Tom McDonnell: TASC made a short submission last week to the Labour Court review of the JLC wage agreement mechanisms. The submission is available here.
The Joint Committee on Jobs, Enterprise and Innovation published a report in February on actions to address youth and long-term unemployment. It can be found here. One of the recommendations (Number 26) states that there should be an investigation into the effects of the minimum wage (both positive and negative) on the jobs market. This is a sensible recommendation. The independent Low Pay Commission (LPC) in the United Kingdom does this every year. What does the evidence suggest?;
The LPC's 2012 Annual Report is here and their discussion of the minimum wage's impact on the UK's labour market begins on page 48 of the pdf. They state that: The general consensus...is that the NMW (i.e, the national minimum wage) has not significantly affected employment .
Both the theoretical and empirical literature are ambiguous concerning the impacts on employment. While the standard competitive model suggests there should be a negative effect on the jobs market, institutional models and dynamic monopsony models both suggest that the effect is actually much less clear cut. Increased aggregate demand and reduced search costs are just two reasons why the effect on net employment might be minimal or non-existent. Recent empirical work suggests minimum wage have little or no overall effect. See for example this study by Arindajit Dube, William Lester and Michael Reich.
John Schmitt asks why the minimum wage appears to have 'no discernible effect' on the minimum wage here while Barry Hirsch, Bruce Kaufman and Tatyana Zelenska try and explain the lack of effect on employment here through the framework of differing 'channels of adjustment'.
While innovative solutions to the jobs crisis are needed, reduced levels for wage floors are unlikely to be helpful in reducing unemployment. The major effects would likely be to increase financial hardship and vulnerability for low wage workers, and increasing income inequality, without any meaningful impact on overall employment.
Showing posts with label minimum wage. Show all posts
Showing posts with label minimum wage. Show all posts
Wednesday, 6 March 2013
Friday, 10 February 2012
Minimum Essential Budgets
Nat O'Connor: The TCD Policy Institute recently published a volume by the Vincentian Partnership for Social Justice and Dr Micheál Collins, which examines the 'minimum essential' budgets required by different household types. The Vincentians have been working on this kind of study for a number of years, and a copy of the report can be found under publications on budgeting.ie.
I think Dan O'Brien rather unfairly criticises the report in his Irish Times editorial. He argues that taxpayers’ money should not have funded the research, and that "Impartiality and objectivity are hallmarks of academic research. Publishing the views of a lobbyist blurs the line, thereby undermining TCD's credibility."
In fairness, one of the authors, Micheál Collins, was working as an academic member of staff at TCD at the time of receiving the grant. If anything, his work on the report has helped document the method and findings in a more academically rigorous way. Money was not being given to lobbyists, as Dan O'Brien portrays it.
Every piece of research comes from implicit or explicit normative assumptions. What matters is whether or not the method is robust and the evidence is clearly visible so that others can make alternative interpretations of the same data. In fairness to this study, it is based on an established, qualitative method involving focus groups who discuss what they regard as a reasonable standard of living and it does provide quite a lot of detail about the weekly costs they regard as 'minimum' broken down under a range of headings.
This standard of living does involve more than survival and includes a modest degree of "social inclusion and participation". However, Appendix A shows what is involved in minimum social participation remains frugal. For example, the €12.66 per week in a family budget for socialising is based on ten social events per adult each year. The researchers then go to the local shops and services and check out the prices to pay for the list.
What the report highlights is that, unsurprisingly, a great number of people on modest incomes in Ireland do not have an income sufficient to meet a 'minimum essential' budget. In particular, families with children in a number of cases have insufficient incomes. Moreover, it is of concern that a single person working full-time on the minimum wage also cannot afford an essential budget.
However, some households do have sufficient income. For example, a pensioner couple's income from the non-contributory state pension is sufficient to cover their minimum essentials because of the range of other non-cash supports, like fuel allowance, free travel and medical card. That's a useful validation of the welfare system and hardly a 'lobbyist' perspective.
