National Minimum Wage debate gathers pace

The Irish government is committed to introducing a National Minimum Wage in April 2000. All that remains is for a final rate to be agreed. A rate of IEP 4.40 per hour has been proposed, based on a 1998 report from the National Minimum Wage Commission, and a June 1999 report by the Economic and Social Research Institute concludes that a NMW set at this rate would have little impact on wage costs and employment levels. The NMW debate is set to intensify over the second half of 1999 and its rate will be a central issue in negotiations on a possible successor to the current Partnership 2000 national agreement.

Since the UK introduced its National Minimum Wage in April 1999 (UK9904196F), Ireland is the only EU Member State that currently has no provisions for either a statutory or collectively agreed national minimum wage, or a system of legally-binding industry-level collective agreements setting minimum pay rates across almost all sectors of the economy. Not for long, however: the current Fianna Fail/Progressive Democrat coalition government has committed itself to introducing a National Minimum Wage (NMW) in April 2000. A rate of IEP 4.40 per hour for full-time adult workers (and IEP 3.08 for those aged under 18) has been proposed, following the publication of a report by the National Minimum Wage Commission (NMWC) in April 1998 (IE9804246F).

On 22 June 1999, the deputy Prime Minister (Tánaiste), Mary Harney, published the final report of the "interdepartmental group on implementation of a National Minimum Wage" and a Study on the impact of the minimum wage commissioned from the Economic and Social Research Institute (ESRI). She reaffirmed that "the introduction of a national minimum hourly wage is a key priority of the government. I am on course to implement the National Minimum Wage, as promised in our programme for government, from April 2000." The interdepartmental group report makes recommendations on issues such as the NMW's implementation date, scope, exceptions, variations and enforcement, and Ms Harney said that "with the receipt of this final report, we can complete our consultations with the social partners and start the formal legislative process, on which preparatory work is well-advanced, to give effect to the minimum wage by April 2000. I will be announcing details of my legislative proposals in the near future."

Below, we examine the main findings of the ESRI report and the NMW debate more generally.

ESRI report's main findings

The ESRI report's findings are based on an assumption that the IEP 4.40 hourly rate based on the NMWC recommendations will apply when the NMW is introduced. It predicts that an NMW at this level will directly affect approximately 163,000 workers, or 13.5% of the total workforce (ie those earning less than IEP 4.40 per hour), will be directly affected.

The report concludes that an NMW of IEP 4.40 per hour will have less impact on employment levels and wage costs (which are amongst the main concerns of employers) than originally envisaged in the NMWC report. The increase in the total wage bill is likely to be only about 1.6%. Even allowing for a possible "spill-over" effect because of claims to restore pay differentials from employees earning a wage that is just above the NMW threshold, the wage bill is unlikely to increase by more than 2%. Some low-paying sectors, however, such as hotels/restaurants and distribution, are likely to face bigger increases in wage bills than higher-paying sectors.

The tightening labour market is driving up wages anyway (IE9906280F), even in some lower-paying sectors. For instance, some of the more "progressive" companies in the supermarket and retail sector, such as Superquinn (IE9903274N) and Marks & Spencer (IE9805249N), have recently introduced new pay scales of IEP 4.40 and above, following negotiations with the retail workers' trade union, Mandate. These higher rates are being introduced at a time when many companies are effectively being "forced" to increase wages in order to recruit and retain staff.

The report suggests that a NMW is unlikely to provoke any long-term reduction in employment because it is assumed that increased labour costs will frequently be passed on to consumers through higher prices, particularly in the context of a buoyant economy with high consumer demand for goods and services. It is predicted that the overall effect on employment of the proposed NMW will (potentially) be to reduce employment by 0.9%, but on a one-off, short-term basis. Significantly, the report states that this small reduction will occur in the context of an overall 18.9% increase in employment that is predicted for the period 2000-2010. Therefore, any potential job losses in low-paying sectors will occur at a time when overall employment is rapidly expanding in Ireland anyway (the unemployment rate now stands at 6.4% and is steadily falling).

Comparisons with other countries

The Organisation for Economic Co-operation and Development (OECD) made a submission to the Irish NMWC in 1997 (Working paper No. 186, OECD (1997)). The document provides a useful comparison of Ireland's proposed NMW rate with minimum pay rates in other OECD countries in 1997. Comparing the proportion of full-time median earnings represented by the minimum wage, Ireland's proposed rate of IEP 4.40 (USD 6.70) and 64% of median earnings was second only to the Belgian rate (USD 7.3) of 68% of median earnings. If set at IEP 5 (USD 7.6) per hour, as requested by Mandate and the Services Industrial Professional Technical Union (SIPTU), the Irish NMW would be the highest amongst OECD countries relative to median earnings, at 73% of median earnings, based on 1997 figures.

Debate over the impact of the NMW

The current debate in Ireland is not so much over whether an NMW should or will be introduced - although employers' groups and orthodox economists are still opposed to its introduction in principle - but rather at what rate it should be set. The precise details of the NMW will be finalised in the coming months in the context of negotiations on a successor to the current Partnership 2000 (P2000) three-year national pay agreement (IE9702103F) .

Trade union perspectives

The general trade union view is that an NMW will ensure that some of the wealth that is being generated from the current economic boom reaches low-paid workers, and help to prevent companies competing on the basis of cheap labour. It is suggested that the tax-payer currently has to foot the bill for low-paying employers by funding welfare benefits, such as the Family Income Supplement (FIS), that subsidise the income of the low paid.

