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Jim Power: Small firms face hikes in wage costs as jobs market remains buoyant

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The latest report by the Economic and Social Research Institute was realistically upbeat about the prospects for the Irish economy in the year ahead, and was, significantly, modestly more upbeat than its previous offering in December. 

The ESRI projects modified domestic demand — a better indicator for what is really happening on the ground — will expand by 2.3% this year and by 2.5% in 2025. Such outcomes would represent a positive outturn in the midst of considerable global uncertainty.

Wage growth in excess of inflation, a normalisation of exports after the considerable distortions caused after covid, lower interest rates, significantly lower inflation, and a strong labour market are expected to be the key drivers of the positive economic performance.

The performance of the labour market is perhaps one of the most extraordinary features of the economy in recent years. The ESRI predicts an average unemployment rate of 4.3% this year, little changed from the current rate, and for 4.2% in 2025. That is virtually as close as one can get to a fully-employed economy.

For businesses, the main challenge is the retention and recruitment of employees. Employment packages now have to focus on a variety of offerings, with pay being the obvious element, but hybrid-working, health insurance, leave entitlements, and pension provision are also becoming increasingly important components. 

The composition of the workforce is also very obvious now, particularly in sectors such as health provision, the hospitality sector, agriculture, information and computing, construction, and indeed most other sectors of the economy. 

Immigrants are obviously playing an incredibly important role in driving the prosperity of the economy and will have to play an increasing role over the coming years, if Ireland is to continue to grow and prosper in a sustainable way. 

This is an issue of controversy for certain segments of our society, but it is up to the rest of us to get the message out there about the social and economic contribution that immigrants are making. We must stand up to the racists and Neanderthals, who are aggressively pushing for more airtime.

One of the features of the labour force and the business environment that puzzles me to some extent, is the narrative about the challenges facing business owners, particularly due to labour market measures introduced by government. Yet, the reality is that the labour market remains strong. 

Labour market measures that are impacting particularly heavily on labour-intensive small and medium sized firms, or will impact over the next couple of years, include the increase in the national minimum wage; increased PRSI rates; the move towards a living wage; pension auto-enrolment; statutory sick pay; and the increase in other benefits.

These measures are combining to increase the cost base for many low-margin businesses in a significant way and we are seeing many business closures, particularly in hospitality and retail. Yet, overall employment levels remain strong as other employers soak up the workers being discarded by businesses that are closing. 

Labour market measures are combining to increase the cost base for many low-margin businesses in a significant way and we are seeing many business closures, particularly in hospitality and retail. File Picture

Unfortunately we don’t appear to have up-to-date real-time data on business closures and formations, so it is difficult to be prescriptive in real time.

We are treated to a constant narrative about Ireland being a failed entity and a dystopian hellhole by certain segments of society: You know who you are. But the reality is that Ireland still has a pretty well-functioning economy and society. 

There are, of course, key challenges, with housing, healthcare, and law and order being the obvious examples. Perhaps these are insoluble problems that most societies are dealing with, but that doesn’t mean we shouldn’t increase the effort and resources to address the challenges. Any improvements would enhance the quality of life and sustainability of our economy and society.

From the perspective of the incoming Taoiseach, he has one year at most to change the political fortunes of his party. He should focus on the fact that Ireland does have an entrepreneurial culture and this needs to be supported in a real way. We would all benefit to varying degrees.

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