Friday 14 December 2018

Expect pay demands in IT as stagnated salaries rise

There are plenty of people across the economy who have not had a pay rise in a decade. (stock image)
There are plenty of people across the economy who have not had a pay rise in a decade. (stock image)
Dan O'Brien

Dan O'Brien

How much are people earning, what sort of pay rises are they getting and what do recent salary developments mean for the wider economy and individual industries?

There are plenty of people across the economy who have not had a pay rise in a decade. Subdued pay rates may have made life easier and simpler for companies and their accounts departments, but they have caused no little frustration for many wage slaves over quite some time.

The good news - from a worker's perspective, if not necessarily for employers - is that earnings are rising at their fastest clip since the crash, and they appear to be firmly on an upward trajectory (see chart).

Before looking at this (surprisingly recent) development, let's consider why wage growth has been so low for so long.

A big part of the reason for this is the absence of inflation.

Consumer prices are much the same today as they were 10 years ago (some prices have risen, but others, including essentials such as food and clothing, have fallen). When the cost of living isn't rising, it is easier for employers to resist requests for fatter pay packets.

Another reason they can resist is slack in the labour market. When unemployment is high, workers' bargaining power is low. Both factors have been in evidence in the Irish economy over the past decade, even if conditions in the labour market have certainly become less slack in recent years. But the phenomenon of low wage growth is not explained by these factors alone. In countries that had less severe recessions than Ireland, less unemployment and more inflation (or some combination of the three) pay growth has also been sluggish.

The United States and Germany are two examples - both have been close to full employment for some time but neither has experienced surging pay growth. But it is our nearest neighbour that really stands out. Britain has had much more inflation than Ireland or many other countries in the rich world over the past decade - the result of periods of sterling weakness which has led to higher prices of imported goods and services. It has also had much less joblessness - unemployment is now at 4.5pc after peaking at 8.5pc, both considerably lower than respective current and peak Irish levels.

Yet average earnings for British workers are an astonishing 10pc lower now than a decade ago. Across the rich world only depression-ravaged Greece has had a wage shock of this kind.

Average wages in Ireland have been broadly stable over the same period - even in the depths of recession there was only a small fall in average earnings recorded, as employers generally reduced their pay bills by laying off workers rather than resorting to across-the-board pay cuts. The willingness of British workers to accept such an erosion of their real incomes is something economists are far from understanding. The point that's of relevance to Irish business folk and workers is that the wider international trend when it comes to subdued pay demands appears to have been at play here. Or it was until recently.

In the second quarter of 2017, both measures of economy-wide average earnings - hourly and weekly - grew at their fastest pace since the depths of recession, at 2.4pc and 2.7pc respectively, as measured by year-on-year rates adjusted for seasonality. Both measures of private sector earnings were up by more than 2pc on the same period in 2016, as illustrated in the chart. In real terms, ie when adjusted for (currently non-existent) consumer price inflation, that is a solid rate of increase by any historical standard.

Slightly higher rates were recorded in the public sector, which dragged the all-sectors average up, but not by much. Nor is there a marked difference by the size of the employer. Organisations with more than 250 employees (which includes the public sector) and those with fewer than 50 have had broadly similar wage trends. Mid-sized organisations - with 50-250 employees - have recorded somewhat more subdued wage growth.

From an employers' perspective, accelerating wage inflation can give cause for concern. Pay is a big cost for most businesses and for those operating at low or negative profitability, a significant increase in costs of any kind can be the difference between staying in business and folding. But that is how the market works - the less efficient companies in a sector are outbid by the more efficient for available talent.

After a severe shake out during the recession, the economy is competitive and companies are lean.

With rising demand, profitability is up. A very broad indicator of national competitiveness - the balance of payments with the rest of the world - is strongly in surplus. That suggests that higher wages on an economy-wide basis are justified and not a threat to national competitiveness.

With unemployment and underemployment falling, that is exactly what is happening, even if, as one might expect, wage trends across the economy have not been uniform. Workers in some sectors are doing better than others.

The biggest employer nationally is the retail and wholesale trade. Because it tends to be lower-skilled and low-productivity, it also tends to have lower than economy-average wages - average weekly earnings stood at just €566 in the second quarter.

But the good news for shop assistants and shelf-stackers is that they have also had some of the strongest pay rises in recent years. Over the two years to the second quarter, average weekly pay was by more than 6pc and average hourly pay by almost 5pc.

Given the growing pressures on the distribution system as a result of on-line sales, it is somewhat surprising that earnings growth in the sector is running well above the average.

The answer probably lies in the different trends between wholesaling and retailing wages: the latter have barely grown at all, while the former are rising quite sharply. That, in turn, may reflect the growth in Amazon-like entities which deliver directly to customers from warehouses, by-passing traditional retail outlets.

The hospitality sector is the other big lower pay/skill-lower sector. Despite booming conditions, average earnings for those in restaurants and hotels have been broadly in line with the economy-wide average.

At the other end of the skills and pay spectrum, developments have been equally mixed. The 'professional and scientific' category of workers have enjoyed some of the biggest increases in recent times - average weekly earnings are up by more than a tenth over the past two years.

That is exactly what one might expect as talent becomes scarcer in tightening labour market.

If anecdotes are anything to go by, there are few sector where talent is in shorter supply than IT. Yet earnings growth for techies is bucking the trend. It has been low to non-existent since 2014. With accommodation costs rising for the younger, mobile types in that sector, it is hard to see that trend continuing.

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