Friday 30 September 2016

Are pay rises a price worth paying?

Seamus Coffey

Published 09/08/2015 | 02:30

The Low Pay Commission recommended a 50c increase in the minimum wage
The Low Pay Commission recommended a 50c increase in the minimum wage

The recently published report of the Low Pay Commission brought attention to the conditions of low-paid workers in Ireland. The Commission recommended a 50c increase in the national minimum wage to €9.15 an hour - but did so without any real justification for the increase, bar expressing the view that the increase "is unlikely to be significantly adverse".

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The report also failed to provide much in the way of international comparisons. Low-paid workers in Ireland are better off than their counterparts in almost all other countries. They are paid more, taxed less and are less likely to fall into poverty.

A low-paid worker is defined as someone who is paid less than two thirds of the national median wage. Ireland has the second highest median wage in the EU, therefore the low pay threshold used here is higher than in other countries.

In its most recent survey Eurostat used a low pay threshold of €12.03 per hour for employees in Ireland. This compares to €9.84 in Sweden, €9.83 in Germany, €9.00 in France and €8.57 in the UK.

In a recent survey on minimum wages, the OECD compared the tax burden on minimum wage workers in various countries. They estimated that in 2013 a full time worker on the minimum wage in Ireland would lose about 5pc of their earnings to tax and social insurance. This is the lowest minimum wage tax burden in the EU. By comparison, the equivalent tax burdens would be 10pc in the UK, 19pc in Belgium, 22pc in France and 26pc in Germany.

Ireland has one of the highest minimum wages in the EU with the lowest tax burden. This combination means that the at-risk-of-poverty rate for employees in Ireland is one of the lowest in the EU. We know that working is one of the best routes out of poverty and working in Ireland is even better.

Someone is at risk of poverty if they live in a household where the disposable income is less than 60pc of the national median. Across the 15 EU countries surveyed by the OECD (EU15), 16.4pc of people aged between 18 and 64 were at risk of poverty in 2013. For employees in the EU15, the rate was 7.1pc.

In Ireland, 14pc of people aged between 18 and 64 were at risk of poverty in 2013 while for employees the rate was just 3.1pc. This is the second lowest in the EU15. Only Finland has a lower at-risk-of-poverty rate for employees in the EU15. The employee poverty rates for France, Germany, Sweden and the UK are more than twice the rate in Ireland.

This is not to say that we shouldn't be trying to improve the conditions of low-paid workers - we should - but it is important to realise that we already do more for them than many other countries.

It is also the case that we must be aware of where we expect increased pay for workers to come from.

Companies create value by selling their goods and services above their cost. There is an age-old battle of who gets this value: labour, through wages, or capital, through profits. In Ireland, more of the value is devoted to labour than in almost all other EU countries.

If we look at domestically owned companies in Ireland, figures compiled by the CSO and published by Eurostat show that 68pc of the value created by our companies is devoted to personnel costs for employees. This is the second highest in the EU. Only domestic French companies at 70pc devote more of the value they create to their employees.

The accommodation and food service sector accounts for almost one quarter of the 70,000 minimum wage workers in Ireland. Irish companies in this sector devote 82pc of their value added (the difference between sale price and cost price) to labour. This is the highest in the EU15 and 10 percentage points above the EU15 mean of 72pc.

This means that there is 18pc of value added available for capital and, of course, some of that must go to repairing and upgrading existing capital such as buildings and equipment so the levels of profit are relatively small.

If there are to be pay increases for the low-paid, there is close to no capacity to absorb those from profits - the profits are not there. Increased pay to workers can only come about through increased value created by companies and in sectors like accommodation and food service this can really only be achieved by higher prices.This may, of course, be a price worth paying. We might be willing to pay a bit more for these services to facilitate higher pay for the employees that provide them but we should be clear about whose pockets the increases come from.

The other sector with a significant number of minimum wage employees is the retail sector. In the Irish wholesale and retail sector, 72pc of the value added goes on personnel costs. This is in line with the EU mean. Retailing in Ireland is not unusually profitable. The gross operating rate as a percentage of turnover for Irish retailers is 4.7pc compared a mean across the EU15 of 4.2pc.

What is unusual about the Irish retail sector is the number of people of work in it. There are around 90,000 people in the sector in Ireland. This is around 3pc of our working age population (15-64 years) which compares to an EU15 mean of around 2pc. Only the UK has a higher proportion of the working-age population employed in this sector than Ireland.

As aggregate labour productivity is similar, this suggests that Ireland (and the UK) have greater proportions of part-time and lower-hours staff than other EU15 countries. If Ireland was to move to EU norms in this sector it would roughly correspond to a reduction of around one-third (c.30,000) in the number of people employed in the sector - though the hours worked by the 60,000 who remained would grow by an offsetting amount.

We know how to increase the pay of employees in the food and accommodation sector - higher prices for meals and hotel rooms. We also know how we can improve the conditions and working hours for employees in the retail sector - get rid of a third of them.

Increasing the conditions of low-paid workers is an important objective but it cannot be achieved at no cost. If that was the case, we could have a €30 minimum wage for waiting staff and 39-hour weeks for every worker in the retail sector. We can't do that and a balance must be struck. With the second-lowest at-risk-of-poverty rate for employees in the EU, we are not doing too bad.

Seamus Coffey is a lecturer in economics at UCC

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