Neil McDonnell: Structural problems threaten our economic stability

No one really believes that an extra €54.60 per week for those on the National Minimum Wage will help them rent a house or buy an apartment. But that is exactly what the 'living wage' agenda is suggesting workers should be able to do, writes Neil McDonnell, Isme chief executive.

'Managing departmental expectations is far more difficult when money is plentiful than when it is not.' Picture: Sam Boal/Rollingnews.ie

It is hard to have sympathy for a finance minister suffering an embarrassment of riches come budget time, but the political reality for Michael McGrath is that managing departmental expectations is far more difficult when money is plentiful than when it is not.

In our pre-budget submission to government, Isme asked for significant tax and social welfare reform this year, while also proposing €1.1bn in additional Exchequer income via PRSI and USC simplification measures. From the papers published last week by the Tax Strategy Group, and from the general pattern of leaks from Merrion Street, it does not appear that significant reforms will take place this year.

There is never a good time for tax reform, but the least-worst time to do it is when the current account is not being squeezed. To quote Warren Buffett, “be fearful when others are greedy, and greedy when others are fearful”. If we are unwilling or unable to contemplate bold repairs to our tax and social protection systems in 2023, when will we be ready to do them?

Aside from an abundance of cash (an abundance most economists agree is not sustainable), the other characteristic of the Irish economy is that it is at full employment. With 2.6m people employed, we have never had a workforce so big. And with an unemployment rate of 3.8%, we have never had so few citizens out of work.

In fact, the last time our unemployment rate was close to this was 2001, when we were on the dizzying up-ramp of the Celtic Tiger.

The problem with being in such a good place is that the best you can hope for is to stay there. And that good place is afflicted by structural problems such as lack of housing, infrastructure, and stubborn inflation.

Ireland’s labour force has a steady 2.5% of workers who are unable, unfit, or unwilling to enter employment. With our unemployment rate as low as it is, this means that employers are fishing in a talent pool that is just above one percent of total workers. This is driving wage inflation and relatively high job turnover. The solution to this problem is to import labour from less fortunate countries, but this comes at a political and social cost.

Into this mix, the Low Pay Commission is recommending a 12.4% increase in the national minimum wage (NMW), taking it to €12.70. Isme is regularly castigated for criticising the NMW setting mechanism, but we simply do not believe it delivers for workers, nor does it fix the cost-of-living issue.

No one really believes that an extra €54.60 per week for those on the NMW will help them rent a house or buy an apartment. But that is exactly what the “living wage” agenda is suggesting workers should be able to do. This is a fundamental misunderstanding of a national minimum wage.

What's your view on this issue?

You can tell us here

It is neither designed nor intended to ensure that recipients can service the average Irish mortgage, buy a car and go on a sun holiday. Rather, it is a statutory minimum rate of pay below which an employer cannot pay a worker. And there is no affordable level of NMW that will meaningfully assist workers address their cost of living unless we tackle our domestic cost base.

Rising the NMW does not just affect those on the NMW. Most workers earning below €30,000 per annum have their income benchmarked against the NMW.

Raising the NMW by statute does not mean that a worker’s earnings will increase by the same amount. Where an employer is unable to pass that increase on to their customers, they will economise elsewhere.

In the services and retail sectors, that typically means workers will get fewer worked hours per week or will be required to lift their productivity. In the retail sector we are seeing workers increasingly replaced by self-scan checkouts.

A report published last year by the Economic and Social Research Institute (ESRI) into the 10% increase in the NMW over the three years from 2016 to 2018 showed that workers in accommodation, food, and manufacturing sectors suffered a reduction in worked hours of between 2.5 and 3 hours per week.

A 12.4% increase in one year will have a more painful effect for workers.

Neil McDonnell is chief executive of business representative group Isme