Sunday, 16 August 2009

Other hidden costs of the minimum wage

Nat O'Connor: The debate so far has not considered all aspects of the minimum wage.

Employers are quick to point out that the hourly amount paid to workers is not in fact the only cost of employing them. Employers’ PRSI contributions, HR and recruitment costs, training, etc all add to the cost of labour. That’s fair enough. Likewise, the call for a cut in the minimum wage is not necessarily to punish the 5% of workers currently on that wage, but it is to bring people from unemployment into low wage employment. At least, that seems to be the idea.

What is not often mentioned is that the taxpayer subsidises low wage employment.

For example, benefits like Family Income Supplement or subsidised rent (through the local authorities or the Rental Accommodation Scheme) assist low income workers. These costs may be less than the cost of payments to people who are unemployed, and I think it is generally better for people to be employed than not. But when employers and commentators call for a lower minimum wage, are they assuming that the state will step in to spend taxpayers’ money on subsidising those businesses that employ low wage workers (regardless of how profitable those businesses might become)? Are they aware that these supplements are often insufficient; for example, the growing waiting list for social housing or that nearly one in six households are at risk of poverty after benefit transfers?

If we are going to have a debate on reducing the minimum wage, we need to also have a debate on state subsidy of employment and what we regard as a minimum acceptable standard of living for working families.

Not to mention that many of the same commentators advocating a lower minimum wage also want to reduce social welfare payments.


Michael Taft said...

Excellent point, Nat. Much of the debate is dominated by people who don't appreciate (I'm trying to be polite here) how the various aspects of the 'system' interacts. For instance, as you point out, cutting wages will not only reduce Exchequer tax revenue (never mind the impact on domestic demand) it will drive up social welfare costs. From just a back-of-the-envelope calculation, a Family Income Supplement recipient on €20,000 annual wage, would receive approximately €69 (probably more since FIS is based on net income). With a 5% wage cut - saving the employer in wage and PRSI costs (whether they need it or not) - the FIS will be increased to €81 per week - or a 17% increase in social weflare payment. Nice little taxpayer subsidy to the employer.

Indeed, the increase in levies will lower net income. This will turn into an increase in FIS payments. For thousands of families the government takes with one hand but has to give back with another. Has anyone in the Department of Finance calcualted the balance?

SlĂ­ Eile said...

@Nat Good points. A core issue is that of providing every member of society with an agreed minimum basic income suitable to live a life with dignity. The incentive to contribute to society and earn a living should come from a combination of motives and not income alone although for many it is the sole factor. We are actually still a very rich country notwithstanding a possible cut of 15-20% in GDP over 3 yeas. The distribution of income, wealth, opportunity and power is one of our main problems.
Thanks for pointing to the implicit distorting effect of cutting minimum wages.

Antoin O Lachtnain said...

Nat, what you are proposing is trickle-up theory.

Nat O'Connor said...


If I understand it correctly, Trickle Up Theory argues (broadly) that paying poorer people more is good for the economy, because they are more likely to spend it. Giving more income to the wealthiest doesn't drive the economy because they save it.

I'm not sure that I am advocating that. By including all costs in the calculation of the Minimum Wage it makes it clear that if (a) we agree that people should have a minimum level of certain goods & services, and (b) we allow some employers to pay a person less than is necessary to gain these goods & services, than as a result, (c) the state will have to do so.

This is not the same thing as advocating a high standard of living for everyone in order to drive the economy, it is simply arguing for a minimum level of living standards on principle; although there may be overlap depending on what we agree should be in the basket of minimum goods & services.