Submission from Department of Finance to the Low Pay Commission on the National Minimum Wage
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Submission from Department of Finance to the Low Pay Commission on
the National Minimum Wage
Introduction
This submission outlines the Department of Finance’s views for consideration by the Low Pay
Commission in its deliberations regarding the minimum wage.
From an economic stability perspective, the establishment of the Commission is welcome.
The obligation for the Commission to make an annual recommendation on the national
minimum wage is an improvement on the previous approach where the national minimum
wage was adjusted at irregular and sometimes quite lengthy intervals. The current approach
should contribute to a pattern of more frequent but smaller changes in the minimum wage.
This will be of benefit to both employers and employees and should allow for changes in
underlying economic conditions to be taken into account.
The Commission’s terms of reference provide that it must have regard to a range of issues in
formulating its recommendation on the minimum wage rate. Given the Department of
Finance’s broad economic policy advice role, this submission outlines a non-exhaustive list of
broader macroeconomic considerations that the Commission may wish to take into account
in making its recommendation.
The structure of the submission is as follows: by way of background, the submission first
outlines key macroeconomic trends against which a minimum wage recommendation would
be made. The submission focuses on the need to ensure that Ireland’s wage-setting process
is as flexible as possible in the context of maintaining competitiveness and supporting growth
and employment. The importance of developing the evidence base required for the
Commission’s work is highlighted along with suggestions as to how this might be achieved.
Finally, aspects of the minimum wage – employment trade-off are highlighted.
Macroeconomic Background
The Irish economy experienced almost two decades of strong growth to 2007. Income per
capita converged toward levels in advanced economies driven by improvements in
productivity and employment (the latter supported by considerable increases in labour supply
both through both inward migration and participation).
However, by the mid-2000s growth had become more unbalanced. Construction activity grew
to unsustainable levels on the back of relaxed credit standards and a speculative bubble
emerged. This had knock-on effects on the tradeable sector of the economy as rising prices
and labour market tightness resulted in a loss in competitiveness, making Ireland a less
attractive location for foreign direct investment (FDI). Domestic demand, driven by
construction activity, reached unsustainable levels.
The resulting downturn between 2007 and 2010 was severe. GDP fell by 12 per cent and
employment by 15 per cent from the respective peak to trough quarters (on a seasonally-
1adjusted basis). Employment in exporting sectors1 began to fall earlier, falling 9 per cent
between 2005 and 2009 both in response to the economy’s competitiveness position as well
as the slowdown in global trade.
Although GDP began to grow in 2011, driven by a recovery in exports which was supported
by a significant improvement in competitiveness, it has taken some time for this recovery to
become embedded. Annual average GDP growth has averaged just under 2 per cent between
2011 and 2014. Employment began to rise only in 2012 but since then has recovered by
95,000 or some 5 per cent above the trough. The rate of unemployment has fallen by 5
percentage points but remains high at 10 per cent in March 2015. Over recent quarters, the
recovery has become increasingly broad based. Domestic demand contributed to growth for
the first time last year and is expected to continue to do so. Industrial production (both in the
traditional and modern sub-sectors) has shown a pick-up on the back of both external
demand and increased domestic activity.
Figure 1 Real GDP Level 2007-2014 Figure 2 Labour Market 2007-2014
Source: CSO Source: CSO
Regarding developments in earnings since the minimum wage was last adjusted (July 2011),
average hourly wages (excluding irregular bonuses) have increased by 0.7 per cent in the
economy over the period Q3 2011 to Q4 2014. However, developments have differed as
between the private sector and public sectors; average hourly earnings increased in the
former by 3.2 per cent but declined in the latter by 1.4 per cent. In terms of price
developments, the Harmonised Consumer Price Index (HICP) has increased by 2.8 per cent
between July 2011 and March 2015.2 In overall terms, trends in average earnings and inflation
do not support the view that the minimum wage has fallen appreciably behind.
1
Defined as the Department of Jobs, Enterprise and Innovation’s ‘enterprise-supported’ sector.
2
The Consumer Price Index (CPI) increased by 2 per cent between July 2011 and March 2015.
