Ibec submission to the Low Pay Commission on the setting of the minimum wage 2016

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1 Ibec submission to the Low Pay Commission on the setting of the minimum wage March

2 Key messages for the Low Pay Commission (LPC) 1. Global and regional uncertainty should weigh heavily on the LPC s decision. When it comes to 2016 Ibec would urge caution to the LPC. The past has proven that minimum wage increases are easy to give but impossible to take back. Ireland s economy is in a position of great uncertainty with the changing global environment representing a real and growing risk to this recovery. The factors which are currently driving the recovery are both temporary and prone to reversal in the coming years. All this is happening while the domestic facing sector where the majority minimum wage workers are employed is still exiting intensive care. 2. Exchange rate risk from Brexit is non-trivial and could severely disadvantage Irish companies selling into the UK. In addition to all the other significant economic risks from Brexit, adverse exchange rate movements could leave Irish companies exposed even at existing minimum wage levels. If a Brexit takes place, Ireland could move from a 7% differential with the UK s minimum wage in sterling terms to a 40% differential by July. This is not a tail risk, it is real and substantial. 3. The 2015 minimum wage increase and budget provisions for employers PRSI were poorly aligned. The movement in, rather than removal of, the step effects in employers PRSI was an entirely unsatisfactory solution to the issues raised by both Ibec and the LPC in It is likely that this will increase labour costs significantly for a greater proportion of workers just above the minimum wage. As a result, the likelihood of reductions in employment or hours from the rise in the minimum wage has significantly increased. 4. The 2015 LPC decision led to an increase in the minimum wage 6 percentage points ahead of inflation and 4 percentage points above average wage increases in the economy. The real value of the minimum wage is now 27% higher than when it was introduced. In this context there is little evidence for an increase in the minimum wage economically given an increasingly uncertain global environment, high unemployment, a deflationary cost of living environment and real concerns about the viability of minimum wage increases for firms in the regions. 5. The notion of Ireland as an outlier in terms of low pay bears no weight in reality. A key argument used by various bodies to justify increases in the minimum wage is that Ireland is an outlier in terms of its low pay, poor working conditions and in work poverty. In section 4 we show that this is clearly not the case. Irish low paid workers receive higher pay than almost all their European counterparts in gross terms, adjusted for purchasing power and take home more of it than workers in any other developed country after tax. They are also amongst the least likely workers in Europe to suffer from poverty or severe deprivation. The link between poor social outcomes and work is extremely weak in Ireland with only 0.5% of people living in a household with anything above low work intensity either being at risk of poverty or severely deprived. Inequality of income is linked to low work intensity or lack of labour demand. The minimum wage is not an appropriate policy instrument to combat poverty or inequality in this context. 6. The minimum wage is an incredibly poor instrument with which to target household poverty or income inequality. Section 5 draws attention to the distributional impact of the 2016 minimum wage increase based on data from the ERSI s SWITCH model and the Survey on Income and Living conditions. It is clear from this analysis that the minimum wage is far from a progressive policy. Over 70% of the gross value of the minimum wage increase went to households in the top half of the income distribution; almost half went to the top 30% of households. On the other hand, only 6.5% went to the bottom 30% of households. Insofar as the minimum wage increase is passed on through higher prices or lower employment growth it will represent a net transfer from poorer households to richer ones. 2

3 1. Introduction Ibec supports the minimum wage as a principle and furthermore recognises that the wage floor should increase as economic circumstances improve. It is vital, however, that the minimum wage be appropriate, competitive and affordable whilst also taking into account changes in the cost of living. In this context, we believe, that the Low Pay Commission s (LPC) recommendation in 2015 to increase the minimum wage by 50c (5.7%) was a mistake. The increase was recommended with little or no regard for its economic context. The stated justifications were difficult to comprehend given the deflationary price environment, large regional lags in economic recovery, unemployment above 9% and a minimum wage which was already amongst the most generous in the developed world in gross and net terms. Despite this backdrop the LPC recommended a wage increase (5.7%) which was 3 1/2 times the average pay increase across the economy in 2015 (1.7%). This ensured that the result was a costly pay compression for business. Although studies are unavailable for Ireland, available evidence from the US and UK (which has much looser wage distributions than Ireland) suggests that these spillover effects could impact up to 25% of the total wage distribution. The 2015 report produced by the Low Pay Commission provided insufficient evidence to support the recommended increase to the national minimum wage. Indeed the commission produced no new evidence of its own. The publication contained no evidence on its impacts on households, firms or employment apart from a brief literature review of minimum wage studies. These major studies cited were almost solely based on increases in countries where minimum wages which were significantly lower than Ireland s current minimum wage in nominal terms, purchasing power terms and as a proportion of median income 1. There has been little or no contemporaneous empirical research on the effects of changes to the minimum wage in Ireland and none of real empirical value. This in many respects is data driven. Policy decisions must be based on hard evidence, not aspirations. It is deeply frustrating to see important policy decisions being made in the absence of the necessary economic evidence. If the Commission lacked independent labour market information on which to base a decision, this should have been addressed before publication. The absence of this data provides a real issue for policymakers and must be addressed by robust studies on the extent of minimum wage work as well as effects of changes to it particularly for young people and low skilled workers. The UK s Low Pay Commission model must be followed not only in name but also in the depth and quality of its research base 2. With the current available data in Ireland this is not possible. Finally, the setting of the minimum wage must be evidence based and not on a political whim. There must be clear lines deterring political interference in the Commissions work and no expectation that the LPC will take orders from politicians on minimum wage targets. The independence of the commission must be absolute if it is to serve any useful purpose. Those points aside Ibec s position continues to be that changes to the minimum wage should be based on a number of considerations: Figure 1: Considerations for changes to the minimum wage Labour market conditions International comparisons and competitiveness Sectoral affordability Regional affordability The cost of living 1. This was briefly acknowledged and then casually dismissed in the report 2. Particularly given the LPC s budget ( 500,000) is about half that of its UK counterpart; despite the difference in size of States and length of establishment. 3

