Impact of government’s four-year plan on minimum wage and sectoral wage agreements
Published: 16 February 2011
As part of the European Union/International Monetary Fund (IMF [1]) programme of financial support for Ireland, the Irish government announced its four-year economic plan on 24 November 2010.[1] http://www.imf.org/
The Irish government’s four-year economic plan was announced in November 2010 and approved as part of the EU/IMF programme of financial support for Ireland. The plan cuts the national minimum wage by €1 per hour to €7.65 per hour. It also proposes a review of the system of legally binding sectoral wage agreements, an annual saving of €1.2 billion in the public sector wage bill, a reduction in pension income tax relief and an end to tax breaks on trade union subscriptions.
As part of the European Union/International Monetary Fund (IMF) programme of financial support for Ireland, the Irish government announced its four-year economic plan on 24 November 2010.
Cut in the minimum wage
One of the most controversial elements of the four-year economic plan was the €1 per hour cut in the minimum wage to €7.65 per hour. Legislation cutting the minimum wage passed all stages in the Dáil (the Irish parliament) in early December and the cut came into effect on 1 February.
According to the Minister of State at the Department of Enterprise, Trade and Innovation (DETI), Dara Calleary, if an employee is:
already working under a contract of employment that sets wages at or above the national minimum wage, the employee is entitled under his or her contract of employment to continue to be paid those wages unless otherwise agreed between both the employer and the employee concerned, or unless the contract provides that the employee’s rate of pay is determined by reference to ‘the prevailing NMW hourly rate’). Moreover, the protection afforded a worker does not depend on the contract of employment having been confirmed in writing.
The Financial Emergency Measures in the Public Interest (No. 2) Bill 2010 also gives the Minister for Enterprise, Trade and Innovation almost complete discretion to amend or revoke the level of the wage. Any such decision is to be based on the same criteria used by the Labour Court when making recommendations on the minimum wage, such as competitiveness and effect on employment.
Up to now, the minister could only change the level of the minimum wage after either a social partner agreement or a Labour Court recommendation on application by one of the social partners. These mechanisms remain but are no longer necessary before a ministerial order can be made. In addition, Section 13 of the bill introduces a time limit of 13 weeks for the Labour Court to make a decision on the minimum wage if it is asked to do so by the social partners.
The Irish Congress of Trade Unions (Congress) has made opposing the minimum wage cut its top priority and is leading a campaign against the measure. Congress General Secretary, David Begg, stated in a press release there was ‘no economic, political, social or moral justification for it’. However, according to a press statement by the Irish Business and Employers’ Confederation (IBEC), the government move to reduce the national minimum wage is necessary to support economic recovery and create employment. IBEC also stressed that regaining competitiveness and getting Irish labour costs back into line with similar economies is central to economic recovery.
Opposition political parties have criticised the cut in the minimum wage. Fine Gael said that it would reverse the proposed cut in the minimum wage if it gets into government after the general election on 25 February 2011. The Labour Party has also demanded a reversal of the decision to cut the minimum wage.
Review of legally binding sectoral wage agreements
A review of the framework of Registered Employment Agreements (REAs) and Employment Regulation Orders (EROs) is to be undertaken by the Minister for Enterprise, Trade and Innovation. REAs are legally binding, sectorally agreed minimum pay and conditions which exist in certain sectors – mainly construction, electrical contracting, agricultural, catering and printing. Wage levels are regulated in these sectors by employers and worker representatives reaching specific agreements about pay and conditions of employment, either through REAs or EROs, following consideration by Joint Labour Committees. The terms in each case are protected by legislation. Pay rates are typically above the national minimum wage (NMW) and, in some cases, significantly higher.
The review is to be finalised by early 2011. According to a government statement accompanying the announcement of the joint EU–IMF programme for Ireland, its terms of reference are ‘to be agreed with European Commission Services’.
