Tom McDonnell: The minimum wage was attacked in the Dáil again this week. The substance of the argument was that it was killing competitiveness and adding to the unemployment crisis. The evidence does not support this claim.
Wage factors are just one element of competitiveness. Indeed wages are just one portion of overall labour costs, which in itself is just one part (approximately one third) of overall business costs. TASC has already called for a full review of other business costs that influence competitiveness including utility bills; commercial rates and other input costs.
The minimum wage was introduced in recognition of the vulnerability of low income workers. That vulnerability has not decreased in the intervening period. Minimum wage laws also help boost overall wage equality between women and men as the majority of minimum wage workers are women. The minimum wage also acts as a bulwark protecting migrant and other vulnerable groups against exploitation by employers. Reducing the minimum wage will simply add to the vulnerability of low income groups.
Cutting or eliminating the minimum wage will also reduce aggregate demand: The way to restore economic growth – and jobs – is to restore demand – this requires disposable income – cutting the national minimum runs counter to this. Most other countries in Europe have raised their minimum wage rates.
Lowering the national minimum wage will also directly cost the exchequer through lost revenue. There will also be indirect costs to the exchequer in the form of reduced VAT receipts and increased Family Income Supports and Medical Card payments.
What about competitiveness?
Export-oriented firms tend to be more productive and already pay significantly above the minimum wage. It follows that reducing the minimum wage is not one of the policy measures which would have a positive significant impact on Ireland’s international competitiveness.
The existence of a minimum wage is a boon to all sectors that do not employ minimum wage workers because of increased demand in the economy. A lower minimum wage simply distorts the economy in favour of low paying sectors. On the other hand a higher minimum price on labour shifts the economy’s long-run comparative advantage away from the low value-added unskilled sectors and towards the high value-added skilled sectors.
What about the effect on unemployment? After all that was the core reason given for the attack in the Dáil.
A large body of research in the United Kingdom has found that the British National Minimum Wage has little or no impact on employment; for example David Metcalf at the London School of Economics.
Also, in a seminal (gold standard) econometric study by Dube, Lester and Reich (2008) the authors used policy discontinuities at state borders to identify the effects of minimum wages on earnings and employment in restaurants and other low-wage sectors.
The authors compare all contiguous county pairs in the US that straddle a state border and the results are illuminating – they find no adverse employment effects.
In addition, they show that (as they eloquently put it) “traditional approaches that do not account for local economic conditions tend to produce spurious negative effects due to spatial heterogeneities in employment trends that are unrelated to minimum wage policies”.
So the evidence does not support the proposition that minimum wage laws affect employment rates. On the other hand the minimum wage is a key safeguard for vulnerable low income workers.
21 comments:
This is a general comment and in general, fair enough. However, many marginalized communities may not be able to support a local business if the wages are too high. I am talking about remote, rural communities. These are the most marginalized communities, which are not well represented by social partners or unions or the like.
A white-economy service business is unlikely to be viable in these circumstances. A cafe paying 9.20 euros an hour to its sole employee which works out at 10.50 or more in employment costs per hour. To open 12 hours a day (8-8, say) will work out at 126 euros per day. To do this, you would need to sell 420 euros + VAT = 480 euros per day of food and drink. (I am basing this on your reckoning of labour being one-third of the business costs.)
If they open on Sunday, they will have even higher costs.
That adds up to needing to sell an awful lot of tea and coffee or drinks in order to stay in business.
This is fine in a big town or city, but is it really realistic in a tiny village coffee shop? Do you not see a strong risk that these businesses will be driven into the black economy? Do you think it would be better to shut down these businesses?
If an individual company has genuine problems paying the wages expected by employees then they can take their case to the Labour court. This requires a good deal of transparency on their part of course, but the facility is there.
Arguing for a change in government policy based on very selective anecdotes that already have a mechanism in place to help them is not very helpful.
Employing an economist, carrying out an evaluation and heading to Dublin for a day or two is not an option for a 1-person or 2-person business in economic peril. These are not IBEC members. Their employees are not in unions. They are really small businesses providing important community services.
Anyway, in the catering/bar trades, minimum wage is governed by a joint agreement, which, as I understand it cannot be put on hold by the Labour Court.
It is not an anecdote. It is a reference to a large class of businesses and jobs, an underclass really, which are not being taken into account.