4 Employee PRSI liability 2. The effect of the 2015 increase on firms It is not possible to give a clear indication of how the 2015 increase impacted the labour market from an empirical point of view given the deadline of mid-march. Given the lack of data available, both the LPC and contributors are flying blind when it comes to providing an evidence base for changes to the minimum wage. This is clearly far from optimal if the purpose of the LPC is to provide an evidence base minimum wage increases. In this section we focus on the available evidence of the impact of the adoption of the 2015 LPC recommendation on employers. Given the time based limitations on available data, this section focuses on the impact on employers from the tax system. 2.1 The minimum wage increase and the tax system In our submissions to the LPC in 2015 we drew attention to the fact that the interaction of minimum wage increases with the tax and benefits system would in some cases leave workers worse off due to the structure of the USC and PRSI system. In addition, employment costs would increase significantly for the same reason. Taking on board our views the LPC recommended that any increase in the minimum wage must be reflected in changes in PRSI in Budget Figure 2 displays the PRSI step effect for low earners before and after Budget In 2015 if an employee had a wage increase from 351 a week to 352 per week they would come into the PRSI net, immediately seeing their net pay fall by 13 a week. They would not break even until they reached 366 per week. This meant that small increases in the minimum wage would led to inordinate increases in the labour tax wedge and thus labour costs for employers, greatly increasing the probability of negative effects on employment and hours. The net benefit to existing employees would be negative. Figure 2: Budget 2016 Employee PRSI changes Gross weekly wage Pre Budget employee PRSI Post Budget Employee PRSI Source: Ibec calculations Changes introduced in Budget 2016 set about addressing this anomaly by introducing a graduated and tapered PRSI relief. This new system does not wholly eliminate the step effect but does limit its negative labour market incentives by narrowing its impact of a very narrow slice of the wage distribution. A similar anomaly occurred in employer s PRSI where its level was 8.5% on earnings up to 356 per week but then 10.75% on a workers entire earnings once those earnings exceeded 356 per week. This led to an employer s PRSI gradient as displayed in Figure 3. It is clear this would mean small changes in the minimum wage could led to much greater (at least 30%) increases in the tax wedge on labour and thus employer s labour costs. 4

5 Employer PRSI liability Figure 3: Budget 2016 Employer PRSI changes Gross weekly wage Pre-budget employer PRSI Post Budget-Employer PRSI Source: Ibec calculations Following Budget 2016 this step effect has moved out to 377 per week but with no change in the gradient. Given that step effect now impacts even more employees than it had previously as it has moved further up the income distribution the changes made in Budget 2016 are likely to have had a significant negative effect on labour costs for highly wage sensitive sectors. Although it is very difficult to estimate in a dynamic fashion, given available wage distribution figures, the step effect is likely to have moved from affecting 5% of workers on or below the previous threshold to affecting pay or hours increases for up to 12% of the workforce beneath the new threshold. This movement in, rather than removal of, the step effects was an entirely unsatisfactory solution to the issue and is likely to have increased labour costs significantly for a greater proportion of workers just above the minimum wage. As a result the likelihood of significant reductions in employment or hours from the minimum wage increase has increased significantly. Future LPC recommendations need to ensure that the labour cost burden of employers PRSI is not increased substantially for an increasing number of workers. This must be done by removing the step effect from the employers PRSI system in much the same way as was achieved in the employee contribution to PRSI. 5

