AS IF THE cost-of-living crisis wasn’t concerning enough already, the Economic and Social Research Institute (ESRI) this week threw a new potential problem into the mix.

In its quarterly economic bulletin, the think-tank warned of a “wage-price spiral” if workers sought higher wages in response to rising inflation.

The same forecast also outlined how the ESRI expects prices to grow by an average of 6.7% in 2022, up from its previous prediction of around 4%.

Some crude maths shows how this will effectively reduce the value of people’s pay packets: if the price of everything goes up but your income stays the same, you won’t be able to buy as many things as you could before those price increases kicked in.

To mitigate against that problem, there were calls in some quarters last month for wages to increase in line with inflation.

One advocate of the idea at the time, Labour party finance spokesperson Ged Nash, even pre-empted the ESRI’s language this week when he said that the threat of a “wage-spiral” was based on “outdated economic thinking”.

But the concept of a wage-spiral is real to some businesses when its knock-on effects are considered, as CEO of the Irish SME Association (ISME) Neil McDonnell points out.

“Most SMEs have kind of single-digit profit figures and labour is probably the biggest cost of sales for most of them,” he tells The Journal.

“If wages go up, then if it’s not fully recovered through prices, the cost will have to be recovered through price through decreasing costs elsewhere.

“And in the current environment, that’s next-to-impossible to achieve without turning around to the worker and asking for greater productivity.”

His view is echoed by Robert Sweeney, a senior economic policy analyst at TASC.

“I don’t think it’s really feasible to increase wages at the inflationary rate of 6.7% on its own, because that would just add to inflationary pressures in the economy,” he says.

“Inflation is not homegrown, but we shouldn’t be adding to it domestically.”

But Sweeney also suggests that there are circumstances in which pay increases wouldn’t lead to a dreaded ‘wage-spiral’ – namely, a similar uptick in productivity.

“I would temper what the ESRI said a little bit: they cautioned against wage increases, but I would say that it’s not necessarily wage increases, per se, that would be a problem. It is wage increases that are not accompanied by productivity increase.

“If you have significant wage increases and if that’s accompanied by a more productive workforce, then it’s not going to translate into inflation.”

He also argues that the idea of combating inflation with wage increases is not binary, and that pay rises for some groups could actually help.

“I think some wage increases are desirable and even necessary to maintain – or not to diminish – people’s living standards as much in the face of rising inflation.

“I would advocate for significant wage increases among low-paid people to insulate them from inflation.

“The minimum wage is €10.50 an hour. A 70 cent increase would equate to a 6.7%, which is about the same rate of inflation that the ESRI is forecasting.”

The Low Pay Commission recently began the process of considering what the minimum wage should be set at from 2023, with a public consultation on this finishing earlier this week.

A spokesperson for the Department of Enterprise, which oversees the work of the commission, told The Journal that it would take a number of factors into account – including a rise in the cost of living.

The spokesperson also pointed out that minimum wage has risen from €8.65 to €10.50 per hour since 2015, a rate of around 21% which is more than inflation during the same period.

And Tánaiste Leo Varadkar has asked the Low Pay Commission to report on how best the Government can progress the minimum wage to a living wage, with recommendations on this expected in the coming weeks.

But ISME’s Neil McDonnell says that although small businesses acknowledge the pinch on workers’ pockets at present, asking employers to pick up the tab will not help.

“The inflation we’ve seen most recently is conflict-related,” he said.

“And what we say publicly is that we understand the impact of this on consumer prices, but simply asking employers to cover that is asking to start a wage-price spiral.”