Ah yes, the fallacy of the minimum wage as a defender of AD. It surprises me that we don't have price controls as well based on this logic. A wage is after all a price agreed between two people.
So the minimum wage is €8.50. This means that people cannot legally offer their services for less than this, even if their productive capability is really less than this. An unskilled, inexperienced, poorly literate or language deficient person is therefore by reason of the minimum wage unable to work. Advocates of the minimum wage are adding to the unemployment list.
The argument for minimum wage as that it keeps AD up. Wrong. It excludes more people from working, it adds to the cost of the exchequer which has to tax more to support the people it excludes. Tax you will agree decreases AD of the general population.
It adds to the price of the product or service being produced locally. Therefore people would look for cheaper substitutes. e.g. bar staff wages are high thus increasing cost of the drinks, ergo people shop in off licences and number of people employed in bars is reduced, thus reducing AD.
Would you agree or not that it's better than someone is in a workplace than not? A workplace offers people the chance for advancement, gaining skills and experience. The dole doesn't do that.
Minimum wage is a fallacy. If you think that min wage is the best way to increase demand, it is wrong. The goal of raising wages cannot be done by government fiat. It can only be done by increasing the productivity of each employee. If an employee is worth more to an employer because they have increased their productivity then their price will increase. The minimum wage is creating unemployment, decreasing AD and reducing competitiveness. In the end we all pay more for services that are worth less, and we eventually find cheaper substitutes, like imports or doing it yourself. You need to rethink your logic.
Brendan, I just went to your website and clicked on the "job opportunities" link. Not only do you not believe in the minimum wage, going by your site, you don't believe in paying ANY wages. All the jobs are advertised as unpaid.
now, the jobs listed have titles like Director of Operations, Director of Communications, Director of Elections, Director of Policy Formulation, Director of Human Resources and Director of Equality.
All unpaid, all working for free.
how is that working out for you?
Not well at the moment Conor ;-). If I win the euro lotto I'll look at paying salaries. Would you be interested :-)? When you don't have donations from developers its hard to have a budget to buy paper clips. However, the Director of Communications position is filled. I must take that one down.
@Anon,
Are you complaining about the REAs or the statutory minimum wage? It is a bit slippery to move the goal-posts after being challenged. The REAs are set by the JLCs, which are employee-employer bodies. Those rates of pay are reviewed on a yearly basis. They are separate from what is being discussed in the article.
A one-man operation does not need to employ an economist to do an evaluation. Strictly speaking, no business needs to employ an economist since the legislation only requires that you obtain the consent of your employees. An application on consent like that will be pretty straight-forward and would hardly require a day in Dublin.
Your example also does not add up: you say that a cafe would have to sell €480 worth of tea/food in order to break even if it employs one person @ €126 a day. Let's say that, on average, each customer spends €8 (I don't think this is an unreasonable figure for a cafe, €10 might actually be a more realistic number. A bar would certainly be about that). That means that a business would need to bring in 60 customers a day in order to break even. Put another way, that works out to 5 customers an hour (presuming they are open for 12 hours). At such a rate, one would not need an employee at all. The cafe just wouldn't be busy enough for two servers (I am assuming the cafe-owner would be working in the cafe also). This would be the case regardless of whether the minimum wage was €2 or €8.50.
Now, a cafe can get busy at certain times and be empty at other, but there is nothing in any of the employment agreements or the minimum wage act that says you must keep the employee for the full 12 hours. An owner could hire an person just to help with the lunch rush from 11 to 3. Thus, we can cut your figure of €126 to €42. If one employs someone under 18, the amount is €26. All in all, your example of the 'hardship' the minimum wage imposes on businesses does not hold.
@Brendan Quinn,
Empirical studies are agnostic on the deleterious effects of the minimum wage.
Your claim also ignores the notion of an efficiency wage where a higher wage makes the job more desirable and, as a result, increases employee productivity. You might also consider circumstances when you have an employer in a monopsony position: a minimum wage can actually increase employment by undermining the monopsonist's power.
I should point out the the minimum wage laws allow for a 'discount' if you hire a young and/or inexperienced employee.
Your arguments against the minimum wage are fallacious. In fact, one could turn them around use them as an argument to legalise slavery. We can assume that there is a potential employer out there who would rather not pay his 'employees' a wage at all. He may just wish to take ownership of them and take charge of feeding and clothing them. By abolishing slavery, we have removed this person from the labour market and, thus, have added to the dole numbers. I am sure you'll agree that this is a scandalous state of affairs. We must legalise slavery forthwith!