6 3. The Economic context in The economic outlook and exchange rates The economic outlook for 2016 is much different than at this time in A global slowdown, local uncertainty and the prospect of the Brexit vote loom large over Ireland s economic prospects. Our forecasts put economic growth in the region of 4% this year but the possibility of deviation from that figures is large. In the same way that much of the drivers of Ireland s growth last year were external, many of the issues causing doubt about economic growth this year are not within our control. Policy should take the path of least harm as the economy navigates what could be a tricky time. It is imperative that we maintain underlying competitiveness and fiscal stability to guard against external shocks. Economic growth in 2015 was driven by the three tailwinds of low interest rates, falling oil prices and favourable exchange rates. While it is unlikely that oil prices or interest rates will significantly move against Ireland in 2016, their effect on growth will be significantly more muted than last year. The external environment facing the Irish economy when it comes to exchange rates on the other hand will be significantly more uncertain in Exchange rates and Brexit Fears of a Brexit have pushed the euro/sterling exchange rate which is key for Irish companies in the traded sector from 0.7 in March 2015 to almost 0.8 today. Various analysts have suggested that euro/sterling exchange rate will move toward 0.85 before the vote on Brexit in June and there is a wide band of uncertainty around the possible exchange rate effects of the vote itself. Figure 4: Euro/Sterling exchange rates and Brexit Source: Bloomberg, UBS Analysts have suggested that the euro/sterling exchange rate would move toward or above parity in the case of a Brexit and could fall to around 0.75 if the referendum is rejected. This exchange rate risk must be borne in mind by the LPC. Although Brexit is not the most likely referendum outcome it is by no means a tail-risk. For small trading companies in Ireland Brexit would have a number of effects including regulatory divergence with a main trade market, cost competitiveness and product sourcing issues, energy cost increases and possibly reductions in trade between Ireland and the UK. The ESRI (2015), for example, have estimated that as much as 20% of Ireland s trade with the UK or about 3 billion could be wiped out in the case of a Brexit. In addition to this, if euro/sterling moved to parity in the case of a Brexit this would leave the wage floor for Irish exporting firms at 37% higher in sterling than its UK equivalent. 6

7 = 100 Figure 5: Irish and UK minimum wage at a reasonably range of mid-year euro/sterling exchange rate levels Irish minimum wage (converted to Sterling) UK minimum wage (Sterling) c 80c 90c Parity In addition, a marked slowdown in the global economy has been apparent in recent quarters. This is worrying as in the past Ireland s economy has moved in unison with global growth. In recent years Irelands GDP has shown almost unitary co-movement with that of the World. As a result, we expect that these factors will weigh heavily on the Irish economy this year with growth slowing to 4%.Retaining underlying competitiveness will be key to sustaining prosperity in this much more uncertain global climate. Figure 6: Nominal effective exchange rate, Ireland Source: BIS 7

8 The concentration of growth The concentration of this growth is also important to bear in mind when discussing minimum wage increases. Merchandise exports in 2015 were up 17 billion on the same period a year earlier. This suggests a bumper year for companies trading abroad. This growth in exports should be met with particular caution, however, with over 70% of the growth coming from the pharma sector where the majority of exports are priced in dollars (with the weak euro inflating their euro value). Indigenous SMEs on the other hand the main employers of minimum wage workers have not seen the same impact from an economy which appears to be booming in aggregate figures of economic activity. This export boost has led to a substantial boost in profits in the economy which is heavily concentrated in a relatively small number of sectors; this was a major factor in the rising corporate tax take in This should not be taken as evidence of broad based increase in profitability in business however. The top 1% of companies by net income, of which there are only 450, paid 83% of total corporation tax in 2013 the most recent year for which data was available. The top 10% (circa 5,000 companies) paid 97% of the total tax take; while the remaining 122 million (3%) of the 4.07 billion tax take was paid by 90% of companies. A rising tide of economic activity in 2015 was no doubt welcome but was far from lifting all boats. Despite Ireland being a small very open trading economy when it comes to exports the record of Irish SMEs mirrors the poor record of Irish indigenous firms in general. Irish firms account for only 14.6% of total exports from Ireland with SME s accounting for 8% of this total. Foreign SMEs on the other hand perform much better, accounting for 18% of total exports more than the total indigenous sector combined. Table 1: Contribution to exports Irish Foreign Total SME 7.9% 18.0% 26.0% Small 3.1% 3.3% 6.4% Large 6.7% 67.3% 74.0% Total 14.6% 85.4% 100.0% Source: Lawless, McCann & McIndoe Calder, Central Bank, 2012 This is driven primarily by the fact that most Irish owned SMEs are in domestic facing sectors with Ireland lacking a strong mittelstand sector of exporting manufacturers often seen in other countries. The issue here is that this leaves the Irish indigenous SME sector far more open to fluctuations of the domestic economy. The affordability of minimum wage increases must be seen in this context. Total domestic demand is still 7.1% below its peak in value terms with consumer spending down 4% over the same period. Rising employment along with a return of moderate wage growth will see the volume of consumer spending rise by 3.7% in It is likely that in value terms consumer spending will only recover to its 2007 levels in late 2016 or early Despite this the wage floor for these firms has increased by 6%. Given that household debt is still the 3rd highest in Europe Irish households are likely to be extremely sensitive to any external event which weighs on consumer incomes or sentiment such as a rise in interest rates, a recovery in oil prices, Brexit or a global slowdown. These external risks have increased significantly in the past six months with the global economy now entering a time of greater uncertainty. 8

