At full employment, one of two things can happen: the economy will source additional labour from somewhere and keep growing; or wages will start getting bid up as employers chase a shrinking pool of workers or as workers demand greater levels of remuneration.
At a certain point, this erodes competitiveness and growth stalls. That’s what the economic textbooks tells us. In reality, both phenomena tend to happen at the same time. In Ireland at the moment additional workers are coming into the workforce and wages are being bid up.
Since the pandemic, we’ve been getting additional labour from two sources: firstly, from greater participation rates, driven in the main but not exclusively by more women taking on roles on the back of remote working options, and, secondly, from increased levels of inward migration.
At the publication of the Central Bank’s latest quarterly bulletin, Robert Kelly, the bank’s director of economics and statistics, said: “As we came out of the pandemic, what we saw was an increase in participation rates but what we’ve seen in more recent quarters is that it’s now inward migration which has increased our employment numbers.”
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It is uncertain as to whether this will continue, he said, noting Ireland was not the only tight labour market in Europe.
“So it is difficult to see how you would have this sustained inward migration given the competitiveness of the labour markets across Europe,” Kelly said. He also indicated there were other potential “frictions”, such as a shortage of housing here, that might slow inward migration.
In its report, the Central Bank noted, however, that the number of employment permits issued on a monthly basis remains twice pre-pandemic levels, suggesting that inward migration will continue as labour demand among firms remains elevated.
As for the other phenomenon that typically occurs at full employment – higher wages -, there are strong indications that this happening. The Central Bank predicted wage growth would lift to 6.2 per cent this year, up from 4.3 per cent in 2022, a level not seen in the Irish economy since before the financial crash. European Central Bank policymakers fear strong levels of wage growth will entrench inflation in the system.