Employers like the one I described are not represented at JLC negotiations. They are not even consulted in practice. I know lots of employers in the sector, including relatively large ones, and none of them are represented.
You cannot employ skilled staff as trainees. You cannot 'cycle' people out at the end of the training period.
You can only get a temporary dispensation from minimum wage as I understand it. Consent of employees is certainly not sufficient. I would be surprised if the labour court gave out the exemption as lightly as you suggest.
You are way off the mark as regards the average spend in a small cafe in a small town. To make the revenue per customer you are talking about you would need to be HACCP compliant to serve food prepared on the premises. That is a business with far higher costs.
So you think the owner of the business should work there for free, or for less than what you consider a basic wage?
@Anon,
No one mentioned cycling out trained employees or anything of the sort. Actually, I just pointed out that you can employ people on a casual basis under the minimum wage/JLC rate. I also pointed out that employing a young person (there are a lot of young people who work in the catering/hospitality trade) meant that you could pay less.
If you don't believe me on the minimum wage you can look up the relevant part of the statute: s 41 of the National Minimum Wage Act, 2000. The procedure is there in black and white. An employer in financial straits must obtain the consent of his employee(s) before bringing an application to the Labour Court. Minimum time period for an exemption is 3 months; the maximum is a year.
Your claim that my estimate of the average spend is way off and would require a HACCP compliant premises, but I am simply adapting the example you were using. From what I understand, you seem to be talking about a cafe that sells only tea or coffee. This is a very particular business model, but once again it begs the question: why would such a business need another server? Moreover, why would such a business need another server to work a 12 hour shift? It makes no sense.
Incidentally, I have always been skeptical of any claims about the cost of HACCP.
Do I expect business owners to work in their own business? The answer is yes. If they cannot pay the minimum wage to an employee, they should muck out themselves. You seem to imply that the owner of a business would get nothing if they didn't pay themselves a wage. This is arrant nonsense. The owner gets the profits. If they cannot profit to the extent that it provides them with a basic living, then perhaps they should consider closing up.
@Anon,
No one mentioned cycling out trained employees or anything of the sort. Actually, I just pointed out that you can employ people on a casual basis under the minimum wage/JLC rate. I also pointed out that employing a young person (there are a lot of young people who work in the catering/hospitality trade) meant that you could pay less.
If you don't believe me on the minimum wage you can look up the relevant part of the statute: s 41 of the National Minimum Wage Act, 2000. The procedure is there in black and white. An employer in financial straits must obtain the consent of his employee(s) before bringing an application to the Labour Court. Minimum time period for an exemption is 3 months; the maximum is a year.
Your claim that my estimate of the average spend is way off and would require a HACCP compliant premises, but I am simply adapting the example you were using. From what I understand, you seem to be talking about a cafe that sells only tea or coffee. This is a very particular business model, but once again it begs the question: why would such a business need another server? Moreover, why would such a business need another server to work a 12 hour shift? It makes no sense.
Incidentally, I have always been skeptical of any claims about the cost of HACCP.
Do I expect business owners to work in their own business? The answer is yes. If they cannot pay the minimum wage to an employee, they should muck out themselves. You seem to imply that the owner of a business would get nothing if they didn't pay themselves a wage. This is arrant nonsense. The owner gets the profits. If they cannot profit to the extent that it provides them with a basic living, then perhaps they should consider closing up.
There's no point debating if you want to bring the argument down to slavery. We both know (apart from human rights issues) slavery distorts the market, is a disincentive to creating labour saving devices or systems and therefore prevents the creation of greater capital into the economy.
There aren't too many monopsony industries, govn is usually the only buyer in some cases and look how bloated and costly that is.
How did we survive prior to 2000 I will never know.
Btw if there were the same laws when I was 15 I wouldn't have got a job where I learned skills and got experience to get better jobs. We all can't go from college, uni and graduate job.
The objections to the minimum wage are unencumbered by any factual baggage.
The misconception seems to be that employment is a gift of the employer and too pricey a gift for Sean means no bauble at all for Siobhan.
