Underdog penalised
Patrick Freyne looks at the SFA proposal to cut the lowest salary offered to workers.
The Small Firms Association (SFA) wants the minimum wage reduced by 1 EUR (from its current level of 8.65 EUR). The argue that at it is the second-highest in Europe, it is seriously detrimental to our competitiveness and the survival of small business. The unions and most political parties have dismissed the idea.
Tanaiste and Minister for Enterprise, Trade and Employment Mary Coughlan has said there are no plans to reduce it – and others such as Jack O’Connor, general secretary of Siptu, have responded angrily. He calls the proposal “reprehensible and almost beneath responding to”. But the SFA is not wavering on the point.
“Businesses are in trouble”, says Patrician Callan, SFA director. “The proposal was based on a piece of research we did which shows that Ireland had the second-highest minimum wage in the EU. Normally the minimum wage is reviewed around the time of the social partnership negotiations. The last time it was referred to the Labour Court for their recommendation and they come back with a recommendation to increase it by euro but didn’t provide any basis or any analysis as to why. We were never very happy with that, and now we’re finding it’s causing difficulties for businesses in terms of competitiveness, particularly internationally. The last review it had increased by 55% and in that entire time the inflation rate had increased by 32% so it was almost double the rate of inflation.”
Classical economics tends to see the minimum wage as a trigger of unemployment, and the SFA seems to be again pushing this view. However, Prof Donal O’Neill from the economics department at NUI Maynooth, says that this position has lost its primacy. “I could tell you one theory that would predict negative employment and then I could tell you another that predicts positive effects,” he says. “So really you’re going to have to go and see what the actual empirical analyses is showing. And even among institutions like the OECD, which would traditionally be more classical in their approach, their view now is that, on balance, a sensible minimum wage is not going to have any significant negative effect on employment.”
O’Neills own research bears it out. The minimum wage was first introduced in this country on April 1st, 2000. It was set at £4.40 or 5.58 EUR and hour. At the time, the SFA predicted a rise in unemployment and business closures. But O’Neill found otherwise in a study (co-written with Brian Nolan and James Williams), Evaluating the Introduction of a National Minimum Wage: Evidence from a New Survey of Firms in Ireland. “Basically we contacted a number of firms prior to the introduction of the minimum wage and the contacted them again afterwards,” he says. “We got detailed information on their employment structure, their wage levels and so on, and the idea was to compare employment growth among firms that had minimum wage workers with firms that didn’t have minimum wage workers. If the introduction of the minimum wage was damaging, we would expect to see slower employment growth among the firms that had minimum wage workers relative to those firms that didn’t. We found very little evidence of that.”
Callan argues however, that this study was done in the midst of an economic boom and so the normal rules didn’t necessarily apply. “Labour costs are the biggest cost in most businesses and if a business can’t cover its costs it closes down or it lays people off,” she says. “There’s a reason all our jobs are disappearing now and that’s because our businesses are not cost-competitive. We’re a very open, small economy and that means we need to track ourselves in economic terms against all of our international competitors. And having the second-highest minimum wage in Europe is a huge difficulty on that basis.”
Others query some of the SFA’s assumptions. “It doesn’t withstand scrutiny because the country with the highest minimum wage is Luxembourg and its rate of unemployment is lower than ours,” says Siptu’s O’Connor, “And some countries with lower minimum wages have higher unemployment rates. One way or another, I don’t think it’s fair to target the most vulnerable people in society.”
And O’Neill notes that relativity is a factor. “They say the minimum wage is multiples higher in Ireland than it is in Bulgaria, but I don’t think anyone is going to turn around and say that we should have a wage of €113 a month like Bulgaria,” he says. “You need to take the whole structure into account. The Bulgarian minimum wage is about 50% of the average wage and that’s what it is in Ireland as well. Ireland is at the top of the minimum wage range but not to the extent it’s highlighted in the SFA’s documents.”
Callan, however, is adamant the SFA’s depiction is accurate and the minimum wage at the level it is set will affect job prospects. “The most vulnerable businesses, the ones most likely to close down are the ones that employ low-paid workers, says Patricia Callan. “So it’s a question of whether you want to try and maintain people in employment or maintain the minimum wage. We’ve been paying ourselves two to three times the pay increases of our European counterparts over the last number of years. Many businesses around the country have negotiated pay freezes and decreases with their staff. They looked after those staff in the good times in terms of bonus payments and outings and everything else. And people are willing to take a pay cut to maintain their jobs.”
O’Neill thinks they’re focusing on the wrong issue. “The SFA produce a list every year of their biggest problems, and the minimum wage barely squeezes into the top 10 problems as reported by small firms,” he says. “Less than 20% of small firms see minimum wage as a major problem whereas 50% report red tape, bureaucracy and increasing legislation as more significant. And it seems like bad PR. The SFA are proposing this at a time when inflation is at 5%, so to cut the nominal minimum wage by 10% means you’re looking at a real fall of 15-16% for the poorest workers in society. There’s no question it’s a tough time for small firms, but it’s a tough time for low-paid workers too, and I think many people feel that’s the wrong part of society to target.
Business and Finance, Minimum Wage, 15th August 2008