Minimum wage rise is a blunt weapon
This recommendation is expected to be implemented in the October budget and will become operational in January.
Not surprisingly, there has been mixed reaction to the proposed rise. Many of those who run businesses are not happy, as it will squeeze margins further and undoubtedly undermine the cost competitiveness of the economy to some extent.
Trade unions and many on the left are complaining the increase is not enough and are advocating for a rise to at least €10 per hour.
The commitment to form the Low Pay Commission was included in the Statement of Government Priorities 2014-2016, agreed by the Tánaiste and the Taoiseach in July 2014.
It was set up on a statutory basis and its role is to advise the Government, on an annual basis, on the appropriate level for the National Minimum Wage. Specifically, the key issues that it was asked to examine in formulating its advice to Government — in relation to the minimum wage — are the change in earnings since the national minimum wage was last increased in 2011; the unemployment and employment rates generally; the expected impact of a change to the minimum wage on employment, the cost of living, and national competitiveness; changes in income distribution; and currency exchange rates.
Ged Nash, the minister with responsibility for business and employment, stated at the time that the commission was being set up that he wanted “to see the minimum wage increased progressively in the coming years as the economy improves” and that there was “an inevitability about pay increase demands as the economy improves”.
However, he also stated that the National Minimum Wage should only be increased “where circumstances allow”.
His bias has been pretty obvious, however. Clearly the commission now believes circumstances allow for an increase. The economy is recovering; Ireland’s external competitiveness is being enhanced by the weakness of the euro against sterling and the dollar; employment is expanding again and the unemployment rate has come down to 9.7% of the labour force (which is still dangerously high); and earnings have not done very much since 2011.
Those who support an even higher increase in the minimum wage argue that all of the increase will feed its way back into consumer spending very quickly as the low-paid have a very high marginal propensity to consume. They also feel that it is essential to bring all workers to at least the level of the minimum living wage as quickly as possible. This was recently estimated at €11.50 per hour. Those who oppose any increase in the minimum wage argue that the economic recovery is still too fragile to risk an outbreak of wage inflation; that it will squeeze margins further; that it will lead to wage demands further up the line and damage the competitiveness of the economy and, ultimately, lead to reduced working hours, a loss of employment and —for some — business closure.
Only time will tell who is correct. However, given my interactions with many of the small businesses who would tend to pay minimum wage in the retail and hospitality sector in particular, increasing the minimum wage is not a good idea.
While retail and hospitality in the greater Dublin area is now doing better, it is very clear that many such businesses around the country are still struggling very badly, because the cost base is still high and consumer spending power is still under considerable pressure. It is important to remember that the improvement in Ireland’s competitiveness over the past couple of years has been on the back of currency movements that are totally outside of our control, rather than any improvement in the costs of doing business. The proposed increase will further pressurise many such small businesses and its timing is very inopportune, putting it mildly. The welfare and tax system should be used to achieve the minimum living wage, rather than the blunt and dangerous instrument of administrative wage hikes.
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