9 Index 2008 Q1 = 100 Figure 7: Domestic demand in Ireland Q1 2008Q4 2009Q3 2010Q2 2011Q1 2011Q4 2012Q3 2013Q2 2014Q1 2014Q4 2015Q3 Personal Expenditure on Consumer Goods and Services Total Domestic Demand Source: National Accounts There remain a number of downside risks to Ireland s economic positon. These risks mainly stem from the fact that the drivers of the contribution of net trade to economic growth are temporary in nature. Irish exports in particular are extremely vulnerable to movements in exchange rates and the weak euro has been a significant boost to Ireland. While a future depreciation in 2016 will led to some level of export growth, it is unlikely to be of the same magnitude that was seen in In the long term this is not the basis for sustainable economic growth. The risks in the global environment facing Ireland will be much larger in 2016 than they were in In addition, the risk of substantial negative economic outcomes will increase in the second half of the year with the possibility of Brexit. Transitory competitiveness gains should be treated as what they are; building in higher costs domestically on the back of these temporary gains has the potential to leave Ireland exposed when the temporary factors recede in future years. Changes to minimum wage levels must take the path of least harm. This means the LPC must have one eye on the future of the global and domestic economy. Recent history has shown that minimum wages increases once instituted will not be reversed easily or for long. 3.2 Labour market conditions CSO figures for Q4 showed employment growth of 2.9% annually. Employment in Q was up 44,100 on the same period a year earlier meaning average employment growth throughout the year of 2.6%. Total annual employment growth slowed in Q4 to 2.3% but this is far from a trend at this stage given that this is similar to the hiring patterns seen in Employment is now likely to reach 2 million, for the first time since early 2009, in the coming months. In addition, unemployment is now below 9% with preliminary CSO estimates suggesting that this may now be as low as 8.8%. It is worth noting that employment in accommodation and food, retail and support services, the major three sectors in which minimum wage employees work, was at best stagnant in Retail in particular has seen poor employment growth for some time. Employment is now back at 2005 levels and has not seen any significant year-onyear progress since 2007 despite some pick-up in the domestic economy. This is particularly worrying given the sector is Ireland s largest employer. Since 2005 growth in the wage floor has outstripped turnover growth by a factor of over 30 percentage points in a sector where labour accounts for 70% of total costs. 9

10 Index Figure 8: Retail turnover and the minimum wage Retail turnover Minimum wage Source: Ibec calculations from retail sales index From an economic point of view this stagnation in retail employment makes sense. High consumption levels during the boom covered the fact that wage adjusted labour productivity is by far the lowest of any EU15 country (the hospitality sector has the second lowest). Restructuring brought on by the collapse of domestic demand and increased competition in the sector means that firms are now much more sensitive to labour costs (which make up 70% of total costs). The regional spread of the recovery remains a challenge. Most parts of the country are now seeing some recovery. Employment is growing annually in every region bar the West. Despite this, the difference in the pace of employment growth between Dublin and the regions has widened significantly in Employment is now growing at 5% annually in Dublin compared to 2% in the rest of the country. 10

11 Figure 9: 2015 employment growth by sector, 000 s Accommodation and food services -0.8 Admin and support services Wholesale and retail Finance and real estate Education Transport Professional services Agriculture, forestry and fishing Information and communication Public administration Other Health Industry 11.6 Construction 17.1 Source: Ibec forecasts, Q Another useful way of looking at the churn in the labour market is to examine transitions between employment and non-employment (and vice-versa). In effect these show the number of persons in each quarter either moving from employment into unemployment or out of the labour force along with the number of people moving into employment over the same period. The most striking feature of these figures is the fact that the number of people moving into employment each quarter has remained relatively steady since 2010 despite the marked upturn in the labour market. The majority of net employment growth in the period since 2012 has actually been achieved due to a dramatic fall in the number of persons losing or leaving employment. This suggests that growth in the number of companies able to retain existing headcount, rather than the creation of new jobs, has been the single most important factor in the labour market upturn of recent years. This should be borne in mind when looking at minimum wage increases particularly when assessing the effect of increases on existing headcount as well as increasing employment. 3.3 Wage developments The unemployment to vacancy ratio is a prime indicator of labour market tightness. In Ireland, this ratio has fallen substantially from 55 unemployed persons per vacancy in 2009 to 15 people per vacancy in While this drop is significant, the ratio is still elevated, particularly in a European context. By contrast, compared to the UK and Germany (2 people per vacancy) the ratio is still quite high suggesting the Irish labour market has some way to go yet to return to full employment. Ibec s most recent HR Update survey of 350 HR managers suggests that some moderate pay growth is returning to the Irish economy. Seven out of ten (71%) companies surveyed expect to increase basic pay in 2016; this is an increase from 67% in 2015 from the same survey. The median increase of 2% remained relatively unchanged from recent years. Given that the remainder of respondents expected basic pay to remain unchanged, the average expected pay increase across the economy was 1.75% in both 2015 and There remains large differences between sectors, however, with upwards of 90% of firms in some high-tech manufacturing sectors expecting to give pay increases in the coming year. On the other hand, only half of employers in some domestic services sectors planned to give a pay rise in This divergence in wage trends, which reflects both skills gaps and the relative recovery of domestic versus exporting sectors of the economy, should be borne in mind when it comes to setting the minimum wage. 11

