Tuesday, 27 July 2010

Minimum wage - facts, fiction and flights of fancy

Sinéad Pentony: The minimum wage rate is €8.65 per hour and it has been frozen since 2007. The introduction of the two per cent income levy in the 2009 supplementary budget resulted in an effective cut to the minimum wage reducing it to €8.48, because if your income is greater than the minimum threshold of €15,028 per year or €289 per week, you pay the levy on the full amount of your income. There have recently been calls by the Restaurant Association of Ireland (RAI) for JLC rates to be reduced to the minimum wage level, and from other business lobbies for a reduction in the minimum wage by one euro.

It was in that context that TASC made a presentation to the Oireachtas Joint Committee on Enterprise, Trade and Employment on ‘The Minimum Wage’. TASC’s evidence demonstrated that any reduction to the minimum wage would exacerbate the deflationary situation and have a negative impact on the public finances. In the media debate following TASC’s submission, the business lobbies focused on the cost of the minimum wage and how it is ‘unsustainable’, ‘preventing businesses from hiring’ and ‘a major contributor to a loss in competitiveness’. Once again, it’s important to identify the facts from the fiction in relation to the minimum wage and to look at the latest evidence on competitiveness.

Despite what you may read or hear, the minimum wage rate is not the second highest in Europe for the following reasons:

1. First, when comparing minimum wages across a number of countries you can only do so by taking the Purchasing Power Parities into consideration i.e. calculating how much you can buy with your minimum wages. This is done by expressing the minimum wage in terms of a common unit called the Purchasing Power Standard (PPS). When expressed in PPS terms, Ireland’s ranking drops from second to sixth place, reflecting our higher cost of living. Ireland’s monthly minimum wage is €1,152 in PPS. The UK is in fifth place with a monthly minimum wage of €1,154 (in PPS) and France in fourth place with a monthly minimum wage of €1,189 (in PPS)(details here).

2. Second, Eurostat data calculates wages per month. Ireland’s monthly rates are calculated on the basis of a 39 hour week, France on the basis of a 35 hour week and the UK on the basis of the 38.1 hour week. If we differentiate for the number of hours worked in the three countries we find that the hourly minimum wage is €7.84 (PPS) in France; €6.99 (PPS) in the UK and €6.82 (PPS) in Ireland.

3. Third, the data only refers to those European Members that have statutory minimum wages. This means that the dataset does not include the Scandinavian countries. Collective bargaining is used to set minimum wages in these countries and an October 2008 study by Swedish economists showed that Sweden, Finland and Denmark all had higher hourly minimum wages in 2006 than Ireland, as did Norway which is not a member of the EU.

4. Eurostat also calculates the minimum wage as a per cent of average monthly earnings. The minimum wage in Ireland was 42 per cent of average industrial earnings in 2008, which puts Ireland in ninth place in the EU, or in twelfth place if we include the corresponding 2006 percentages for the Scandinavian countries

When calculating the cost of employing a person, it is more accurate to look at the overall cost of labour which is made up of labour and payroll taxes (PRSI). Ireland has one of the lowest levels of employers’ social protection contribution in the OECD. The Irish rate (10.8 per cent) is significantly lower than the OECD average (15.2 per cent) and the euro area average (27 per cent), which reduces the total cost of employing workers in Ireland. The hospitality sector is the largest employer of low wage workers and labour costs in Ireland in this sector are the third lowest in the EU 15. Only Greece and Portugal had lower costs per employee than Ireland.

When we look at the facts in the cold light of day it is clear that the minimum wage is not out of step with other European countries and when we consider the total costs of employing people, Ireland is indeed very competitive. However, if the minimum wage is causing serious problems for businesses, surely it would be highlighted in any analysis of competition?

Last week the National Competitiveness Council published its annual report on competitiveness for 2010, and it demonstrates that the minimum wage is not a factor impacting on business’s capacity to survive the current challenging trading environment. They found that Ireland’s cost competitiveness has improved considerably for a range of key business inputs such as energy, property and a number of business services. However, the areas where key inputs in Ireland remain relatively expensive include broadband, waste disposal and legal fees. There is no mention of the minimum wage being prohibitive for business ... and in fact the report found that “Irish salary levels are broadly in line with the euro area average across the benchmarked occupations”(p.22.)

Business lobby groups have also been arguing that the minimum wage is preventing them from hiring, and that the costs associated with hiring minimum wage workers is putting business under pressure. This argument is not supported by a single shred of evidence. In fact, the evidence supports the opposite – that the minimum wage has little or no impact on employment. David Metcalf at the London School of Economics undertook empirical research and a wide ranging review of the literature in 2007 and found that the British National Minimum Wage has little or no impact on employment (see also here).

There is no doubt that the recession has impacted on businesses and has led to many businesses having to close their doors and cease trading. However, these difficulties have not been caused by the minimum wage. Factors such as access to credit, high commercial rents, professional fees, waste charges, the price of food and the collapse in demand, in particular, have had a devastating effect on the SME sector. These are the factors that need to be addressed to support businesses in these difficult times – rather than an unsubstantiated attack on the lowest paid workers in our economy.

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