Submission from Department of Finance to the Low Pay Commission on the National Minimum Wage Post author By Philip Lane Post date May 13, 2015 here. Categories In Uncategorized 6 Comments on Submission from Department of Finance to the Low Pay Commission on the National Minimum Wage ← TCD Policy Institute event on mortgage arrears → QUB public policy blog 6 replies on “Submission from Department of Finance to the Low Pay Commission on the National Minimum Wage” First, approximately two-thirds of Ireland’s trade is with countries outside the euro area. This means that fluctuations in the euro’s exchange rate are critical for the export performance of Irish firms. A key flaw in this document is that it treats the economy as one unit while the the minimum wage mainly impacts the indigenous sector, which is dominated by domestic non- exporting firms. For the FDI sector wages are not high and in respect of merchandise exports most are produced by capital intensive firms. Besides, shipments into global supply chains are not likely to be impacted by short-term exchange rate changes. Tourist and restaurant work has the lowest pay and a foreign worker ratio of about 33%. We don’t know how rates of pay in the food and drinks sector compare with rates in UK counterparts. In 2014 Ireland accounted for 25% of the UK’s food and non-alcoholic drink exports and including alcohol, there was a trade balance between the two countries. Pay of course isn’t the only factor in supplying to the likes of Tesco. Economies of scale matter too. The low pension coverage in the indigenous sector of course is ignored. It’s not the most illuminating of documents, and MH is right to highlight how it treats the economy as a single unit when it is actually quite differentiated. The literature on minimum wages is broadly positive on their impact, but generally recognises that there will be a threshold beyond which they impact negatively on employment. Short of that threshold, they can have quite positive impacts in areas like supporting the labour share of returns to businesses (which has been slipping in developed countries), and stimulating economic activity by putting money into the hands of people who will spend it. The direct impact of the minimum wage in Ireland is mostly in lower paid domestically traded sectors, plus hospitality which is a quasi-export sector. In purely domestically traded sectors, the direct impact on employment of a moderate increase in the minimum wage is likely to be close to zero. Market demand is not likely to shift much, and it is likely that the hit will be taken through a combination of reduced net margins in businesses and price increases. In tourism, by contrast, a higher minimum wage is likely to exercise a drag on market demand because international customers can go elsewhere, reducing employment opportunities. That said, a proportion of the employment hit will be in the form of reduced inward migration as opposed to loss of employment opportunities for Irish residents. What I think is more important than the direct impact of a minimum wage increase is the induced effect, mediated through the impact of price increases on the living costs of those working in sectors involved (directly or indirectly) in exporting. Also significant is the impact on the cost to exporters of lower end business services such as cleaning and security. Between them, these factors will make an increase in the minimum wage drive up the costs of exporters, with a risk of slowing or stalling our export-driven economic recovery. On balance, I would say that the right strategy is to hold the minimum wage down for a while longer so as to underpin exporting competitiveness, until the unemployment rate hits about 5% to 6%, and then increase it relatively aggressively to help spread the benefits of the recovery. The recommendations made by the low pay commission will be in line with the ideologies of the majority/most influential of its members. If that does not coincide with the ideology of the government at the time the report will be shelved. I know. I’m a complete cynic. The last paragraph makes a good point. Shouldn’t we base the minimum wage on the cost of living in the area? If so we would need to have a multiplier for living in areas where its more expensive. EG minimum wage x 1.2 if you live in Cork City and 1.3 if you live in Dublin etc? “In principle, this suggests that adjustment of the minimum wage should be symmetric and allow for consideration of a reduction in the rate in response to a shock to demand or a sudden loss in competitiveness.” To argue for the inclusion of a downward shift in the minimum wage, in the same week that well paid and well pensioned public servants discuss restoring their significant very positive pay differential with private sector workers, takes a degree chutzpah, to say the least. I tend to agree with strategic outlined by BCT, and with his analysis: “In purely domestically traded sectors, the direct impact on employment of a moderate increase in the minimum wage is likely to be close to zero” In terms of loss of competitiveness in the 2002 to 2008 period, the impact of increases in the minimum wage rate was insignificant. Of far greater significance, for the past 40 years, was the application of percentage wage increases as opposed to flat rate increases; a methodology that opened up a vast standard of living differential between higher paid and lower paid workers. The fact that wages proved to be sticky downward in the recession, is a poor reason to support the argument that the minimum wage should be flexible downward. It would be have been far better to have some form of mandatory short-time working to lessen the overall impact on employment, rather than forcing the lowest tier to bear the brunt of the next crisis. Thankfully, the subsidiation of employer redundancy costs, a significant factor in the increase in unemployment as distinct from short-time working has now been removed, although I understand submissions have been made to introduce it. Those submission should be resisted. And we have the older(50+)/younger pay gap which has increased by over 50% in the past decade. The childer, if given the option, would move to aggressively reverse direction here. ‘Minimum’ is an unfortunate term. Living Wage in context is real. @JR +1 @All Wouldn’t a ‘low pension coverage commission’ be a better policy for labour to champion at the momemt? Come to low pay when the unemployment rate gets down further. Comments are closed.