A research paper from the Central Bank this week shows that the majority of Irish workers surveyed expect average inflation next year to hit 10 per cent. It rose to 8.2 per cent in May, so the expectation isn’t as pessimistic as it might initially appear.
Yet half of Irish workers surveyed by the Central Bank also expect to receive no pay rise over this period. Of those who do expect a pay rise, the majority expect it to fall well short of inflation.
This suggests a major reckoning may be on the way between Irish employers and workers – it is simply untenable for companies and policymakers to expect workers to swallow huge drops in real wages over a sustained period of time.
Workers are in a strong bargaining position. The economy is wracked by labour shortages. Entire sectors such as hospitality and retail are finding it fiendishly difficult to hire experienced staff, and wages in those sectors inevitably will rise sharply this year, putting even more upwards pressure on the prices charged to customers.
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Central bankers and politicians have been keen to counsel workers to cool it on their demands for pay increases lest it drive even more rampant inflation. In Britain, the Bank of England warned workers to “think and reflect” on pay, while the Central Bank here warned that it could cause “harmfully high inflation” to persist.
But last week at Davos in Switzerland, Gita Gopinath, deputy managing director of the International Monetary Fund (IMF), laid out another possible scenario: employers could pay up on the pay rises demanded by employees and accept lower profits instead.
That would prevent a wage-price spiral, but it requires companies to display the restraint that central bankers are asking of workers.
If employers hold the line on substantial pay increases then many workers will simply move jobs to get what they want. Churn will be a huge factor in the recruitment sector over the next year. Recruitment consultants must be rubbing their hands in glee.
