High wage costs are making small and medium-sized Irish companies less competitive, an industry group said yesterday, in a signal that employers may take a tougher stance on pay.

A survey of 400 companies by the Irish Small and Medium Enterprise Association (ISME) found that wages rose 6.2 per cent in 2003, more than twice the EU average. The increase was down from last year's 7.5 per cent rise but still well ahead of inflation.

ISME said wages had increased by an average of 24 per cent over the past three years. Wages throughout the EU increased an average of 9 per cent over the same period.

"The overall effect is that [small and medium-sized companies\] are becoming extremely uncompetitive," said Mr Jim Curran, head of research at ISME. "This is completely unsustainable."

Wages account for a large percentage of small business costs. They began to increase rapidly during the Irish boom as competition for skilled labour and high inflation put upward pressure on wages.

ISME said the Government's 2000 Programme for Prosperity and Fairness was partly to blame for the "unsustainable" increases in pay.

The programme's three-year framework for pay raises was established when the rate of inflation was 7 per cent. Inflation fell to 2.2 per cent in November 2003.

"The fact that we have had a slowdown in inflation has caught a lot of people out," said Prof Patrick Paul Walsh, an expert in labour economics at Trinity College Dublin.

"The problem is now you have a stock of workers who maybe should take a wage cut," said Prof Walsh. "But that's not really going to happen."

He said employers could be forced to cut jobs if pay increases continued to rise.

Prof Walsh said the survey could be an early signal that employees may soon be forced to accept real-terms pay cuts in order to keep their jobs. "The game has started," according to Prof Walsh. "They are trying to tell people in small and medium enterprises that if you want to keep the good times going, you are going to have to do this."