Ireland's two largest trade unions, SIPTU and Mandate, which primarily represent low-paid workers, have suggested that they would be unwilling to enter another national agreement to succeed P2000, unless the IEP 4.40 rate - which constituted two-thirds of average earnings in 1997, but which is predicted to constitute 56% by 2000 - is adjusted upwards to take account of increases in average earnings. They are calling for a NMW of between IEP 4.80 and IEP 5.00 per hour, which would constitute two-thirds of average earnings in 2000. The Irish Congress of Trade Unions (ICTU) has accepted the proposed IEP 4.40 rate, but also suggests that it should be updated in line with increases in earnings.

Employers' perspectives

The Irish Business and Employers Confederation (IBEC) opposes the NMW in principle, even though the majority of its affiliated members pay above the proposed rate. It believes that the measure will undermine economic competitiveness by driving up wage costs and inflation, and provoke redundancies in low-paid sectors. It is also concerned that the NMW will have knock-on effects by encouraging employees higher up the pay scale to maintain wage differentials relative to lower-paid workers. IBEC would prefer an extension and improved enforcement of the existing system of Joint Labour Committee s (JLC s), which set minimum pay rates across a number of low-paying sectors.

The Small Firms Association (SFA), which is an affiliate of IBEC, and which represents many employers that will be affected by the NMW legislation - a 1997 survey of 1,800 firms by the SFA ("Small Firms Association survey on the introduction of a National Minimum Wage", SFA (1997)) found that 53% of small firms were paying less than IEP 4.50 per hour - are vehemently opposed to a NMW. They argue that the proposed rate is too high and would reduce job opportunities for the unskilled. The Irish Small and Medium-Sized Enterprises Association (ISME), not affiliated to IBEC, is also totally opposed to the NMW.

Economists' perspectives

The perspective of orthodox labour economists (for example, "What are the effects of a minimum wage? A review of the international evidence", K Denny, C Harmon and B Walsh, paper delivered to the Foundation for Fiscal Studies, Dublin, 12 November 1997). is that an NMW interferes with the free running of the labour market and artificially raises wages (the price of labour) above the rate that would be set if the market was left to operate without any restrictions. These economists believe that a NMW will provoke substantial job losses by increasing the supply of labour while simultaneously reducing the demand for labour.

This economic orthodoxy has, however, been increasingly questioned in recent times, both within and outside Ireland. In their frequently cited empirical study of fast-food restaurants in the US states of New Jersey and Pennsylvania, Card and Krueger found that the minimum wage had little or no adverse effect on employment levels, and may even have employment-creating potential and/or redistributive effects ("Myth and measurement: the new economics of the minimum wage", D Card and A Krueger, Princeton University Press, Princeton (1995)). A study conducted in the UK arrived at a similar conclusion ("Employment and the introduction of a minimum wage in Britain", S Machin and A Manning, Economic Journal, No. 106 (1996)), as did the recent Irish ESRI report.

Commentary

Ireland is now the only EU country that is yet to implement some form of general minimum wage. Notwithstanding the continued opposition from many employers, there is now a broad commitment to an NMW across the political spectrum, as well as from trade unions and groups representing the socially excluded.

The arguments for and against an NMW are rather complex. On balance, it would appear that the social, economic and business advantages of a NMW outweigh any disadvantages. The NMWC recommendation of IEP 4.40 per hour seems an eminently reasonable proposal in a context of unparalleled economic prosperity in Ireland - especially when it is considered that low-paid workers are not benefiting as much as they might from the current boom. There are large discrepancies in the distribution of income, with the gap between low and high earners being amongst the highest in the industrialised world (as the OECD pointed out in 1997). An NMW would help to ensure that some of the wealth generated by economic growth trickles down to low-paid workers. As mentioned above, it is envisaged that 163,000 workers or 13.5% of the workforce would benefit directly from a NMW of IEP 4.40 per hour. That said, a NMW would be likely to have a greater impact on alleviating income inequality amongst working households than on overall poverty rates. This is because the poorest households often do not have any member working, which is why a range of other (complementary) measures, such as social welfare reforms, are needed to tackle poverty.

Turning to the economic and business implications of a NMW, it seems likely that a rate of IEP 4.40 per hour would have little effect on wage costs and employment levels, although there is a case for differentiating the NMW by age because a high minimum wage for young people could have a detrimental effect on youth employment. Significantly, the NMW will be introduced at a time when overall employment has been rapidly expanding in Ireland. Even if the NMW causes some reduction in employment in low-paying sectors in the short term, it may have a positive impact on overall employment in the long term, as it may help to increase demand for goods and services because the low paid will have more disposable income. This may also have a knock-on effect in other industries and services. The price of labour is not the most significant determinant of employment levels: it is demand which is the crucial factor. A rising demand for goods and services promotes a rising demand for labour.

Total wage costs are unlikely to increase by more than 1.6% due to the NMW. The tightening labour market is pushing up wages anyway in particular sectors, regardless of the introduction of a NMW. To a certain extent, this is because many employers are experiencing problems when attempting to recruit and/or retain staff. The NMW may be of some help in ameliorating staff recruitment and retention problems, by providing employees with a greater incentive both to enter and remain in a particular job.

In addition to its potential effect on recruitment and retention, an NMW may have other positive effects for companies, in that it may facilitate productivity increases and improve employee morale. It may also potentially provide a "level playing-field" for employers, in that it could help to prevent companies attempting to undercut each other by competing on the basis of low labour costs.

The NMW debate is set to intensify in the coming months. The final rate at which the NMW is to be set will be a central issue in negotiations on a possible successor to P2000. (Tony Dobbins, UCD)

Other references:"National Minimum Wage" - what it really means, C Higgins, Industrial Relations News No. 19, May 1999; Submission to National Minimum Wage Commission, ICTU, October 1997; "The impact of the minimum wage in Ireland", Report for the interdepartmental group on the implementation of a National Minimum Wage, B Nolan et al, March 1999; "A submission to the National Minimum Wage Commission on behalf of low paid workers", SIPTU, September 1997.

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