Marc Coleman

Thursday 24 July 2014

More jobs but at less pay leads to rise of working poor

As a third tier in our economy emerges, a new underclass is in danger of being created, writes Marc Coleman

Marc Coleman

Published 09/03/2014|02:30

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Rules which favour the wealthy are unlikely to change

THREE years into its term of office and the Government is taking stock.

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It's a difficult and detailed affair, this stocktaking business. Best done without any distractions. And what with the assembled crowned heads of Europe in Dublin and drama unfolding in the Ukraine, it is a week full of distractions. Distractions from some important if not alarming details about where our economy is going.

As the spectre of war haunts Europe, a spectre of a different kind is about to haunt our economy: the spectre of the working poor.

Yes, the poor were always with us. But unlike Eoghan Harris's friend Moby Dick – who could send political careers flying into oblivion with a flick of his tale – they were too small to matter politically. And they tended not to vote. But a glance at last week's Exchequer returns suggests this is changing.

With a 3.3 per cent jobs growth in the latest employment figures and allowing for a 0.6 per cent fall in earnings, the tax take should – other things being equal – be up by about two and half per cent. But Tuesday's Exchequer data show a rise of just 0.2 per cent.

What is happening here is that from a two-tier economy we may be evolving into a three-tier economy. The first tier – the public sector, with average weekly earnings of €907.50 – is well known.

The second tier is the existing non-public sector tier where weekly earnings average €622.57. Now while public sector workers do have "higher qualifications" on average outside the primary and secondary education sector, there is no evidence to show this corresponds to a productivity gap that justifies a 45 per cent pay gap – the highest outside bankrupt Greece.

And with the third tier of our economy now coming into view, that gap is even more questionable. At incomes at or below €350 a week – corresponding to the income tax exemption threshold of €18,000 – a new underclass is in danger of being created.

Now these workers do pay tax. In fact, we have the highest indirect taxes in Europe (and a rake of fees and charges for services that in other countries are free). But these workers pay no income tax.

Hence the conundrum of rising employment, but stagnant income tax receipts.

These jobs are also welcome. With the labour force up 0.9 per cent in the last year, bringing unemployment below 12 per cent is a compliment to government policies such as avoiding income tax rises, eliminating the USC for low paid workers and recent measures in the last Budget and the Action Plan for Jobs.

Yes, schemes are partly causing jobs growth. But which is better: waking up every morning with some work and a prospect of a future? Or continuing to languish on the dole? If schemes can get the young unemployed started on a path of employment rather than welfare dependency, so be it.

But the Government must also accept that rises in jobs quantity caused by lower quality have consequences. This applies even when jobs aren't scheme-based. For a start, with low-paid sectors like agriculture and tourism accounting for the lion's share of growth, jobs growth is unlikely to lead to the consumption growth we need to create a virtuous growth circle, as seen in the mid-Nineties.

In her paper on mortgage arrears, Central Bank economist Yvonne McCarthy put her finger on the problem. Referring to the majority of those with "delinquent" mortgages who have jobs, she writes "many of these borrowers have suffered a significant drop in their income, a change in employment conditions or are in fragile employment".

The very fact that she is referring to those with mortgages means she isn't talking about the JobBridge brigade. Rather, she is referring to the fact that a growing number of those at work are facing falling incomes and financial instability.

In 2010, a year in which disposable income had yet to suffer further falls, the latest household budget survey tells us that those earning incomes of the kind we are seeing in new jobs (at or below the income tax exemption threshold of €18,000 per year or about €350 per week) are struggling to make ends meet.

Their average weekly disposable income is just below their spending. And this data is for 2010, before the property tax and water charges kick in. The chronically high cost of living is a key reason for this. And why people in this income bracket find it so difficult to meet the largest regular outgoing they face: the mortgage.

Pointing to the large numbers of emigrants with jobs, some conclude that emigration is a "lifestyle choice". But if so, it is because it is a choice between having some kind of lifestyle or none at all.

The irony is that, in many other EU countries, life on a low income (while not a barrel of laughs by any stretch) is far more bearable than it is here. The first reason for this is that the basics of life are provided more cheaply: healthcare, transport, education, accommodation, food and drink are provided by a modestly-paid cost efficient public sector, a well regulated housing market or by modestly taxed competitive markets.

Here public service provision is stakeholder-driven rather than consumer-driven, the housing market faces shortages and there is a lack of competition – and chronic overtaxation – in the food and drink markets.

Government should start tackling this situation by cutting indirect taxes and social charges. But that is just the start. Unless we see a fundamental rethink of the contracts between State and taxpayer on one hand and State and consumer on the other, the working poor might soon make Moby Dick look like your friendly family goldfish.

Current affairs radio show 'Coleman at Large' is on Newstalk 106-108fm, Tues & Weds from 10pm

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