What is missing from the report is a more full exposition of the costs. The publication notes that grocery prices are typically based on the least expensive supermarket 'own brand' items, but we only see aggregates and it would be useful to see item-by-item breakdowns; I imagine that this would be of particular use to the Department of Social Protection and services like MABS who advise people on how to budget their income. It should also be of interest to businesses to see evidence of market niches for cheaper goods and services.
The focus on weekly itemised expenditure is also of value because it highlights in very tangible terms how vulnerable household budgets are to relatively small ‘shocks’, like medical expenses or the costs of a funeral. What happens in reality is that people on low incomes are particularly badly insulated against such one-off expenses and these can lead to the use of moneylenders. In 2007 (latest survey) more than one in five people had difficulty accessing banking facilities (i.e. getting a basic bank account). This gap is filled for people on the lowest incomes by “52 licensed moneylenders in Ireland, 36 of whom operate ‘doorstep collection’ businesses” and who can charge over 150 per cent interest on small loans. See TASC (2010) Life and Debt.
The issue of one-off 'shocks' emphasises the importance of non-cash supports as 'shock-absorbers'; such as the medical card or social housing. These help people to cope with sudden expenses, without having to use up any savings they might have or take a loan. The study also usefully opens the door to more in-depth examination of where non-cash supports can help people get by without getting into debt.
I think Dan O'Brien rather unfairly criticises the report in his Irish Times editorial. He argues that taxpayers’ money should not have funded the research, and that "Impartiality and objectivity are hallmarks of academic research. Publishing the views of a lobbyist blurs the line, thereby undermining TCD's credibility."
In fairness, one of the authors, Micheál Collins, was working as an academic member of staff at TCD at the time of receiving the grant. If anything, his work on the report has helped document the method and findings in a more academically rigorous way. Money was not being given to lobbyists, as Dan O'Brien portrays it.
Every piece of research comes from implicit or explicit normative assumptions. What matters is whether or not the method is robust and the evidence is clearly visible so that others can make alternative interpretations of the same data. In fairness to this study, it is based on an established, qualitative method involving focus groups who discuss what they regard as a reasonable standard of living and it does provide quite a lot of detail about the weekly costs they regard as 'minimum' broken down under a range of headings.
This standard of living does involve more than survival and includes a modest degree of "social inclusion and participation". However, Appendix A shows what is involved in minimum social participation remains frugal. For example, the €12.66 per week in a family budget for socialising is based on ten social events per adult each year. The researchers then go to the local shops and services and check out the prices to pay for the list.
What the report highlights is that, unsurprisingly, a great number of people on modest incomes in Ireland do not have an income sufficient to meet a 'minimum essential' budget. In particular, families with children in a number of cases have insufficient incomes. Moreover, it is of concern that a single person working full-time on the minimum wage also cannot afford an essential budget.
However, some households do have sufficient income. For example, a pensioner couple's income from the non-contributory state pension is sufficient to cover their minimum essentials because of the range of other non-cash supports, like fuel allowance, free travel and medical card. That's a useful validation of the welfare system and hardly a 'lobbyist' perspective.
What is missing from the report is a more full exposition of the costs. The publication notes that grocery prices are typically based on the least expensive supermarket 'own brand' items, but we only see aggregates and it would be useful to see item-by-item breakdowns; I imagine that this would be of particular use to the Department of Social Protection and services like MABS who advise people on how to budget their income. It should also be of interest to businesses to see evidence of market niches for cheaper goods and services.
The focus on weekly itemised expenditure is also of value because it highlights in very tangible terms how vulnerable household budgets are to relatively small ‘shocks’, like medical expenses or the costs of a funeral. What happens in reality is that people on low incomes are particularly badly insulated against such one-off expenses and these can lead to the use of moneylenders. In 2007 (latest survey) more than one in five people had difficulty accessing banking facilities (i.e. getting a basic bank account). This gap is filled for people on the lowest incomes by “52 licensed moneylenders in Ireland, 36 of whom operate ‘doorstep collection’ businesses” and who can charge over 150 per cent interest on small loans. See TASC (2010) Life and Debt.
