Tuesday, 14 December 2010

Slashing the Minimum Wage: Olli made us do it (or: never let facts get in the way)

Tom McDonnell: Over the weekend, a Government TD insisted on RTE's Week in Politics programme that we should ask Olli Rehn why the minimum wage was cut. I leave it to the reader to decide what that implies for our national sovereignty.

Much of the justification given for the cut was that we had the second highest minimum wage in Europe and that it needed to be cut to provide more employment opportunities. More on this in a second.

The latest annual report of the United Kingdom’s highly respected Low Pay Commission (LPC) is here. The British government uses the recommendations of the Commission when passing legislation related to the minimum wage (including the setting of rates). You will find a wealth of information on issues such as gender composition, sectoral breakdown and other key issues.

Unfortunately, there is no equivalent Commission for Ireland and it is to our great detriment that we do not conduct the same level of research into these areas in Ireland. Irish policymakers seem to have only a passing acquaintance with the strange notions of theory and evidence.

Fortunately for us the LPC report has international data on the rates set for national minimum wages.

I refer you to Appendix 3 of the Low Pay Commission’s report and in particular column 3 (PPs) of Table 3A.1 on page 233. The table has data for eight different EU countries. Ireland has the fifth highest minimum wage rate of the eight EU countries shown. Most importantly, we find that the rate for our nearest neighbour - the UK - was 5.80 (sterling) and the equivalent rate for Ireland, before the 12 per cent cut imposed last week, was 5.43 (sterling) in terms of purchasing power parity. Note as well that only one country in the sample has reacted to the crisis by cutting the minimum wage.

So it seems that those spouting off that we have the second or third highest national minimum wage in Europe either haven’t bothered to check the facts or have decided to ignore the facts.

I’ll leave it to you to decide which is worse.


Slí Eile said...

@Tom Thanks for that data source. Another source is the OECD Minimum Wage Database. It shows, for 2009, that the statutory minimum wage in Ireland was 6th highest out of 17 countries for which information was available. Users can download the data from here
and by using the US dollar exchange rate correct for purchasing power parity you can work out a table for 17 countries. Ireland was US$14,165 - seventh place behind Portugal, Belgium, Australia, France and Netherlands. In a separate table you can extract data showing Ireland in 4th place out of 21 countries in terms of the ratio of the minimum wage to the median wage in the country. You can get the UK Low Pay Commission international comparison by going to the 2009 Report here http://www.lowpay.gov.uk/lowpay/report/pdf/7997-BERR-Low%20Pay%20Commission-WEB.pdf
Figure A5.1 shows Ireland at 32% - below the G7 average for ratio of minimum wage to median earnings. See also Table A5.1 where Ireland was below the UK even before the recent cut.
An interesting conclusion from the UK data you cite is that when adjusted for the recent cut in the Irish minimum wage along with currency and price parity adjustments the Irish rate is well below - not above the UK rate. And the value of the 'social wage' is higher in the UK in areas such as household spending on education, health and access to local community services and transport.
So the next time an economist or politician says that the Irish minimum wage is among the highest in the world just ask them two question:
what international source data are you drawing on.

Anonymous said...

You have now shifted the goalposts a little. Your problem with the minimum wage isn't the minimum wage itself in absolute terms. Your issue is the lack of purchasing power that it brings.

Things are too expensive in Ireland. Surely this is at least half of the problem we need to deal with? (And I know, this is about a lot more than labour costs, as has been correcctly pointed out here before).

Slí Eile said...

@Anon - the issue is very simply the claim by certain Government ministers and some economists who should know better and take more care with data - that the statutory minimum wage is one the highest in the world (or 'second highest' in Europe). I challenge anyone to substantiate this by reference to actual data sources - OECD, Eurostat, Low Pay Commission etc

Rory O'Farrell said...

Also the issue for employers isn't the wage rate itself, but labour costs. As PRSI is low in Ireland compared to other countries, the minimum hourly cost of employing a person is lower in Ireland than the wage rate would suggest.

You have a point I think. With a genuine devaluation all costs come down (and debts), which can be described as fair. But with the simulated devaluation it is wages that are targetted, rather than the various other costs, so it is redistributing income away from workers.

Anonymous said...

I see Jack o'connor has taken my suggestion to heart. http://www.independent.ie/national-news/union-calls-for-probe-into-retail-profiteering-2464688.html