2Minimum Wage Levels: International Comparison
The most current data on the minimum wage, available from Eurostat, indicates that of those
countries with a minimum wage in Europe, Ireland is 5th highest in the nominal value of the
gross minimum wage and 6th in purchasing power parity (PPP) terms. The nominal minimum
wage will be the relevant indicator for considering competitiveness impacts while the PPP
measure captures the take-home value of the minimum wage.
Arguably what matters to employees is their disposable income not gross pay. In considering
adjustments to the minimum wage, the relatively favourable treatment of low-paid workers
under the Irish tax and welfare system needs to be borne in mind. In 2013, Ireland’s effective
tax rate for single people at 67 per cent of the average wage was the 5 th lowest in the OECD
at 12 per cent, and 9 percentage points lower than the OECD average of 21 per cent.
Figure 3 Gross Monthly Minimum Wage, January 2015
2,000
1,800
1,600 Euro Purchasing Power Standard
1,400
1,200
1,000
800
600
400
200
0
Source: Eurostat
Latest data available from the OECD on the ratio of minimum wages to median wages (Kaitz
ratio) indicate that Ireland is in the middle of the distribution of OECD countries. Overall,
therefore, these comparisons do not suggest that the minimum wage in Ireland is out of line
with other countries.
3Figure 4 Gross Earnings Kaitz Index, 2013
0.7
0.6
Ratio of Minimum to Median
Wages of Full-time Workers
0.5
0.4
0.3
0.2
0.1
0
Turkey
Israel
United States
France
Hungary
Romania
Canada
Chile
Latvia
Australia
Poland
Netherlands
Ireland
Slovak Republic
Greece
Spain
Mexico
Belgium
Czech Republic
Slovenia
New Zealand
Portugal
Luxembourg
Korea
Japan
Lithuania
Estonia
United Kingdom
Source: OECD
Competitiveness
The recent turnaround in economic performance is in large part due to the considerable
improvement in competitiveness in recent years. Prices and wages developments have grown
less than in trading partners having moved out of kilter in the years preceding this. Combined
with the more recent depreciation of the euro, this has seen Irish competitiveness – as
measured by the real effective exchange rate - recover the bulk of the deterioration recorded
during the boom years (see chart below). However, it is important to bear in mind that the
nominal effective exchange rate can fluctuate rapidly.
The recovery in competitiveness has facilitated a re-allocation of resources within the
economy towards the tradeable sector. Exports are now at an all-time high and have
recovered their crisis losses. Employment in agency-supported foreign-owned firms has
grown 12.5 per cent to 172,000 in 2014 from a low of 153,100 in 2009, reflecting FDI inflows
over the period. The share of net exports in GDP has also exceeded its high of the early 2000s,
suggesting that the necessary re-balancing of the economy is well advanced.
4Figure 5 Ireland’s Nominal and Real Effective Exchange Rates
Source: ECB. Note: 2007 = 100 NEER: Nominal effective exchange rate; REER-CPI: CPI-deflated real effective exchange rate
Figure 6 Net Exports as a Share of GDP
Source: CSO
The gains in Irish competitiveness achieved since 2008 have been hard won. Membership of
a currency union implies that competitiveness adjustments must be effected by way of wage
and price moderation. This lesson was not recognised in Ireland in the first decade of
monetary union. Relative cost improvement via the exchange rate channel is not available to
individual members of the euro area, implying that relative labour costs have to adjust to
competitiveness losses. However the Irish experience suggests evidence of downward
nominal wage rigidity in the private sector during the crisis years (Walsh, 2012). This had high
short-term costs in the form of the increase in unemployment which are only unwinding now.
Two policy implications flow from recent experience:
First, approximately two-thirds of Ireland’s trade is with countries outside the euro
area. This means that fluctuations in the euro’s exchange rate are critical for the
export performance of Irish firms. To illustrate the significance of exchange rate
movements for the cost base and competitiveness, Figure 7 plots the performance of
5Ireland’s minimum wage and the UK minimum wage expressed in euro. Of their
nature, currency movements can be abrupt, impacting the cost base of firms. A wage-
setting process which is as flexible as possible is essential. This would allow firms to
retain rather than shed labour in response to a decline in the price it can charge for its
products on global markets.
