The Low Pay Commission will soon be recommending an increase in the minimum wage. How much should it recommend? Let’s start with the conclusion: the minimum wage should rise by €1 per hour. Now, let’s go through the arguments.
First, some background: the minimum wage (NMW) is €8.65 per hour. This rate was set back in 2007. In 2011 it was cut to €7.65 but only a few weeks later the current government restored the cut; this would have affected very workers as employers would have been prevented by law from cutting the pay of workers already employed.
Ireland is the only EU-15 country that has frozen the NMW since 2007 (with the exception of poor Greece where the Institutions demanded a cut).
The average increase (bar Greece) has been 16 percent in other EU-15 countries with a NMW. A number of other, poorer EU countries have actually doubled their NMW (Romania, Bulgaria and Latvia) – but these countries were starting off a low-base.
Over that period thee has been an alarming rise in deprivation among those at work.
- In 2008, when the recession began, 6.6 percent of people in work suffered deprivation
- In 2013, this proportion rose to 19.2 percent
Approximately 350,000 in work suffer from multiple deprivation experiences. This is not necessarily confined to low-paid employees; there will be self-employed in this category while many workers higher up the wage ladder may be suffering from deprivation due to debt issues or rising child costs. Nonetheless, it is reasonable to assume that a significant proportion are low-paid employees.
There’s one more background brush. There are claims that Ireland has an extra-ordinarily high NMW relative to other EU countries. These claims omit much and misunderstand more. The comparison with France is instructed. It starts by misreading the Eurostat numbers (which present the minimum wage in monthly amounts). It would appear that Ireland has a fractionally higher NMW than France. However, in France the working week is 35 hours. When this is adjusted for hourly pay, the situation is reversed. But that’s just a start.
In the misreading of the monthly wage, the Irish NMW is 0.3 percent higher than in France. However:
- When we adjusted for working hours, the Irish NMW falls to 10 percent t below French levels.
- When living standards (PPS) is factored in, the Irish NMW falls 17 percent below French levels.
- When the full compensation package (the social wage, or employers PRSI) is factored in, the Irish NMW falls to 22 percent below French levels.
So, from starting out at being higher than in France, when full account is taken of the working week, living standards (a Euro in France goes further than in Ireland) and the social wage (that’s why in France workers have access to a greater range of public services and income supports; see here for a discussion of that) – when all this is factored in, the Irish NMW is well below French levels.
Such are the ways stats are misread and misrepresented.
So what should the Low Pay Commission recommend? Much of the answer depends on what you use as a benchmark. Inflation? Relationship with median wage? Historical trend? Each has their pros and cons.
But there is a strong argument that the minimum wage should be benchmarked against the average market wage (i.e. private sector). Using the average is partially convenience; we don’t have a dataset of the median wage (the wage at which 50 per cent earn above and 50 percent earn below) going back annually to when the NMW was introduced.
Using National Accounts data, what has been the historical relationship between NMW and the average market wage?
In 2000, when first introduced, the NMW was 39 percent of the average market wage. There’s an up-and-down movement up to 2007, reflecting spikes when the NMW was increased. However, since 2007 it’s been all downhill, reflecting the failure to increase the NMW. In 2015, it is estimated that the NMW has fallen to 34 percent of the NMW.
- Restoring the NMW to the level in 2000 would require an increase of €1.31 – to €9.96 per hour.
- If we used the average 15-year relationship between the NMW and the average market wage would require an increase of 97 cents – to €9.62.
A €1 increase would bring the NMW back to the average relationship with the market wage.
Can businesses afford such an increase? For instance, IBEC warns that a 2 percent increase in the NMW would raise the wage bill of an average hospitality (hotel, restaurant) by approximately 2 percent – due to knock-on effects on wages above the NMW level. Sound scary? IBEC thinks so.
Yet, in the last year sales turnover in the hospitality sector increased by 10.6 percent. So even if wages increased by two percent, they would fall when benchmarked against turnover. This doesn’t tell the whole story and the CSO is promising a more comprehensive measurement of business activity which would include gross value-added; but increased turnover is a sign of recovery. So are increased wages.
There are two ways the impact of a NMW increase on enterprises can be minimised:
First, the ‘inability to pay’ clause in the NMW legislation: if employers can show that implementation of the NMW increase would force them to lay-off employees or terminate their employment, they can get a postponement for up to one year from the Labour Court. This is important as it means that only those companies where employment won’t be affected will be required to pay the increase immediately.
Second, the Low Pay Commission could spread this increase out over, say, two years – or approximately 50 cents per year. This would ease in the increase and provide certainty to enterprises over the two year period.
This certainty of expectations – for workers and businesses – can lead the Low Pay Commission to undertake a strategic, long-term approach to the minimum wage. I would propose that they:
- Declare that the long-term goal is to bring the NMW into line with the Living Wage.
The Living Wage should, in time, become the statutory floor. How long would this take and what increases would be necessary? Let’s assume the Living Wage increases at 2 percent per year, inflation-indexed.
- Annual increases of 5.6 percent would be necessary to reach the Living Wage in seven years.
- Annual increases of 4.6 percent would be necessary to reach the Living Wage in ten years.
These time-scales would require increases of approximately 50 cents per year – though I suspect it would be less since in the short-term inflation is unlikely to reach 2 percent.
This may seem like high increases but in both scenarios the increases would be less than the NMW experienced prior to the crash: in the period 2000 – 2007 the average increase was 6.5 percent.
So: a €1 increase in the NMW. This is just the first step in providing decent work. Other steps would include elimination of precarious work, providing part-time workers the right to extra hours in their workplace when they become available, and statutory Sunday premium and overtime pay, along with other rights. So it is only one step.
But what an important step – a clear signal that work will be rewarded, not by continued deprivation, but by an income one can live on adequately and fruitfully.
Let’s start walking.