level for a sustained period,” says Ben May at consultancy Oxford Economics.