Monday 26 September 2016

The minimum wage system works - but that's just luck

Published 14/05/2015 | 02:30

Cartoon may 13th business
Cartoon may 13th business

IF I'd known the bus was coming, I'd have waited. Just a couple of weeks after trekking through the undergrowth of low wages and living wages, along comes a shiny new vehicle from the OECD with "Minimum Wages" on its destination blind.

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As it says, minimum wages - let's call them MWs for short - are common, with 26 of the 34 members countries setting legal minima for pay, and the USA having one of the first.

That is just one of many surprises in the report. A bigger one is that the Nordic countries are among the eight who do not have statutory minimum wages; and that the most recent OECD country to impose one is Germany.

The reason for this apparent anomaly is that the elaborate system of sectoral wage bargaining in these countries - much of it underpinned by law - is seen as making legal MWs unnecessary. This is perhaps the central lesson of this report - that comparisons are tricky. Such arrangements can be viewed only in the wider context of the country to which they apply.

The report singles out the total cost of employing MW workers (which would vary widely between countries even if they had the same actual figure), take-home pay, and how MW schemes affect different groups.

It is not always the poor. Research in Ireland and elsewhere has found that large numbers of MW workers live in households with income above the poverty line. Sometimes well above it, as in the case of middle-class students doing part-time work.

Each system produces different results, whether in poverty reduction, employment and the impacts on those of different skills, different ages, different household incomes and, as the OECD naturally points out, different genders; and the Irish system is quite different from most.

This is well worth remembering, as the new Low Pay Commission prepares to set about its work; the "living wage" enters the bargaining lexicon; and wages generally start to rise - led, despite all promises to the contrary, by public sector rather than private.

The Irish minimum wage system derived from just such political crudity. Both its levels and its interaction with the tax and welfare system owe little or nothing to rational analysis. Yet, according to the report, it seems to work rather well.

The OECD measures MWs against the median wage - not the average but the figure which most people earn. In Ireland, it is around €29,000 a year. Before the Crash, the Irish minimum rate was 53pc of the median. In purchasing power, after adjusting for different prices in different countries, it was the sixth highest.

The minimum wage of €8.65 per hour was controversially reduced by one euro during the recession, which brought it to 50pc of median earnings - pretty much the OED average.

That cut has since been reversed. The report's data goes only to 2013 but we can assume that the Irish rate is again one of the more generous, although not enormously so.

But that is just the actual amount. Just as with income inequality, of which this is a part, the picture changes dramatically once taxation and entitlement to benefits are included. Then, the net income of an Irish head of family on minimum wage becomes the third highest in the OECD, after Australia and Luxembourg - and one shouldn't really count Luxembourg in anything.

So that leaves only Australians faring better. The reason is that Irish families on low incomes face hardly any deductions from their wages - and those they do will probably fall further when promised USC changes come in. This is not the case everywhere.

Net income for MW earners varies enormously between countries. In some, even a full-time job on minimum wage still leaves the household well below the standard definition of poverty.

Of course, such families may receive other benefits, although not necessarily. Czech Republic, Estonia, Greece and Spain are the EU countries where full-time work by two people on minimum wages is not enough to get a family above official poverty levels.

The point is that most people might well think Ireland should be in this group, listening the incessant drumbeat about the unfair Irish society. Reality seems to be exactly the opposite. Along with Britain and Australia, Ireland is a country where even one half-time job on MW is enough to take a family with two children out of poverty. In most countries, a single full-time MW job leaves two-parent families below the poverty line.

One talks about households because another well-established, but little-acknowledged, fact is that in Ireland, single workers are treated very differently from couples (however defined).

A single parent faced, not the second lowest, but the second highest deductions in the OECD from an 5pc increase in the minimum wage as benefits reduced an contributions rose.

Complications do not end there. Irish employers pay just about the lowest employee tax - yet another well-known secret. This keeps total labour costs down, which may see people employed at low wages who would otherwise be unemployed.

Faced with such complexity, one must hope that the new pay commission will ignore all that tendentious inequality stuff and test the radical demands of the living wage lobby against the data.

The report itself says job losses are more likely when the MW is high to start with and, interestingly, when labour markets are already weak. It warns against increasing legal minimums automatically - in line with average wages, for example - rather than considering labour-market conditions and the specific situation of the intended beneficiaries.

It is therefore in favour of independent low-pay commissions, such as exist in several countries, including Britain. "Public consultations and a requirement to publish recommendations promote minimum-wage adjustments that are transparent and predictable for both businesses and workers," it says.

The new commission is an opportunity to do things differently from the methods which keep bringing us to the verge of destruction. But that is in doubt before it has started. Minister of State Ged Nash wants "to see the rate of the national minimum wage progressively increased over a period of time", while preserving the usual ministerial veto.

So much for complications. If that is to be the approach when deliberations start, we will know that nothing much has changed and getting things right by accident is still our best hope.

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