The issue of one-off 'shocks' emphasises the importance of non-cash supports as 'shock-absorbers'; such as the medical card or social housing. These help people to cope with sudden expenses, without having to use up any savings they might have or take a loan. The study also usefully opens the door to more in-depth examination of where non-cash supports can help people get by without getting into debt.
Friday, 22 July 2011
Thomas Palley on a global minimum wage system
Thomas Palley is Bernard L. Schwartz Economic Growth Fellow with the New America Foundation. This piece was originally published in the FT Economists' Forum. The proposal is drawn from his forthcoming book, From Financial Crisis to Stagnation: The Destruction of Shared Prosperity and the Role of Economic Ideas, Cambridge: Cambridge University Press.
The global economy is suffering from severe shortage of demand. In developed economies that shortfall is explicit in high unemployment rates and large output gaps. In emerging market economies it is implicit in their reliance on export-led growth. In part this shortfall reflects the lingering disruptive effects of the financial crisis and Great Recession, but it also reflects globalization’s undermining of the income generation process. One mechanism that can help rebuild this process is a global minimum wage system. That does not mean imposing U.S. or European minimum wages in developing countries. It does mean establishing a global set of rules for setting country minimum wages.
The minimum wage is a vital policy tool that provides a floor to wages. This floor reduces downward pressure on wages, and it also creates a rebound ripple effect that raises all wages in the bottom two deciles of the wage spectrum. Furthermore, it compresses wages at the bottom of the wage spectrum, thereby helping reduce inequality. Most importantly, an appropriately designed minimum wage can help connect wages and productivity growth, which is critical for building a sustainable demand generation process.
Traditionally, minimum wage systems have operated by setting a fixed wage that is periodically adjusted to take account of inflation and other changing circumstances. Such an approach is fundamentally flawed and inappropriate for the global economy. It is flawed because the minimum wage is always playing catch-up, and it is inappropriate because the system is difficult to generalize across countries.
Instead, countries should set a minimum wage that is a fixed percent (say fifty percent) of their median wage - which is the wage at which half of workers are paid more and half are paid less. This design has several advantages. First, the minimum wage will automatically rise with the median wage, creating a true floor that moves with the economy. If the median wage rises with productivity growth, the minimum wage will also rise with productivity growth.
Second, since the minimum wage is set by reference to the local median wage, it is set by reference to local economic conditions and reflects what a country can bear. Moreover, since all countries are bound by the same rule, all are treated equally.
Third, if countries want a higher minimum wage they are free to set one. The global minimum wage system would only set a floor: it would not set a ceiling.
Fourth, countries would also be free to set regional minimum wages within each country. Thus, a country like Germany that has higher unemployment in the former East Germany and lower unemployment in the former West Germany could set two minimum wages: one for former East Germany, and one for former West Germany. The only requirement would be that the regional minimum wage be greater than or equal to fifty percent of the regional median wage. Such a system of regional minimum wages would introduce additional flexibility that recognizes wages and living costs vary within countries as well as across countries. This enables the minimum wage system to avoid the danger of over-pricing labor, while still retaining the demand side benefits a minimum wage confers by improving income distribution and helping tie wages to productivity growth.
Finally, a global minimum wage system would also confer significant political benefits by cementing understanding of the need for global labor market rules and showing they are feasible. Just as globalization demands global trade rules for goods and services and global financial rules for financial markets, so too labor markets need global rules.
In sum, globalization has increased international labor competition, which has contributed to rupturing the link between wages and productivity growth. That rupture has undermined the old wage based system of demand growth, forcing a turn to reliance on debt and asset price inflation to drive growth. It has also increased income inequality. Restoring the wage – productivity growth link is therefore vital for both economic and political stability. A global minimum wage system can help accomplish this.
