With inflation soaring, how Ireland  defines a living wage is crucial

A living wage must be calculated on the minimum required for a single adult working full-time to meet the basics

The food budget for 2021 for a full-grown adult was €47 a week, less than €7 a day. Picture: iStock

The government have recently announced plans to introduce a ‘living wage’, though they seem to have redefined the concept.

The minimum wage is currently €10.50. The government’s ‘living wage’ hourly rate was recently announced as €12.17, set at 60% of median hourly earnings, with a vague plan (‘depending on economic circumstances’) to bring it in over the next few years.

The living wage, however, is expressly calculated by adding up the costs of a minimum essential standard of living and dividing the figure by full-time working hours. 

And it really is the ‘minimum essential’. The food budget for 2021 for a full-grown adult was €47 a week, less than €7 a day. 

The Living Wage Technical Group have been calculating these costs for several years and last year estimated that €12.90 an hour (the 2022 figure has yet to be published but is likely to be closer to €14 this summer due to inflation) is the minimum required for a single adult working full-time to meet the basics. 

This translates to €503 a week (€26,156 a year). For some idea of distribution, the median income of a single adult household is €19,9429 (€383 a week).

A significant majority of Irish single adult households therefore take in less than the cost of a minimum essential standard of living.

When we measure poverty in Ireland, we often use the ‘at-risk-of-poverty’ threshold, which similarly is defined as anyone below 60% of median household income. 

For a single adult, this threshold was about €16,000 in 2021 (over this and you’re not ‘at-risk’). The Living Wage for a single adult is almost 70% higher than this threshold. There is clearly a huge mismatch between the two approaches.

Defining a living wage at this arbitrary point in the wage distribution rather than based on the cost of a minimum essential standard of living ... well it’s not really a living wage.

For example, if there was a complete income freeze across the entire economy (wages, transfers, taxes, etc) and inflation hit 10%, there would be no revision to the estimate though there would be a clear change in material conditions for everyone. 

Most people understand what this would mean, especially for those struggling. This could have real consequences for the wage floor we decide on in future.

Even the deliberations at the Low Pay Commission on the national minimum wage incorporate inflation. 

Low inflation was one of the main arguments for restraint in wage increases over the past decade. Of course, now that inflation is high, high inflation is one of the main arguments for restraining wages.

Real-term pay cuts for workers

It’s not unlikely that we will be faced with scenarios in future with this arrangement where workers will take real-term pay cuts, have their spending power diminish but still be considered to be on a ‘living wage’ from one year to the next.

Another year of inflation at current rates and €12.17 will actually be lower in real terms than the current minimum wage.

An increase in the minimum wage is obviously to be welcomed, though workers will continue to struggle on it. 

Even for workers on full-time hours, the state will likely have to continue to subsidise the living costs facing many of these workers, through supports like the Housing Assistance Payment (Hap) (only a third of HAp recipients were working in 2015, it was more than half by 2018).

The share of Irish households in material deprivation (unable to afford the basics) actually increased in 2019, a year of strong real wage, employment, and macroeconomic growth as did the share of Irish workers. 

Almost one in five Irish people were in households the year before the pandemic that could not afford the basics. 

The increase that year was driven almost exclusively by rising ‘extreme deprivation’ within particular groups: renters and young adults, particularly young women.

Nominal wage gains over the pandemic have basically been inflated away and any worker with a wage increase below 9% this year will effectively be taking a pay cut.

As the living wage estimate is based on living costs, it could be reduced with more ambitious intervention by government to address the cost of living crisis, such as introducing energy price caps for companies doing exceptionally well in the current environment.

In the medium term, addressing the cost of housing is clearly the priority. A state-led retrofitting programme for the public and social building stock would bring down energy costs for households and manage risk going forward for the wider economy related to the reliance on energy imports.

• Ciarán Nugent is an economist at the Nevin Economic Research Institute