Wages and prices in balance but interest rates a threat – independent.ie small green apple calories

The bank research found that the rule of thumb which says wages respond to unemployment tends to apply only when unemployment is particularly high or low. Changes of a few percentage points in moderate rates of unemployment do not have a significant effect on wages. The problem is defining the low point at which things change.

Other influences are quite different from pre-crash days, with an unusual – perhaps unprecedented – pattern. The public sector is well-paid, at €26 an hour but has had limited gains so far.

Workers in accommodation in food earn just half as much, but saw a 5.5pc rise in pay over those five years. Also odd, but welcome, is that the other lowest-paid sector, wholesale & retail, did even better, with a rise of almost 9pc. Only the professional and communications sectors had bigger increases in earnings.

A lot of statistical regressions will be needed to provide analytical evidence as to the causes of these unexpected patterns.Interest rates in the meantime, we will have to make do with everyday observation.

That might help explain developments in the public sector. Yes, there were strikes and threats of strikes, but settlements were mostly reasonable, given what happened for so long before.

There was not the wave of unrest that those of us with long memories might have expected. Union power is not the issue here, but member militancy and public tolerance may be.

It raises the thorny question which has bedevilled economists and central bankers: what exactly is the role of inflationary expectations on wage behaviour?

Monetary policy, which is supposed to look ahead, lays great stress on expectations but, as with nearly everything in monetary policy, the actual evidence is hazy. The irish experience may be support for the theory that expectations do make a difference.

Some statistical explanation is needed here too. The 6pc increase in rents (5pc for local authority rents) is a long way from the 0.3pc inflation rate in the year to january.Inflation rate that figure itself incorporates a 1.7pc increase in the cost of services and a similar fall in the prices of goods.

Everyone has their own personal inflation rate but it seems fair to say that not many are worrying much about rising prices eroding the value of their earnings.

The CSO’s measurement of the vacancy rate has fallen to 1pc and many workers will instead be expecting further rises as labour supply gets tighter.

This is how it should be, with wages balancing supply and demand for labour without the complication of rising prices, but another complication is on the way.

As central banks begin to raise interest rates, prices will rise, and expectations of more along with them. This effect will be more pronounced in ireland because of the high level of borrowing, especially on tracker mortgages.

They will have to follow the ECB all the way, while there might – indeed ought to be – some reduction in bank margins for those on variable rates.Interest rates

Irish rates will still be too low for irish conditions but the shock of any significant change should not be underestimated. That will help restrain consumption but it will also increase pressure for wage increases.

In these unusual circumstances, the old nostrums about inflation and loss of competitiveness should not be wheeled out too readily. This may be a time to let market forces do their work.