12 Average wages across the economy rose by 1.9% in 2015 almost in line with the results of Ibec s HR managers survey (1.75%). Although much of the underlying change in average wages can be driven by compositional shifts like hiring younger workers there is clear upward momentum in wage trends. There is a large divergence between sectors when it comes to wages. Administrative and support services (+6.4%) and ICT (+4.9%) are the sectors where the largest average wage increases can be seen. On the other hand changes in other major employers such as manufacturing (+0.3%), health (+0.4%) and accommodation and food (+0.3%) have been much more modest. A number of sectors including construction (-1.9%), finance (-0.7%) and utilities (-1.9%) have seen average wages fall but again with the possibility for compositional effects these results should be treated with some caution. 3.4 The cost of living Overall inflation for 2015 fell by 0.3%. Goods prices are highly influenced by the global economy, particularly by commodity prices and therefore the falling oil price had a substantial impact on recent deflation. Both energy prices and transport costs have had a negative impact on goods inflation this year, as has increased competition in the retail sector. Service prices, which have been rising, on the other hand are highly influenced by housing. Our expectation is that inflation in 2016 will remain below 1% based on the weak price of oil and slowing inflation and economic growth globally. As such, there is little evidence of a cost of living basis for minimum wage increases. One of the alternative justifications for an increase in the minimum wage mentioned at the oral hearings of the LPC in 2015 was that measured inflation would be felt much more keenly by persons in lower income deciles. This was based on the assumption that persons in lower income households consumed a very different basket of goods to those in higher income deciles. Ibec argued at the time that there was no evidentiary basis for this claim. Figure 10: Average annual inflation by income decile, Bottom Top Average Source: Colgan & Callan, 2015 A recent ESRI analysis which provides evidence of this theory disproves the claim that minimum wage earners feel inflation pressures more keenly. Inflation is experienced fairly uniformly across the wage distribution. Indeed, the key deciles in which minimum wage workers reside (4, 5 and 6) have seen average or below average inflation over the past decade. As such this is no justification for an increase in the minimum wage. 12

13 Axis Title Figure 11: The minimum wage, M M M M M M M M04 Minimum wage (actual) Minimum wage if following HICP Source: Ibec calculations from HICP The HICP or CPI are both valid measures with which to index the experience of low income households. As a result of the deflationary price environment and the increase in the minimum wage as a result of LPC s reccomendation the minimum wage is now 1.95 above where it would have been if it had been indexed to inflation, a 27% real increase in value. 13

14 4. Low pay & the minimum wage There is little evidence for an increase in the minimum wage economically given an increasingly uncertain global environment, high unemployment, a deflationary cost of living environment and real concerns about the viability of minimum wage increases for firms in the regions. This is particularly true given that the most recent increase outstripped inflation by a 6 percentage points and wage growth by 4 percentage points. In this context a key argument used by various bodies to justify increases in the minimum wage is that Ireland is an outlier in terms of its low pay, poor working conditions and in work poverty. The argument goes that substantial increases in the minimum wage are a key component to solving this issue. In this section we look at Ireland s international position when it comes to pay in the context of these claims and also provide evidence of the distributional impact of the minimum wage. 4.1 The minimum wage in Ireland Following the introduction of the new minimum wage in January Ireland s statutory minimum wage floor is now the second highest in Europe after Luxembourg and the highest of any of our competitor countries. Adjusted for the cost of living it is the 6 th highest in Europe although this is heavily weighted by Dublin living costs. Source: Eurostat Table 2: 10 largest minimum wages in the EU, H1 2016, nominal Purchasing power Luxembourg 1,923.0 Luxembourg 1,596.7 Ireland 1,546.4 Germany 1,451.4 United Kingdom 1,529.0 Belgium 1,381.6 Netherlands 1,507.8 Netherlands 1,372.9 Belgium 1,501.8 France 1,360.7 Germany 1,473.0 Ireland 1,264.6 France 1,466.6 United Kingdom 1,133.4 Spain Malta Malta Spain Greece Greece It is also worth noting that Ireland has the lowest level of taxation on these earnings of any country in the OECD barring Mexico (which has a negative income tax designed to draw workers into the formal sector). Indeed Irish minimum wage workers pay less than half of the effective tax rate of those in the UK and about 1/5th of those workers on the new minimum wage in Germany. Figure 12: Effective tax rates for minimum wage earners 40% 30% 20% 10% 0% -10% -20% Source: OECD 14