In the real world, employers only ever employ the labour necessary for the process; cheapening labour by abolishing the minimum wage only increases the level of income retained by the employer, not increases employment. It would be particularly disastrous currently, as that hoarding of capital is the source of the crisis, with its counterpart the deficiency of demand.
Employment in this economy rose dramatically after the introduction of the mininmum wage, as did wages and so did exports. In fact exports grew dramatically even as wages grew far faster than European competitors.
Real compensation of employees here grew at an annual average rate of 2.1% in 1992-2006, compared to 0.9% for the Euro Area as a whole (the gap in nominal wage growth is even wider). Yet exports grew at an annual average rate of 11.9% compared to 6.3% for the Euro Area.
If wages were the primary determinant of competitiveness, this would not be possible. Thankfully, they aren’t. Investment is. Irish investment grew at an average 8.3% pace over the same period, compared to 2.1% for the Euro Area.
It is therefore possible to have high wage growth, high GDP growth and high export growth. In fact, the 3 are related and I know of no country which has high GDP but low wage growth over the medium-term. But all this is only possible if you have high investment growth.
Firstly, in a credit bubble, growth in all sectors in possible. We're taking about Ireland here. High export growth in Ireland is attributale to FDI export focus companies that pay higher wages anyway. High GDP stems from those FDI's exporting into a booming world economy. Please quote GNP only if we are debating Ireland competitiveness. Domestic export companies pay higher wages because of the higher productivity of their employees. That is about 1/3 of economy. The other 2/3 of economy is domestic focused. Of that group you had mainly construction, 20% of economy in its entirerity. I don't have figures from services but alot of high paying jobs depended on housing bubble, or low paying with high bonuses.
Minimum wage really only is important for a small but vital sector of economy. I think we could agree on that, e.g. farming/harvesting, shops,bars, etc. basic service sector jobs. They are low-skilled. A minimum wage sets the value for all of those basic low-skilled jobs regardless of their productivity. You also don't or can't put in figures for tips etc accrued to waiting staff. This is off the books possibly but important take home pay for some service sector staff.
The hoarding of capital is not the source of the crisis, it is an effect of the crisis i.e. the lack of confidence in the market. If that statement was true, hoarding would have happened in 2006/07 and precipitated the crisis by a lack of spending. I am pretty sure that is not the case. Deficiency in demand is a problem but subsidizing wage rates is not a solution.
You say employers only ever employ the labour necessary for the process. Agreed. That's called private sector efficiency. However behavioural economics would highlight that an owner manager who has to work 80hrs weak would if it was economical to do so hire an individual to take on some of that work. At the current min wage rate it is not. Abolishing or at least halving the rate might make it economical and thus give a young person (that is where the highest unemployment rate is, as they have no experience or credibility) a job to start out from.
I find it incredible you say wages are not a primary determinant of competitiveness but in one way you are right. Productivity is the primary determinant of competitiveness. If min wage is €10 p.h but that person's productivity is at 100% then there is no value whereas min wage at €5 p.h with productivity at 50% then the other 50% is the value they create, the capital they create. They earn €5 an hour but sell €10 an hour. That means they can pay for themselves, overheads, costs and make a profit for their employer. At €10 they cannot therefore no job! Investment therefore grows because high productivity makes it agreeable to risk investment money.
I hope I have given people some points to think about.
Michael Burke,
You have taken two variables which no one would expect to have a linear relationship, established as fact that they are not related linearly and used that as a basis for your argument. The causes of the export growth in Ireland and the related global growth are well-rehearsed. They have nothing much to do with the minimum wage, one way or the other.
Rosencrantzisdead,
A small cafe that only sells pre-prepared food (which can include heating things up in the oven, selling certain kinds of confectionery) is pretty common in Ireland. One I know in Dublin city where prices are higher, is very busy and sells some cooked food struggles to get the average sale above EUR 6.20 including VAT.
You maybe skeptical about the amount of trouble that needs to go into food hygiene where food is prepared from raw ingredients, but the local HEO will not be.
The provision you refer to is a necessary but not sufficienct condition for getting an exemption from statutory minimum wage (which is of no relevance to the current issue). You still need the evidence and realistically, this means substantial paperwork is needed. Anyway, the relief does not address structural issues since the relief is only temporary and it only relates to statutory minimum wage, not the JLC/REA rates that are relevant to service businesses.
As for profit. Firstly, there is not very much profit in running such a small cafe.