The global economy is suffering from severe shortage of demand. In developed economies that shortfall is explicit in high unemployment rates and large output gaps. In emerging market economies it is implicit in their reliance on export-led growth. In part this shortfall reflects the lingering disruptive effects of the financial crisis and Great Recession, but it also reflects globalization’s undermining of the income generation process. One mechanism that can help rebuild this process is a global minimum wage system. That does not mean imposing U.S. or European minimum wages in developing countries. It does mean establishing a global set of rules for setting country minimum wages.
The minimum wage is a vital policy tool that provides a floor to wages. This floor reduces downward pressure on wages, and it also creates a rebound ripple effect that raises all wages in the bottom two deciles of the wage spectrum. Furthermore, it compresses wages at the bottom of the wage spectrum, thereby helping reduce inequality. Most importantly, an appropriately designed minimum wage can help connect wages and productivity growth, which is critical for building a sustainable demand generation process.
Traditionally, minimum wage systems have operated by setting a fixed wage that is periodically adjusted to take account of inflation and other changing circumstances. Such an approach is fundamentally flawed and inappropriate for the global economy. It is flawed because the minimum wage is always playing catch-up, and it is inappropriate because the system is difficult to generalize across countries.
Instead, countries should set a minimum wage that is a fixed percent (say fifty percent) of their median wage - which is the wage at which half of workers are paid more and half are paid less. This design has several advantages. First, the minimum wage will automatically rise with the median wage, creating a true floor that moves with the economy. If the median wage rises with productivity growth, the minimum wage will also rise with productivity growth.
Second, since the minimum wage is set by reference to the local median wage, it is set by reference to local economic conditions and reflects what a country can bear. Moreover, since all countries are bound by the same rule, all are treated equally.
Third, if countries want a higher minimum wage they are free to set one. The global minimum wage system would only set a floor: it would not set a ceiling.
Fourth, countries would also be free to set regional minimum wages within each country. Thus, a country like Germany that has higher unemployment in the former East Germany and lower unemployment in the former West Germany could set two minimum wages: one for former East Germany, and one for former West Germany. The only requirement would be that the regional minimum wage be greater than or equal to fifty percent of the regional median wage. Such a system of regional minimum wages would introduce additional flexibility that recognizes wages and living costs vary within countries as well as across countries. This enables the minimum wage system to avoid the danger of over-pricing labor, while still retaining the demand side benefits a minimum wage confers by improving income distribution and helping tie wages to productivity growth.
Finally, a global minimum wage system would also confer significant political benefits by cementing understanding of the need for global labor market rules and showing they are feasible. Just as globalization demands global trade rules for goods and services and global financial rules for financial markets, so too labor markets need global rules.
In sum, globalization has increased international labor competition, which has contributed to rupturing the link between wages and productivity growth. That rupture has undermined the old wage based system of demand growth, forcing a turn to reliance on debt and asset price inflation to drive growth. It has also increased income inequality. Restoring the wage – productivity growth link is therefore vital for both economic and political stability. A global minimum wage system can help accomplish this.
Thursday, 23 June 2011
Cut Rents not Wages to Save Jobs in Retail
Nat O'Connor: Retail Excellence Ireland (REI) has released a survey of their members, which they contend shows that abolition of the JLC system would lead to thousands of jobs being created in retail (Press Release, 15 June 2011). There are good reasons to believe that this is a mistaken point of view.
REI got responses from nearly half their members, 342 companies which operate 4,445 stores, who said that if the JLC system was abolished that they would save 2,896 vulnerable jobs and create another 2,888. Treating this as a representative sample, REI estimate the total number of jobs created would be four times this, as there are c. 25,000 stores in Ireland.
There are three problems.