Second, Ireland’s real economic output is particularly volatile, due in part to the
openness of the economy. It leaves Ireland highly exposed to global shocks, both
negative and positive. The combination of a too-high cost base and a collapse in global
demand had severe consequences for Ireland from 2008 on. Going forward, this
suggests the need for a ‘competitiveness buffer’ to allow the economy absorb
potential adverse shocks with as little impact on employment as possible. In practical
terms it means striving to ensure labour costs do not rise above either productivity at
home and/or those in trading partners. In principle, this suggests that adjustment of
the minimum wage should be symmetric and allow for consideration of a reduction in
the rate in response to a shock to demand or a sudden loss in competitiveness 3.
Figure 7 Comparison of Irish and UK Minimum Wage Rates
Source: Central Bank, GOV.UK, DJEI
Furthermore, in the context of internal adjustment requirements, it is important that trends
in the euro area countries are also accounted for. While there are important economic ties
between Ireland and the UK, it is particularly important to have regard to productivity and
wage trends in euro area member countries, especially in the context where internal
adjustment may be required.
3
The Low Pay Commission’s Terms of Reference only allow consideration to be given for a positive change in
the national minimum wage.
6Data
To best support its work, it is crucial that the Commission develops an analytical framework
in which to examine and determine its minimum wage rate recommendation. Such a
framework would allow the Commission to identify the necessary data and information inputs
required for empirical analysis and to make well-informed, evidence-based
recommendations. A large number and variety of data sources have already been identified
to meet the Low Pay Commission’s data requirements. However, other information4, such as
the incidence of the minimum wage and the distribution of wage levels around this rate, are
likely to be unavailable in the short term and in the absence of robust data it would be prudent
to focus on establishing the necessary information sources which would add to the evidence
base in a timely fashion. To this end engagement by the Commission with the CSO and other
relevant bodies regarding the development of new or augmented surveys and the potential
for providing more detailed data should be explored.
The Minimum Wage – Employment Trade-Off
As part of its legal function the Commission’s minimum wage rate recommendation must give
due consideration to “assist as many low-paid workers as is reasonably practicable without
creating significant adverse consequences for employment”. An increase in the minimum wage
above the market clearing wage is likely to reduce employment. A recent overview of the
effects of minimum wages on employment concludes “that the evidence still shows that
minimum wages pose a trade-off of higher wages for some against job losses for others, and
that policymakers need to bear this trade-off in mind when making decisions about increasing
the minimum wage.” (Neumark et al., 2014).
The degree to which employment is potentially affected depends, inter alia, on the
distribution of skills and experience across the labour force and the point at which the
minimum wage intersects the wage distribution. This is reflected in the current age-related
lower minimum wage for young workers.
While identifying a cohort of low-paid workers will be part of the evidence base to be put
together by the Commission, it would be useful to consider the time-variant aspect of the
cohort. In order to assist the most low-paid workers over time, it may be beneficial to consider
the wider group of potential and future individuals who could fall into the low-paid category
at any one time. To this end consideration of the extent to which low-paid employment
enables workers to accumulate experience and human capital and acts as a stepping stone to
higher paid employment will be material.
Finally, the economic recovery in Ireland has been uneven across the country, with the
recovery thus far primarily concentrated in Dublin and other urban areas. To the extent that
a market clearing wage is likely to be lower in weaker performing regions, consideration might
be given to the differential effects of any adjustment in the national minimum wage on
employment at a regional level.
Department of Finance
April 2015
4
Other sources not name checked by the Commission already which may be of use include the Survey of Income
and Living Conditions (SILC) and the forthcoming National Employment Survey (also known as the Structure of
Earnings Survey), both of which are conducted by the Central Statistics Office.
7References
Neumark, D., Salas, J. I., & Wascher, W. (2014). Revisiting the Minimum Wage—Employment
Debate: Throwing Out the Baby with the Bathwater?. Industrial & Labor Relations Review,
67(3 suppl), 608-648.
Walsh, K (2012). Wage bill change in Ireland during the recession – How have employers
reacted to the downturn? Journal of the Social and Statistical Inquiry Society of Ireland,
Volume XLI, 39-71.
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