As well as criticising EROs and REAs for fuelling ‘labour market rigidity by preventing wage levels from adjusting’, the National Recovery Plan 2011–2014 (1.03Mb PDF) identifies three specific issues with these sectoral minimum wage mechanisms:
specific cost-increasing conditions such as pay rates for Sunday working;
geographical divisions which can sometimes appear arbitrary;
inflexibility in measures for adjusting agreements in line with broader labour market developments.
According to the National Recovery Plan, these issues must be addressed to encourage competitiveness and employment growth in these important sectors.
Cut in public sector pay and pensions
In terms of public service pay, €1.2 billion in annual savings are to be generated over the four years, amounting to an 8% decline in the pay bill from 2010 levels. The cost savings are to be relatively evenly spread from 2011 to 2014 inclusive, with €400 million sought in 2011, €300 million each in 2012 and 2013, and €200 million in 2014.
The planned reduction in public sector staff over this period is 13,200 (from 307,900 to 294,700 workers). When taken together with the reduction of 11,500 workers since 2008 under the government moratorium on recruitment and promotions in the public service, this amounts to a total reduction of 24,750 workers between 2008 and 2014.
The National Recovery Plan envisages additional savings from an:
immediate 10% reduction in the pay of all new entrants to the public service, leading to a further sustainable reduction in public service pay costs over the medium term. In addition, all new entrants will start on the minimum point of the scale.
There will not be many new entrants to the public service over the next few years due to the moratorium on recruitment. However, several sectors such as education have some leeway to recruit and, in the longer term whenever the moratorium eases, a small but significant cohort of public servants will emerge on the new, lower post-2011 scale.
Shay Cody, the General Secretary of the Irish Municipal, Public and Civil Trade Union (IMPACT), Ireland’s largest public sector trade union, noted in an internal union communication that the 10% cut would mean new entrants would start on almost 25% less than their counterparts in the same job had been on just two years earlier. He added:
This position has not been, and will not be, accepted by IMPACT and the union will seek, when opportunities arise, to redress this situation through the industrial relations process.
A reduction for public service pensioners is also part of the plan. This will take the form of an average reduction of 4% for existing pensioners according to the rates and bands set out in the table below.
| Annual pension | Reduction rate |
|---|---|
| First €12,000 | 0% |
| €12,001–€24,000 | 6% |
| €24,001–€60,000 | 9% |
| Balance over €60,001 | 12% |
Source: National Recovery Plan 2011–2014
In explaining the reasons for cuts in public service pensions, the National Recovery Plan states that pensions now account for almost 15% of the total public service pay and pension bill, having increased from €1.35 billion in 2005 to €2.8 billion in 2010.
Reduction in pension tax relief
On income tax, one of the key changes is the phased standard rating of pension tax relief for employees, self-employed workers and individuals. This will begin with:
the reduction in 2011 of the annual earnings cap for employee/personal pension contributions by almost 25% from €150,000 to €115,000;
a reduction in the Standard Fund Threshold (currently over €5 million).
Over the following three years, the rate of income tax relief will be reduced to 34% in 2012, 27% in 2013 and 20% in 2014. This is estimated to yield an additional €165 million in each full year, giving an overall cumulative reduction in pension tax expenditures of €700 million.
The government acknowledges in the National Recovery Plan that this ‘may reduce saving for private pension provision’, but adds that it ‘is committed to raising €700 million from this sector over the period of the plan and is willing to engage with the industry to examine alternatives to deliver this outcome’.
End of union subscription tax breaks
Tax relief on trade union membership fees, which has been in place since 2001, is to be ended in 2011. It had been available at the standard rate for up to €300 per year and its abolition had been recommended by the Commission on Taxation in 2009. Many union members did not claim the relief, with just over half claiming it in 2006.
Roisin Farrelly, IRN Publishing
Eurofound recommends citing this publication in the following way.
Eurofound (2011), Impact of government’s four-year plan on minimum wage and sectoral wage agreements, article.