Firstly, good business sense does not add up to good economics. Say one business cuts the wages of its staff - that business has saved money and, all things being equal, should become more profitable (although staff performance might also fall). However, one stores's employee is another store's customer. If the 200,000+ generally lower paid workers protected by the JLC system all suffer pay cuts, that is going to lower demand in the economy; i.e. they are all going to have less money to spend in the local economy. And people on low wages spend most or all of their money. (All of this is basic economics). Hence, the companies consulted by REI might believe today that they could save and create jobs - but if demand falls, as it surely must from cutting the JLC system, than the same stores will find that they cannot expand employment after all.
Secondly, we cannot be sure if the 342 companies that responded to REI are in fact a representative sample. These companies have an average of 13 stores each, but there are many one-off stores among Ireland's 25,000. We do not know if these stores would be in the same position to save or create jobs. So, REI's multiplication by four might be over-stating the probability of job retention/creation.
Thirdly, the international evidence is broadly against any strong relationship between cutting wage levels and job creation. The strongest studies are of US States, and even counties within those states. These studies compare two areas side-by-side (with similar workforces, similar industries, etc) where one of them cuts wage protection and the other does not. Over time, no great difference in job creation is shown. This evidence strengthens TASC's confidence in the theory that while individual businesses may benefit from lower wage costs, they equally suffer from the economic effects of reduced demand. (See references below)
Therefore, it is fairly safe to assume that cutting the JLCs will neither save nor create jobs in retail.
There is hope however.
REI also found that the companies surveryed would save 7,791 vulnerable jobs and create 5,072 new jobs if the Upward Only Rent Review (UORR) was abolished. Unlike the JLC system, which affects demand that retail so badly needs, there is no such effect with rents. Most commercial landlords are higher income individuals or companies that save rather than spend most of their incomes. Therefore, cutting those incomes will not greatly affect retail demand as they are likely to cut their saving rate before they will drop their lifestyles (spending habits).
However, we still don't know if the multiplier of four would apply or to what extent these 4,445 stores experience of UORR is representative of others. In fact, city centres (where rents are highest) tend to be dominated by chain stores. So, it is possible that many one-off local stores are less affected by UORRs; although excessively high rents can be a problem for any business.
We could be more conservative than the REI and suggest merely doubling the survey findings to estimate the likely employment effects. That would mean abolition of UORRs could lead to c. 15,000 vulnerable jobs being saved and c. 10,000 new jobs being created.
On REI's website, there is a banner headline stating: "High Rents Are Killing Retail Jobs". In a similar vein, Declan Ronayne, MD of DSG Ireland (Currys, PC World, etc) spoke on RTÉ's Morning Ireland programme (23 June 2011, c. 8am) that the focus on JLCs was a mistake, and that rent levels was a much more pressing issue.
Economic theory and evidence concurs with this perspective. Cutting rents, not wages, is indeed likely to save and create jobs in retail.
References
Thanks to Tom McDonnell for these.
Card D. and A. Krueger (1994). Minimum Wages and Employment: A Case Study of the New Jersey and Pennsylvania Fast Food Industries. American Economic Review. 84(4), 772-793. Available here.
Dube, A, L, T. William, & Reich, M. (2010). Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties. UC Berkeley: Institute for Research on Labor and Employment. Available here.
The preface to this book puts the results into plainer English.
Note: the economy is a dynamic, complex system. Establishing causality is notoriously difficult in the social sciences. Just because a study argues there are ‘no employment effects’ or ‘substantial employment effects’ should never be grasped as proof about an underlying economic relationship. All we can ever have is estimated probabilities.
The Duffy/Walsh report made the point that there was evidence of publication bias in wage-floor research. Evidently ‘employment effect’ results were more likely to get published than ‘no employment effect’ results. They referenced this: Doucouliagos, H. and T. D. Stanley (2008). Publication Bias in Minimum-Wage Research? A Meta-Regression Analysis, British Journal of Industrial Relations.
REI got responses from nearly half their members, 342 companies which operate 4,445 stores, who said that if the JLC system was abolished that they would save 2,896 vulnerable jobs and create another 2,888. Treating this as a representative sample, REI estimate the total number of jobs created would be four times this, as there are c. 25,000 stores in Ireland.
