SME SURVEY 2007 In association with ISME

Mark Fielding, CEO ISME, The Independent Business Organisation.

An ISME Employment Wages and Conditions Survey finds that labour costs pose the most serious threat to SME competitiveness, as wages across all sectors increased on average by 5.7% in the last 12 months, in excess of the rate of inflation and over twice the European average, which is 2.6%.

This year’s report was undertaken to establish the actual rates of pay and conditions that prevail in SMEs. Over 700 companies employing 30,000 staff contributed to the survey, which was done throughout March 2007.

The results of the survey highlight that wage rate increases for SMEs in Ireland, at 5.6%, far outstrip our competitors, at over twice the rate increase in the rest of the EU. This is having a devastating impact on competitiveness with the rate of increase now reaching an unsustainable level, particularly for labour intensive sectors.

RISING INCREASES

The level of increases is generally consistent across all sectors, with the highest increases being recorded in Sales (6%) and the Retail sector (5.9%) highlighting the demand for staff in those areas. Interestingly the craft sector recorded the lowest increase, which indicates a slight contraction in the construction sector.

As usual, the highest wage costs were in Dublin, with rates on average five to ten per cent higher than rates in the rest of the Country. While fringe benefits tend to be the exception rather than the rule, there has been an increase in benefits being offered by all sectors over the last number of years. This indicates that, together with significantly increasing wage rates, SME employers must provide incentive benefits to recruit and retain key staff.

SPIRALING INFLATION

Increasing wage rates across all sectors can be attributed to a number of factors. The high rate of inflation in the last 12 months has created a further benchmark from which wage rates are determined. The level of inflation, currently at 5.1%, is extremely concerning and needs to be brought under control as a priority to prevent a cost spiral, which would be disastrous for the economy.

LABOUR SHORTAGES

There continues to be evidence of labour shortages occurring in certain job categories, particularly in the skilled sector. While job creation is forecast to slow down in the next 12 months, 31% of SMEs have indicated that they expect to increase employment, therefore maintaining a healthy demand for labour. The increase in the minimum wage earlier this year from €7.65 to €8.30 per hour increased the pressure on wages as it imposed an artificial floor on wages and created a knock-on effect, as higher paid employees used it as a benchmark from which to negotiate wage increases. The rate is due to increase further to €8.65 from July 1st, which will put further pressure on wage rates in the coming months. The increase in mortgage payments as a consequence of European interest rate hikes is putting pressure on employers for pay increases to off-set the increased outlay by employees. With further interest rate increases anticipated the more the demands on pay rates will intensify, creating a knock on effect on labour costs.

COMPETITIVENESS AT RISK

The most significant impact of rising labour costs is on competitiveness. This is particularly the case for smaller businesses that have a far higher labour to value added ratio than bigger companies, normally 48% in comparison to 8% for big business. As a result of this, any increase in wages has six times the effect on SME value added, than it has on large business. Consequentially, labour costs pose the biggest threat to the viability and sustainability of the small business sector.

As wage rates continue to be high, this will continue the erosion of competitiveness in the indigenous sector vis-à-vis our trading partners, unless affirmative action is taken to dramatically slow down the rate of increases. It is therefore critically important that the level of inflation is brought under control and a lid is kept on the cost of public services and utilities, which has been one of the main causes of inflationary pressure. We need to prevent a vicious circle of price increases pushing up wage increases and prompting price increases.

SUSTAINABLE ECONOMY

The rate of pay increases has reached a level that is quickly becoming unaffordable for the majority of SMEs. It is essential that remedial action be taken at official level to control the level of costs imposed on the public and business community. Wage moderation is now a prerequisite for sustaining and developing future economic activity and it is imperative that labour cost increases are brought into line with the EU average, at least, to ensure that our competitiveness is not completely eroded.