15 Ireland has a minimum wage which is amongst the highest in the developed world and tax rates on low earners which are the lowest in the developed world. As a result the number of hours needed to be worked at the minimum wage in Ireland in order for a worker to exit poverty, at 8 hours per week (in 2013), is the second lowest in the OECD. This is compared to 16 in the UK, 40 hours in Germany and 61 hours in the United States. Figure 13: Number of Hours Worked at Minimum Wage to exit Poverty, excluding Social Assistance Benefits, Lone Parent, two children One-earner couple, two children Source: OECD 4.2 Low pay in Ireland A number of commentators have suggested that Ireland has a low pay problem. This is based on data which purportedly shows that Ireland has the second highest level of low pay in the OECD. Commentary quoting this figure often leaves out the crucial adjective when it comes to this data relative. The OECD and Eurostat regards a person as being relatively low paid if they earn less than 60% of the median wage in a country. By this measure Ireland does have high levels of relative low pay. This statistic, however, is used in a wholly misleading way in public commentary and is not a useful guide for assessing Ireland s true standing when it comes to the economic or social outcomes of employees at the bottom of the income distribution. When it comes to relative low pay Ireland is a victim of its own success in creating many high quality jobs in its exporting MNE sector as well as wages well above the European average (despite low productivity) in its domestic sectors. The median Irish worker has the second highest hourly pay in the EU. Relative to this high median wage a large proportion of lower paid workers in the relatively lower paid and low productivity domestic facing sectors fall below the arbitrary low pay threshold. Bringing many of these workers above this threshold, which is 3.78 (52%) above the EU average, would be economically unviable in Ireland s low productivity domestic facing sectors. This is particularly true given that workers in these sectors are already amongst the highest paid in Europe in both nominal, purchasing power and productivity adjusted terms. Ireland has the 6 th highest median wage in Wholesale and Retail and the 4 th highest in Accommodation in Food of any country in Europe. Despite this our low pay threshold is equivalent to 80% of median pay in retail and 90% in accommodation and food. These workers are not low paid in any sense (either nominally or in PPPs) relative to Western European norms; they are classified as low paid as a statistical artefact of our relatively high pay dual economy. Table 3: Median wages and the low pay threshold Median wage Low pay threshold Median wage (Wholesales & Retail) Median wage (Accommodation & Food) Denmark Ireland (2 nd ) (2 nd ) (6 th ) (4 th ) Luxembourg Belgium Finland

16 Germany Netherlands Sweden France Austria United Kingdom EU Italy Spain Cyprus Greece Malta Slovenia Portugal Croatia Czech Republic Estonia Poland Slovakia Hungary Latvia Lithuania Romania Bulgaria Wage adjusted labour productivity in the Irish retail and food and beverage sectors is the lowest and 3 rd lowest respectively in the EU. Further increases to wage floors must be seen in this context. Looking at aggregate productivity (as the 2015 LPC report did) it tells us very little about what is going on in the economy as a result of distortive MNE activity. The Low Pay Commission must be cognisant of the dismal productivity performance of those sectors where the minimum wages bite is the largest. The current minimum wage bite is equivalent to 45% of median monthly earnings in the overall economy but is 57% of median earnings in Ireland s retail sector and over 70% of earnings in accommodation and food. The same figures for young workers (those under 30) are 67%, 73% and 86% respectively raising the relative bite of the minimum wage in Ireland significantly for younger workers. Figure 14: Wage adjusted labour productivity in the retail and accommodation and food sectors Retail trade Food and beverage service activities 16

17 Figure 15 is a box plot of the distribution of full time equivalent wages which best typifies the low wage issue in Ireland in relation to the minimum wage. The data is presented in FTEs so as to remove the element of labour demand from the figures (i.e. part-time work) which cannot be solved by minimum wage increases in either case. This shows that Ireland s low pay problem is actually a relative low pay problem driven by a long tail of high earners in Ireland who are paid much better than their European counterparts. Irelands top 5% of workers are the 3 rd highest paid in Europe with our bottom 5% of lower earners the 6 th highest paid. Adjusted for purchasing power these relative positions do not change. As such it is clear that the notion of Ireland as a low pay economy in a European context is driven by relatively high wages for median and above median workers rather than relatively low wages. Figure 15: Distribution of full-time equivalent monthly wages, Source: Eurofound For each Member State, the cross represents the average wage in the country, the thick horizontal line shows the median, the box around it the 50% of workers with wages around the median and the longer lines or whiskers represent the wage levels that correspond to the fifth and 95th wage percentiles in the country. The end of the long lines at the bottom and top correspond with the entry point to the bottom and top 5% of the wage distribution. 17

