Tuesday, 26 March 2013

What's a Euro anyway?

Is a euro in a Cypriot bank, locked down by withdrawal limits and capital controls, the same as a euro in an Irish or French bank? 

Is a euro sitting in, say, a payroll account in Laiki with a balance of more than €100,000 (and subject to an unspecified “haircut” on Thursday ) the same an “Irish euro”?

They’re both euro, both promises to pay the bearer, but honestly, do you have a preference? Of course you do. You’d prefer your money to be outside Cyprus. You’d prefer an Irish euro to a Cypriot one. So they’re not the same. Do we even have a single currency now, then? What does the Euro mean?

And how did this happen? At least in part, it happened because all the finance ministers of the Eurozone sat around earlier this month and let the Cypriots leave the room with a proposal to make depositors pay for bank losses, including insured depositors with balances of less than €100,000. They rowed back on that part, but you can’t undo the damage of their having taken it seriously to begin with.  Imagine a snowed-in family just once agreeing “if we get really hungry, we can eat the rabbit”. You can take that back all you like – everybody knows the rabbit’s not safe any more. He’s not just a pet, he’s protein. Depositors aren’t just protected customers now, they’re also a source of money to save the bank. 

We sat back and let that happen – all the Eurozone countries did. We let deposits in Cyprus undergo that subtle shift in meaning. We let their banks be closed for ages, with devastating impact on small firms and families. We let their tax rate be changed. We let them hang out there, hoping it would save us, the rest of this uneasy union. Where does that leave solidarity, in this European Project under our presidency?

Just now, you’d prefer an Irish euro to a Cypriot one. Remember that feeling, because, as Martin Niemöller might have written were he more interested in money, and living in more peaceful times, “First they came for the Cypriots ...”

Sheila Killian

Tuesday, 12 March 2013

Drivers of progressive tax

A recent OECD  report olooks at the progressivity of income tax systems in their 34 member countries. A progressive tax is often simply defined as one where you pay a higher rate at higher income, but the OECD goes a little further, incorporating social security contributions, child benefits and some other measures. They also consider different sorts of taxpayers – single people and single-income couples, both with and without children. The big limitation of their analysis is that they only look at how progressive the tax system is up to the level of twice the average wage. This matters because countries with a welfare system targeted at low earners will tend to be progressive at those levels. In fact, across the OECD, taxes are more progressive at low incomes, and less so as incomes rise. Despite this caveat, the report has interesting analysis, and gives a really interesting picture of where Ireland is, albeit at lower income levels.

So how do we fare, as a country?  Well, we stand out in a number of ways. The headline result is that on average our tax system looks really progressive – we’re at or near the top of most tables across the OECD. When you drill into our individual charts, however, you can see that this is largely driven by how our system works at the lowest income levels. We are progressive here, particularly when social security contributions are taken onto account because the USC is charged a lower rate in this level.  As you reach and exceed the average industrial wage, our progressivity drops dramatically, which is why in Ireland in particular it would be nice to see this study extended into higher income brackets.

We show a few interesting kinks  in our system especially when you compare tax wedges and tax rates for taxpayers with and without children. Much of this kicks in at income levels of around €50,000 and probably derives from the shift from the low to the high tax bracket. 

The analysis is tantalising, but because it only looks at incomes up to around €85,000, it sheds no light on the fairness or otherwise of higher taxes on the higher-paid. The full report is available here  

Sheila Killian

Wednesday, 6 March 2013

Effects of the minimum wage on the jobs market

Tom McDonnell: TASC made a short submission last week to the Labour Court review of the JLC wage agreement mechanisms. The submission is available here.

The Joint Committee on Jobs, Enterprise and Innovation published a report in February on actions to address youth and long-term unemployment. It can be found here. One of the recommendations (Number 26) states that there should be an investigation into the effects of the minimum wage (both positive and negative) on the jobs market. This is a sensible recommendation. The independent Low Pay Commission (LPC) in the United Kingdom does this every year. What does the evidence suggest?;

The LPC's 2012 Annual Report is here and their discussion of the minimum wage's impact on the UK's labour market begins on page 48 of the pdf. They state that: The general consensus...is that the NMW (i.e, the national minimum wage) has not significantly affected employment . 

Both the theoretical and empirical literature are ambiguous concerning the impacts on employment. While the standard competitive model suggests there should be a negative effect on the jobs market, institutional models and dynamic monopsony models both suggest that the effect is actually much less clear cut. Increased aggregate demand and reduced search costs are just two reasons why the effect on net employment might be minimal or non-existent. Recent empirical work suggests minimum wage have little or no overall effect. See for example this study by Arindajit Dube, William Lester and Michael Reich.

John Schmitt asks why the minimum wage appears to have 'no discernible effect' on the minimum wage here while Barry Hirsch, Bruce Kaufman and Tatyana Zelenska try and explain the lack of effect on employment here through the framework of differing 'channels of adjustment'.

While innovative solutions to the jobs crisis are needed, reduced levels for wage floors are unlikely to be helpful in reducing unemployment. The major effects would likely be to increase financial hardship and vulnerability for low wage workers, and increasing income inequality, without any meaningful impact on overall employment.