There are three problems.
Firstly, good business sense does not add up to good economics. Say one business cuts the wages of its staff - that business has saved money and, all things being equal, should become more profitable (although staff performance might also fall). However, one stores's employee is another store's customer. If the 200,000+ generally lower paid workers protected by the JLC system all suffer pay cuts, that is going to lower demand in the economy; i.e. they are all going to have less money to spend in the local economy. And people on low wages spend most or all of their money. (All of this is basic economics). Hence, the companies consulted by REI might believe today that they could save and create jobs - but if demand falls, as it surely must from cutting the JLC system, than the same stores will find that they cannot expand employment after all.
Secondly, we cannot be sure if the 342 companies that responded to REI are in fact a representative sample. These companies have an average of 13 stores each, but there are many one-off stores among Ireland's 25,000. We do not know if these stores would be in the same position to save or create jobs. So, REI's multiplication by four might be over-stating the probability of job retention/creation.
Thirdly, the international evidence is broadly against any strong relationship between cutting wage levels and job creation. The strongest studies are of US States, and even counties within those states. These studies compare two areas side-by-side (with similar workforces, similar industries, etc) where one of them cuts wage protection and the other does not. Over time, no great difference in job creation is shown. This evidence strengthens TASC's confidence in the theory that while individual businesses may benefit from lower wage costs, they equally suffer from the economic effects of reduced demand. (See references below)
Therefore, it is fairly safe to assume that cutting the JLCs will neither save nor create jobs in retail.
There is hope however.
REI also found that the companies surveryed would save 7,791 vulnerable jobs and create 5,072 new jobs if the Upward Only Rent Review (UORR) was abolished. Unlike the JLC system, which affects demand that retail so badly needs, there is no such effect with rents. Most commercial landlords are higher income individuals or companies that save rather than spend most of their incomes. Therefore, cutting those incomes will not greatly affect retail demand as they are likely to cut their saving rate before they will drop their lifestyles (spending habits).
However, we still don't know if the multiplier of four would apply or to what extent these 4,445 stores experience of UORR is representative of others. In fact, city centres (where rents are highest) tend to be dominated by chain stores. So, it is possible that many one-off local stores are less affected by UORRs; although excessively high rents can be a problem for any business.
We could be more conservative than the REI and suggest merely doubling the survey findings to estimate the likely employment effects. That would mean abolition of UORRs could lead to c. 15,000 vulnerable jobs being saved and c. 10,000 new jobs being created.
On REI's website, there is a banner headline stating: "High Rents Are Killing Retail Jobs". In a similar vein, Declan Ronayne, MD of DSG Ireland (Currys, PC World, etc) spoke on RTÉ's Morning Ireland programme (23 June 2011, c. 8am) that the focus on JLCs was a mistake, and that rent levels was a much more pressing issue.
Economic theory and evidence concurs with this perspective. Cutting rents, not wages, is indeed likely to save and create jobs in retail.
References
Thanks to Tom McDonnell for these.
Card D. and A. Krueger (1994). Minimum Wages and Employment: A Case Study of the New Jersey and Pennsylvania Fast Food Industries. American Economic Review. 84(4), 772-793. Available here.
Dube, A, L, T. William, & Reich, M. (2010). Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties. UC Berkeley: Institute for Research on Labor and Employment. Available here.
The preface to this book puts the results into plainer English.
Note: the economy is a dynamic, complex system. Establishing causality is notoriously difficult in the social sciences. Just because a study argues there are ‘no employment effects’ or ‘substantial employment effects’ should never be grasped as proof about an underlying economic relationship. All we can ever have is estimated probabilities.
The Duffy/Walsh report made the point that there was evidence of publication bias in wage-floor research. Evidently ‘employment effect’ results were more likely to get published than ‘no employment effect’ results. They referenced this: Doucouliagos, H. and T. D. Stanley (2008). Publication Bias in Minimum-Wage Research? A Meta-Regression Analysis, British Journal of Industrial Relations.
