Longer hours ‘depress wages’

More slack in the labour force as people put in longer hours may be a factor in depressing wages, new research claims. Central Bank researchers set out to understand why wages have risen slowly despite the rapid unemployment drop.

Predicting that weekly wages will grow by only 3% next year, they found several factors were weighing on wages’ growth.

This is despite the number of people in employment was approaching the levels recorded before the onset of the economic crisis 10 years ago.

Unemployment had fallen from 15% at the height of the financial crisis in early 2012 to 6.1% currently.

“There are a number of potential reasons behind the post-recession weakness in wages, including temporary factors such as low inflation and changes in employment composition; for example, while employment has shifted away from construction, it has grown in sectors such as education, health, professional services, information and communications, and accommodation and food services,” the researchers said.

“A further factor is how slack is measured for example, unemployment versus non-employment; in the first quarter of the year, around one-in-10 Irish workers reported they were willing to work up to 16 hours more per week on average. This suggests a greater degree of slack in the labour market than indicated by other measures and presents a potential drag on wage growth,” they said.

The research entitled, The Labour Market and Wage Growth after a Crisis, showed wages have risen relatively quickly in firms that are facing skills shortages and finding it hard to recruit, including IT, financial services and in the professions. That suggests “labour tightness may be leading to stronger wage growth in those particular sectors”.

However, in many other employment areas, wages growth has barely grown despite the recovery in the economy. “While the rapid fall in unemployment may have led to expectations of wage increases, the historical relationship between wage growth and the unemployment rate does not necessarily support this.

“Institutional wage setting, a shift in the natural rate of unemployment, recession-related scarring effects and productivity all have a role to play,” said the researchers, Suzanne Linehan, Reamonn Lydon, Tara McIndoe-Calder, Paul Reddan and Diarmaid Smyth.

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