One of the NERI’s goals for 2020 and beyond is to make our outputs more accessible to a wider audience. We launched our new website in early December and we will be launching new types of output in early 2020.
One of the new output types is an essay or ‘long-read’ series where NERI staff will take a deep dive on issues of relevance to policymakers and the wider public. Our initial topics will include ‘green industrial policy’, ‘economics of collective bargaining’ and ’12 principles for sustainable growth’ amongst others.
Debuting today is the first in the NERI's new Report Series. The aim of these reports is to provide an accessible update of economic and labour market conditions and trends on part or all of the island of Ireland.
Prospects for Private Sector Wage Growth in 2020
The domestic Irish economy’s long cyclical upswing appears to be slowing down somewhat, although labour market conditions continue to improve. The CSO estimate that the unemployment rate fell to 4.8% in November, with unemployment down over 17,600 compared to the previous year. Long-term unemployment is down to 1.4%, while annual employment growth was a healthy 2.4% in the third quarter of this year. Despite the labour market improvements, there is only limited evidence that the economy is overheating.
Average weekly wages in the private sector stagnated between 2008 and 2015, but increased by an annual average of 3% since the third quarter of 2015. Average weekly earnings were €708.24 in the third quarter of 2019 and were up 3.9% over the previous year. Average hourly wages also began to accelerate in 2015, and have increased 10.5% in the last four years including 4.7% between third quarter 2018 and third quarter 2019. Average hourly wages are now €21.69 in the private sector.
The short-run outlook for wage growth is favourable and reflects the increasing tightness of the labour market. In practice, regional, sectoral and firm specific differences and contexts will drive differences in wage outcomes.
The long-run sustainable path for wage growth will depend on future developments in price inflation and labour productivity. Historically labour productivity in advanced economies ranges between 1% and 1.5% over the medium-term. The European Central Bank has an inflation target of just below 2% (though actual inflation has been consistently below the official target in recent years). This suggests sustainable medium-term wage rises of between 2.9% and 3.4%.
However, this assumes that the labour share adequately compensates the economic contribution of labour. Labour shares have been declining in many advanced economies over the last forty years. This phenomenon has also occurred in the Republic of Ireland. Falling labour shares drive inequality. To reverse this trend of declining labour share and rising market inequality it will be necessary for labour compensation per hour to exceed the medium-term average sum of inflation and labour productivity. This suggests a medium-term wage target of 3.5% or higher.
You can read the report here.