Time for a Re-set and Return to More Normal Pay Adjustments in 2025 in Light of Falling Inflation (October 2024)
With the economy at full employment, containing price and wage inflation in 2025 will be conditional on productivity growth being realised. Otherwise, nominal wage growth and pay settlements generally need to trend lower if we are to avoid a negative effect on Ireland’s relative competitiveness.
Whilst most employers are experiencing a tight labour market, operating costs in many areas for Irish business remain higher than in competitor economies and as we look towards 2025, hiring trends are slowing and there are emerging downside economic risks.
Labour Market Tightness Remains a Challenge
Overall unemployment stood at 4.3% in September 2024 which historically represents a labour market operating at full capacity. In 2024, the ESRI anticipates that employment will rise to 2.78m and that the unemployment rate will average 4.3%. This represents a 30% increase in employment since 2006. Almost 75% of the working age population are now in employment, a near–record high and the labour force participation rate increased to 66% in Q2, 2024, the highest level recorded since Q3, 2008. For 2025 the ESRI expects unemployment to fall further and reach 4% by the end of 2025 and the employment number is expected to exceed 2.9m by the end of 2025.
Importantly, the Central Bank has cautioned that momentum continues to slow and the pressures on supply versus demand seen in the labour market in recent times will ease, with employment growth falling as a result. The number of job postings continues to fall from its peak in March 2022.
With HICP inflation averaging 2.25%, real earnings grew by almost 2.5% in Q1, 2024, the first quarter of real earnings growth since mid-2021. Real wage growth is expected to continue through to next year as inflation continues to fall, with real incomes projected by the ESRI to rise by 2.4% this year.
Whilst tight labour market conditions are supporting increases in nominal wages in excess of inflation presently, the Central Bank (September 2024) predicts that “with some easing of labour demand expected, nominal wage growth is projected to slow down in 2025 and 2026.”
Impact of Transition to the Living Wage
We are in Year 2 of a four-year path towards the Government target of introducing a National Living Wage (LW) based on 60% of median wages by January 2026.
The Government has in Budget 2025, announced an increase in the National Minimum Wage of €0.80 to €13.50 per hour from 1st January 2025. This is a 6.3% increase and amounts to a c. 19% cumulative increase over 2 years (2024/2025). This is significantly in excess of inflation which has been at or below 2% since March 2024 and is projected by the Government to remain below 2% both this year and next. With one more year to bridge the gap to 60% of median wages for the proposed Living Wage, a further large increase in the NMW in 2026 appears to be likely.
This will create pressure on existing differentials in domestic economy service sectors (e.g. in Retail, Hospitality, Catering) and on certain roles across the economy particularly where longer serving employees will see their differential rates over the NMW being eroded. It is also likely to lead to pressures from trade unions for a mark-up above the proposed Living Wage to justify their role and relevance.
Outlook is for Further Easing of Inflation
Figures from the Central Statistics Office (September 2024) show that Consumer Price Index (CPI) rose by 0.7% in the year to September 2024, down from 1.7% in August 2024. Prices on average, as measured by the EU Harmonised Index of Consumer Prices (HICP), remained unchanged in September 2024 compared with September 2023 and down from 1.1% since August 2024. This is the lowest level of HICP inflation since March 2021.
The Central Bank (September 2024) predicts a lower inflation (HICP) rate of 1.6% for 2024 and 1.9% in 2025, moderating further to 1.5% in 2026. It assesses that headline inflation in Ireland is dominated by the services component, due to increasing prices in the restaurant, accommodation, and rental sectors.
The ESRI (Summer 2024) also expect inflation (CPI) to stabilise at 2.3% in 2024 and to fall under 2.0% to 1.9% in 2025. They predict HICP inflation to average 2.0% in 2024 and remain just above CPI inflation at an average of 2.0% in 2025. Indeed, whilst Ibec has predicted an annual average inflation rate of 2.3% for 2024, it too expects this to fall to under 2.0% to 1.9% for 2025.
