Workers don't expect pay rises to match inflation

Most workers expect their real earnings to go down even after pay increases

While a third of working Irish residents expect their earnings to increase slightly over the next year, the majority believe that earnings will grow by less than consumer prices over the next year.

Workers in Ireland do not expect their wages to rise over the next year by enough to offset rising inflation research by the Central Bank has found.

According to a survey of Irish households, the vast majority expect the inflation rate to increase over the next 12 months with people expecting average inflation of 10% over the next year.

While a third of working Irish residents expect their earnings to increase slightly over the next year, the majority believe that earnings will grow by less than consumer prices over the next year.

Separate Central Bank research found that increases in business costs are likely to be reflected in consumer prices now and in the coming quarters, with limited scope for many businesses to adjust labour costs or profits to respond to these increases.

An economic letter titled 'A snapshot into inflation and earnings expectations by Irish residents' outlines the findings of a research collaboration between the Central Bank and the Ireland Thinks monthly survey.  It found that in February and March, around one-quarter of respondents indicated they had taken some action to seek higher wages over the previous three months, in order to offset changes in living costs.

While stronger wage demands may surface in time, especially if labour market conditions remain strong or inflation expectations increase, the survey found that the majority of workers have not actively demanded higher wages to compensate for the increased cost of living.

In addition to this, workers admit their real earnings will fall given the rise in consumer prices. In April, workers who believed their earnings would increase in the coming year expected an average increase of 5.8%. At the same time, they expect real earnings, when adjusted for inflation, to decline by 3.5%.

A second economic letter 'Business Costs and Consumer Price Inflation' examines the costs of domestically-oriented businesses in Ireland to study how increases in input costs filter through to consumer prices. 

Irish businesses said the recent rise in input costs, as a result of supply chain bottlenecks and the war in Ukraine, is being reflected in consumer prices now and this is likely to continue over the next year.

How prices respond depends upon a number of factors, including whether or not businesses can offset cost increases through adjustments in wage costs, productivity or profits. However, with a tightening labour market expected, there is less scope for adjustment through wages.

"Accordingly, profits may fall and are estimated to have already done so in 2021," the economic letter states. "However, businesses in sectors that already experience low margins, and that may have been further constrained during the pandemic, may have less scope to respond to cost increases through reduced profits."

The letter concludes that the most sustainable way of addressing rising input costs and minimising persistently high consumer price inflation is through productivity growth across the different sectors of the domestic economy.