Profit is not for paying the people who work in the shop. The main call on the 'profit' is to repay the capital invested in the business and provide a return on that capital.
Maybe it would be better for such a proprietor to shut the business down. But who will then provide the amenities? And who will pay for the UA for both the employer (who has lost his capital) and employee? In practice what is happening is that many of these businesses are being continued in the black economy. This is certainly not good for workers and it is not too good for the owners either.
I am not making a case for abolishing the minimum wage, I am just pointing out that Ireland is a diverse country, not all of it is like Dublin 4 and Dublin 2 and nuanced, flexible approach is needed rather than one-size-fits-all.
@Anon,
The 'substantial paperwork' you refer to would really be just a business's accounts. Obviously, a business has to demonstrate that it cannot pay. Perhaps a letter from their accountant might be included but arguably not much else is needed. Employers frequently represent themselves in the Labour Court without difficulty. The notion that the exemption is somehow impossible or even very difficult to get and would require an expert witness is simply incorrect.
I am sure the FSA and related authorities take food hygiene very seriously. But I am sure that they would wave off any suggestion that the HACCP or related standards place any great burden on a business. On a related issue, would you argue that these requirements/guidelines would force businesses into the black economy? They do require businesses to incur some sort of cost.
One issue that neither of us has considered has been the other costs involved in a business: rents, rates, capital, etc. If those costs are high then they will equally push a business into the black economy probably more than a minimum wage would. Why not advocate for reductions in those business costs rather than seeking simply to pay employees less than 8.65 an hour? We all know that commercial rents are still too high and rates in some areas have shot up.
Finally, you ask for a more 'nuanced, flexible approach...rather than one-size-fits-all.' I find it hard to understand your objection: the JLCs have different rates for different parts of the country. The minimum wage allows for reductions if an employee is under 18 or if they are untrained. What further flexibility would be necessary?
Anonymous,
Good. If wages and minimum wages are not related to competitiveness, then can we stop the bleating about the minimum wage producing 'uncompetitiveness'.
Brendan Quinn,
you attack this problem from a different angle. The truth about the simultaneous growth in Irish wages and its improvement in competitiveness is inconvenient, so let's abolish analysis of the competitive, export, sector of the economy.
Frankly it is of little or no interest in terms of economic growth or employment if the local chippy wins market share from Abrakebabra or vice versa (although it may be of great interest to their owners).
What the idiots of the fast food business don't seem to realise is that a reduction in wages will hurt demand for their products, amongst others.
This idiocy is widepsread. In Britain today, Next, whose CEO publicly supports slash&burn there has just reported 3 months of collapsing sales, ie since the June Budget was announced. Doh!
Michael, why do you call people who create jobs idiots? At the same time you put forward causal relationships as the explanation for correlations without any basis.
Rosencrantzisdead,
FSAI concentrates on food safety. They would certainly say you have to invest in food safety in a food business.
You do not understand how the food business works. You cannot ignore this rule. If you flout these rules and you are cooking food for the public, you will be shut down. HACCP costs are mainly in terms of personnel and time so yes these do put a business under pressure.
Two zones, one for dublin and one for elsewhere is not what I would call nuanced.
I have considered the issue of costs other than wages. McDonnell puts forward the 30 percent employment costs ratio that I have used. In reality the figure is likely to be much higher than that in a small cafe in an outlying location,, and that weakens your argument.
The rent is not going to be much and the suppliers are providing commodities, with plenty of competition.
A sequence of trainees is not likely to be a viable hiring strategy in an outlying town where there are few students and where the staa will have to operate the shop on their own frequently.
I was linked here from an article on thejournal.ie looking forward to a well-thought out argument, which I give you it appears to be. However, there are a number of serious deficiencies:
- Can you define "gold standard" in the context of a publication? I would also argue that a paper that is two years old cannot be seminal, but that is semantics.
- Where are you getting your figures for labour costs versus overall cost? What industry are you referring to?
- Where is the study that shows the majority of minimum wage jobs are filled by women?
- My understanding, people on minimum wage do not pay income tax, how does cutting the minimum wage directly affect the exchequer (purchases are not direct as you stated, nor are welfare payments)
- Where is the study that shows export-oriented firms pay above minimum wage?
- "a large body of research" - can you link to even one of these? Naming an author does not count. Please link to several since it is a 'large body'.
Best Regards
Anon
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