As part of the Stability Programme Update (April 2024), the Department of Finance projected an inflation rate (HICP) of 2.1% for 2024, 2.1% in 2025 and 2.0% in 2026 and mainly reflects the impact of lower energy prices.
Private Sector Collective Bargaining and Pay
In summary, whilst we have seen outlier settlements for company specific reasons, the general level of increases in 2024 spanned a wider range of c 3.0%-4.5.%, with some sector variations. Issues such as extra annual leave, health insurance, service pay, and pension improvements have featured in some limited cases.
The CIPD/IRN Private Sector Pay & Practices Survey 2024 showed that for unionised firms the planned pay increase was 3.9% for the next 12 months compared to 3.5% for the last 12 months. The planned increase by respondents (unionised and non-union) was 4.1% in the next 12 months (with a sector spread of 3.2% for services and 4.4% in manufacturing). Since then, IRN, based on a review of 112 Private sector pay agreements from January to July 2024, assessed they are mostly over 3% per annum, with about a third over the 4% mark. Meanwhile, Ibec, in its most recent Pay Trends Survey Report (September 2024), stated that 85% of respondents increased basic pay by an average of 4.1% in 2024 while the average expected increase by businesses for 2025 is 3.4%.
Towards year end, we can also expect that the Congress of Trade Unions (Private Sector Committee) will likely issue guidance to constituent unions for 2025.
In summary, as we look towards 2025, it is our assessment that:
1. In December 2023, Stratis assessed the private sector 'run rate’ could be c 3.5-4.5% for 2024 with sector/local variations but with an expectation this would trend downwards as the year progresses. This is borne out over H1, 2024, with fewer agreements exceeding 4.0% for 2024 and most trending in the 3.0-4.0% range.
2. This is consistent with the IRN/CIPD 2024 (March) survey findings that ‘employee retention’ (65%) is a bigger driver of pay policy among 2/3 of employers, ahead of inflation issues (54%) or even skill shortages (36%).
3. Pay growth over 2024 has outstripped inflation and workers are seeing a return to real income growth with further upside for workers in 2025 due to the announcements of taxation and social transfer measures from Budget 2025.
4. Pay settlement levels should moderate to lower rates considering the moderation of settlements in competitor economies and the easing of inflation. However, the effects of a tight labour market will continue to act as a significant drag against this trend, including the impact of accelerated increases towards a National Living Wage.
5. Private sector agreements over the rest of 2024 and 2025, are tapering downwards over their term in view of lower projected inflation, albeit there are drag factors. Whilst allowing for these, we expect to see general pay settlements in the range of 2.5% to 3.5% over 2025 but tapering towards the lower end of this range by the end of 2025.
6. There is some evidence of unions pushing for 3-year agreements in anticipation they may do better now, ahead of lower inflation rates taking hold, for 2025 and 2026. If a business is considering a longer agreement it should factor in the expected reduction in inflation over 2025 and 2026.
7. There is a focus by some employers on the use of lump sum or non-consolidated payments, which are useful to reduce the consolidation effect of some base rate increases. This may include recourse to the higher tax-free limits of up to €1,500 (increased from €1,000 in Budget 2025) to be available under the Small Benefits Exemption Scheme.
8. Some deals are also reflecting service-based changes to pay/benefits, whilst adjustments to private healthcare provision continue to feature in some cases.
9. In concluding pay deals, employers should also be mindful of the wider impact for others.
If you would like to talk about any of the above issues, please get in touch with any of our Partners.
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Brendan McGinty | Managing Partner
Stratis Consulting
‘Strategic Employment Relations’
M: +353 (0) 87 2433038
W: www.stratis.ie Twitter: @Stratisconsult LinkedIn: Follow us here
Disclaimer: The information in this article is for general guidance only and does not constitute legal or specific case advice. The answers to specific situations will vary depending on the circumstances of each case. This is not a substitute for specific professional advice relevant to individual circumstances facing your business.
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