18 4.3 In-work wage inequality in Ireland Several groups have suggested that increasing the minimum wage is necessary in order to decrease high levels of income inequality in Ireland by compressing the wage distribution at the bottom. This shows a misunderstanding of the nature and source of in-work wage inequality in Ireland. Inequality before tax and transfers in Ireland is high, infact the highest in Europe. This is driven in the main by low employment intensity of households. The tax and transfers system reduces this to about the European average. State intervention in Ireland lowers the Gini coefficient of measured inequality by 35%, compared to an EU average reduction of 15.7%. Our initial level of high earnings inequality is often attributed to the distribution of hourly wages or in other words a pay effect but this is clearly not the case. Inequality of hourly earnings in Ireland, as measured by both the Gini index and the 90/10 decile ratio is about mid-table in a European context. Figure 16: Gini index and decile ratio (p90/p10) of gross hourly earnings, SE CY LT LV DE LU AT EE PT UK PL IE NL IT ES HU BG EL BE RO SI FR HR MT CZ FI DK SK Decile ratio Gini index Source: DG internal policy, 2015, On the other hand the 2011 Gini for monthly and annual earnings were higher (2 nd and 6 th respectively) as a result of lower than average hours worked and months worked during the year (the labour demand effect).this section has shown that labour demand is the main driver of in-work income inequality in Ireland. As the minimum wage is not an appropriate instrument with which to increase labour demand increases in it are unlikely to have significant effects in lowering in-work income inequality in Ireland. Table 4: Gini index of income inequality by annual, monthly and hourly incomes ibn the EU 28 Gini for annual incomes Gini for monthly incomes Gini for hourly incomes LV IE 0.43 (2 nd ) 0.35 (6 th ) 0.33 (11 th ) UK AT DE CY LT PT EE HU

19 NL LU FR ES BG PL IT SI FI SE DK MT CZ EL HR BE* SK RO Minimum wages, work quality and poverty One of the primary goals of the minimum wage is to reduce poverty and improve the living conditions of the lowest paid in society. This however, is not necessarily what is achieved when the minimum wage rises as not all minimum wage workers belong to low income households. Neumark (2014) found that when the minimum wage in the US went up to $7.25, only 12.7% of workers who earned less than this belonged to low income households. Almost half of those who benefitted from this rise were teenagers and secondary earners in higher incomes households. Not only this but in another study Neumark et al. (2004), found that minimum wages increase both the probability that non-poor families fall into poverty and the probability that poor families emerge as non-poor families. The number however that fall into poverty is greater than the number that escapes. In the previous section we have shown that Ireland is not a low pay country by any means. Proponents of large increases to the minimum wage in their meme of Ireland as a low wage country often suggest that large proportions of workers cannot afford to live sufficiently on their wages. This ignores the fact that the link between work and poverty in Ireland is among the weakest in Europe. In-work poverty in Ireland at 3.9% of employees is the fifth lowest in the EU on par with Denmark and well below the UK (7.1%) or even Sweden (6.5%). As such the notions that any changes to regulated wages could influence poverty are tenuous to say the least. 19

20 % Figure 17: In work poverty in Ireland, % of employment In addition, the notion that many of the new jobs created in recent years are of low quality is often put forward as a reason to increase regulated wages. Infact, the at risk of poverty rate for new workers in Ireland is amongst the lowest in the EU and has consistently been so for over a decade. 8.5% of Irish workers who are employed less than 12 months are at risk of poverty; this compared with 14.6% in Sweden and 17.9% in EU15 countries with more distortive and onerous labour market regulation. This suggests that the quality of new work in Ireland has actually been quite high in a European context. Infact recent OECD work on job quality (2016) shows Ireland ranking among the upper half of OECD countries on all measures of job quality. Figure 18: AROP rate (%) of workers employed less than 12 months Ireland European Union (15 countries) Sweden European Union (27 countries) United Kingdom Poverty in Ireland where it does occur is almost solely linked not to poor working conditions but to low work intensity that is where adults in a household worked less than 20% of the total months they could have worked in any given year. Only 0.5% of the population who are in a house with anything greater than low work intensity are either at risk of poverty or severely materially deprived. Where higher rates of AROP do occur they are almost solely concentrated in households with no or little work rather than working households. 20

21 Figure 19: % of population at risk of poverty or severely materially deprived but not living household with low work intensity The OECD (2009) notes that in-work poverty is more likely to be due to low hours as opposed to low wages. In this section we show the link between poverty and work, and even more so minimum wage work, is weak in Ireland. As such efforts to reduce poverty thorough increases in the minimum wage are likely to be poorly targeted. 4.5 The distributional impact of the 2016 minimum wage increase The OECD have noted (2015) that the minimum wage was a blunt instrument for reducing poverty. This is because many low income families do not have a member that is working and also because many minimum wage workers are not the primary earner and live in a household with earnings that are above average. The results of our analysis based on the ESRI s distributional analysis of Budget 2016 shows that households in the upper half of the income distribution are the main beneficiaries of minimum wage increases. As such the distributional effect of the minimum wage increase in January 2016 is likely to increase inequality of household incomes. The ESRI s post budget distributional analysis was unique this year in accounting for the impact of minimum wage increases on the distribution of household income. What their analysis showed is that the main beneficiaries of the minimum wage increase were in deciles 4-8 in proportional terms. That is, households in the middle or upper half of the income deciles received more from the increase in the minimum wage than those in lower income deciles. Insomuch as minimum wage increases are passed through in higher prices of goods and services (Card & Kreuger, 1992; Aaronson, 2000; Lemos 2004) the impact on the minimum wage increase on household income is clearly distributionally regressive. 21