Wednesday, 25 May 2011
Report of the Independent Review of EROs and REA Wage-Setting Mechanisms
The Report of the Independent Review of EROs and REA Wage-Setting Mechanisms is available here. Click here to read TASC's response. On behalf of the Coalition to Protect the Low Paid, Bill Abom said: "The finding that the JLC wage setting mechanism should be maintained to protect reasonable employment standards for vulnerable workers is welcome". Meanwhile, in the blogosphere, click here to read Michael Taft's take on the report, and here to read the thread over on Irish Economy.
Tuesday, 14 December 2010
Slashing the Minimum Wage: Olli made us do it (or: never let facts get in the way)
Tom McDonnell: Over the weekend, a Government TD insisted on RTE's Week in Politics programme that we should ask Olli Rehn why the minimum wage was cut. I leave it to the reader to decide what that implies for our national sovereignty.
Much of the justification given for the cut was that we had the second highest minimum wage in Europe and that it needed to be cut to provide more employment opportunities. More on this in a second.
The latest annual report of the United Kingdom’s highly respected Low Pay Commission (LPC) is here. The British government uses the recommendations of the Commission when passing legislation related to the minimum wage (including the setting of rates). You will find a wealth of information on issues such as gender composition, sectoral breakdown and other key issues.
Unfortunately, there is no equivalent Commission for Ireland and it is to our great detriment that we do not conduct the same level of research into these areas in Ireland. Irish policymakers seem to have only a passing acquaintance with the strange notions of theory and evidence.
Fortunately for us the LPC report has international data on the rates set for national minimum wages.
I refer you to Appendix 3 of the Low Pay Commission’s report and in particular column 3 (PPs) of Table 3A.1 on page 233. The table has data for eight different EU countries. Ireland has the fifth highest minimum wage rate of the eight EU countries shown. Most importantly, we find that the rate for our nearest neighbour - the UK - was 5.80 (sterling) and the equivalent rate for Ireland, before the 12 per cent cut imposed last week, was 5.43 (sterling) in terms of purchasing power parity. Note as well that only one country in the sample has reacted to the crisis by cutting the minimum wage.
So it seems that those spouting off that we have the second or third highest national minimum wage in Europe either haven’t bothered to check the facts or have decided to ignore the facts.
I’ll leave it to you to decide which is worse.
Much of the justification given for the cut was that we had the second highest minimum wage in Europe and that it needed to be cut to provide more employment opportunities. More on this in a second.
The latest annual report of the United Kingdom’s highly respected Low Pay Commission (LPC) is here. The British government uses the recommendations of the Commission when passing legislation related to the minimum wage (including the setting of rates). You will find a wealth of information on issues such as gender composition, sectoral breakdown and other key issues.
Unfortunately, there is no equivalent Commission for Ireland and it is to our great detriment that we do not conduct the same level of research into these areas in Ireland. Irish policymakers seem to have only a passing acquaintance with the strange notions of theory and evidence.
Fortunately for us the LPC report has international data on the rates set for national minimum wages.
I refer you to Appendix 3 of the Low Pay Commission’s report and in particular column 3 (PPs) of Table 3A.1 on page 233. The table has data for eight different EU countries. Ireland has the fifth highest minimum wage rate of the eight EU countries shown. Most importantly, we find that the rate for our nearest neighbour - the UK - was 5.80 (sterling) and the equivalent rate for Ireland, before the 12 per cent cut imposed last week, was 5.43 (sterling) in terms of purchasing power parity. Note as well that only one country in the sample has reacted to the crisis by cutting the minimum wage.
So it seems that those spouting off that we have the second or third highest national minimum wage in Europe either haven’t bothered to check the facts or have decided to ignore the facts.
I’ll leave it to you to decide which is worse.
Friday, 29 October 2010
Defending the Minimum Wage
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.
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.
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