2014 should become the year of the wage increase. Lord knows, workers need one. Falling incomes, rising prices, increased taxation, cuts in income supports and public services – all have contributed to a toxic situation where living standards are falling, especially under the continuing burden of household debt. So, yes, a wage increase is not only desirable but necessary.
In the last five years weekly earnings have fallen by three percent, with the low-paid sectors (marked with an asterisk) of recreation and hospitality, along with the public sector, taking the biggest hits.
We should remember the compositional effect on these numbers. For instance, if you have three people earning €5, €10 and €15 respectively, these three would average €10. However, if the lowest paid loses their job, the average of the other two increases to €12.50. Yet, those two didn’t experience a wage increase; it’s just that the composition has changed. So, we might find in many sectors, the actual fall in weekly earnings for many/most workers is more (and vice-versa).
No doubt, arguments about ‘wage competitiveness’ and ‘wage inflation’ will be raised (isn’t it odd we never hear about ‘profit competitiveness’ and ‘profit inflation’, or ‘poverty competitiveness and inflation’?). These are arguments we will return to later. Hear I want to outline another issue – one which will impact on the kind of economy and society that is being created for us.
The argument goes like this: we should keep wage increases to a minimum, even freeze them. To ensure that workers’ take-home pay increases we should, instead, cut taxes. This is the line that Minister Brian Hayes took on Morning Ireland and – surprise, surprise – employers’ organisations are articulating. Let’s examine this. If wages are frozen and tax cuts are introduced to raise disposable income we would find the following:
- This will cost public finances – the cost of the tax relief, minus any revenue increase from higher consumer spending.
- Workers will benefit from the tax cut (some? many? most?) but public spending would have to reined in to compensate for the cost of the tax relief. So affordable childcare, free health service, guaranteed pensions in old age, pre-primary education, etc. get put on indefinite hold.
- Employers are the big winners – no wage increase and rising profits.
Minister Hayes scenario means ‘paying’ workers something (tax cuts) and ‘robbing’ workers though lower services and income supports. The state’s budget is hit. Employers get the gain.
Now let’s look at an alternative scenario. Let’s assume a wage increase and no overall tax cuts. What happens?
- Public finances win out – not only because it doesn’t have to fund the tax cut, but the increase in tax revenue from higher wages and consumer spending. These additional funds can be used to re-invest in the social and economic infrastructure . This, in turn, provides even more returns
- Workers benefit two-fold: disposable income increases and an increase in public services and income support.
- Employers have to fund this through higher wages – but many enterprises will benefit from the extra spending power of workers and the increase investment by the state.
So that’s the difference. In one scenario, public finances and workers subsidise additional profit. In the other scenario, employers contribute to increased disposable income and revenue for the state.
So when any Minister comes out with the ‘tax cuts are preferable to wage increases’ line they are arguing for subsidising employers’ profits to be paid for by depressing social and economic investment even further which, in the long-term, is not in the interests of business, workers or the economy.
Of course, the above is a simple abstract. Thankfully, life is much more complicated. For instance, many employers cannot currently afford pay increases (that’s what years of recession and austerity will do). Fortunately, we have a process whereby they can go to the Labour Court and plead inability to pay. Indeed, wage increases from companies that can afford to pay benefit those companies that can’t – because workers will spend their money raising the total amount of demand in the economy.
Raising wages for high earners is not very productive –most of this will just end up in savings. That’s why wage increases should be targeted at low/average income earners.
In addition, we need the Government to reverse course at this late stage – end austerity and increase investment; not only to raise long-term GDP growth but to increase demand in the short-term through higher employment in order to allow employers to increase cash-flow to help pay for the wage rises.
In other words, we need joined-up policy – linking the different needs of various parts of the economy with various instruments which are used in an intelligent and forensic way.
But, dear reader, I really have doubts about whether we’re going to get this from the current Government. And every-time I hear some Minister going on about tax cuts my doubts are confirmed.
Latest posts by Michael Taft (see all)
- Cameron’s Swarm is Europe’s Solution - August 24, 2015
- Eurostat Has Done Us a Favour - July 30, 2015
- No Country for Young People - July 17, 2015
- Growing the Economy the Robin Hood Way - July 15, 2015
- Ireland’s Lean Mean Job Creating Machine is Looking a Bit Flabby - July 10, 2015