22 Figure 20: Impact of minimum wage on earnings by equivalised income decile, % Bottom Top Source: ESRI 2015 Applying these percentage changes to 2014 SILC equivalised household income figures shows that in cash terms decile 8 gained the most adding about 56c a week. This was followed by decile 4, 7, 9 and 6 respectively. Four of the five greatest beneficiaries in terms of increases in take-home pay were at the top of the income distribution. This confirms the view we gave to the LPC in 2015 that the main beneficiaries of minimum wage increases would be second and third earners including adult children in high income households. The impact on the bottom three deciles where poverty is concentrated is almost negligible, the lowest of any income group and likely to be reversed completely by price pass through. Figure 21: 2016 minimum wage increase impact ( ) by equivalised income decile Bottom Top Source: Ibec calculations from SILC 2014 and ESRI 2015 In terms of the total cost of the minimum wage it is possible to estimate from these figures that the minimum wage increase represented a transfer to higher income households. Households in the top 3 deciles of equivalised income received 42.3% of the total additional wages from the minimum wage increase. On the other hand the bottom 30% of households received only 6.5%. In total households in the top half of the income distribution received 70.2% of the total value of the increase in the minimum wage 22

23 Figure 22: 2016 minimum wage increase accrual of total value (%) to each equivalised income decile Bottom Top Source: Ibec calculations from SILC 2014 and ESRI 2015 It is clear from this analysis that not only is the minimum wage an inefficient way of reducing income inequality and targeting poverty it is actually counterproductive in both those objectives. The January 2016 minimum wage increase has had the effect of widening the gap between the bottom half and top half of the income distribution and will have increased the 90/10 decile ratio of inequality. On poverty it is clear from earlier sections that there is very little link between poverty and work. This can be observed clearly from the data presented here. Those in the bottom 3 rd of households by equivalised income received the least benefit from an increase in the minimum wage and insofar as it is passed on through higher price increases or a slowdown in employment growth are likely to be the net loser from the policy. The minimum wage, if it does not impact substantially on employment or profits, is likely to represent a transfer from poorer households to richer ones. 23

24 5. Recommendations for the Low Pay Commission It is difficult to observe the impact of the January minimum wage increase in March given that it has just been implemented. Given the lack of data available, both the LPC and contributors are flying blind when it comes to providing an evidence base for changes to the minimum wage. What is clear, however, is that poor alignment of minimum wage and budget provisions for employer s PRSI have substantially increased the labour tax wedge impact of pay increases for low paid workers and increased the likelihood of minimum wage increase costing jobs. When it comes to 2016 Ibec would urge caution. The past has proven that minimum wage increases are easy to give but impossible to take back. Ireland s economy is in a position of great uncertainty with the changing global environment represents a real and growing risk to this recovery. The factors which are currently driving our recovery are both temporary and prone to reversal in the coming years. All this while the domestic facing sector where the majority minimum wage workers are employed is still exiting intensive care. The 2015 LPC decision led to an increase in the minimum wage 6 percentage points ahead of inflation and 4 percentage points above average wage increases in the economy. The real value of the minimum wage is now 27% higher than when it was introduced. In this context there is little evidence for an increase in the minimum wage economically given an increasingly uncertain global environment, high unemployment, a deflationary cost of living environment and real concerns about the viability of minimum wage increases for firms in the regions. This is particularly true given that the most recent increase outstripped inflation by a 6 percentage points and wage growth by 4 percentage points. In this context a key argument used by various bodies to justify increases in the minimum wage is that Ireland is an outlier in terms of its low pay, poor working conditions and in work poverty. In section 4 we show that this is clearly not the case. Irish low paid workers receive higher pay than almost all their European counterparts in gross terms, adjusted for purchasing powers and take home more of it than any other developed country after tax. They are also amongst the least likely workers in Europe to suffer from poverty or severe deprivation performing better than the vast majority of the Northern European peers. The link between poor social outcomes and work is extremely weak in Ireland with only 0.5% of people living in a household with anything above low work intensity either being at risk of poverty or severely deprived. Inequality of income where it does come is solely linked to low work intensity or lack of labour demand. The minimum wage is not an appropriate policy instrument to combat poverty or inequality in this context. Finally, Section 5 draws attention to the distributional impact of the 2016 minimum wage increase based on data from the ERSI s SWITCH model. It is clear from our analysis that the minimum wage is far from a progressive policy. Over 70% of the gross value of the minimum wage increase went to households in the top half of the income distribution; almost half went to the top 30% of households. On the other hand 6.5% went to the bottom 30% of households. Insofar as the minimum wage increase is passed on through higher prices or lower employment growth it will represent a transfer from poorer households to richer ones. In the context of its limited ability to achieve the objectives many would wish of it and its irreversibility, increases in the minimum wage should follow a path of least harm. Increases should be linked to inflation, wage developments, take into account uncertainty and be cognisant of the dismal productivity performance of those sectors it effects in Ireland. In 2016 we recommend that global uncertainty and the long term stagnation of retail employment should weigh heavily on the decision of the LPC. The path of least harm at this stage would be to retain the minimum wage at its current level until there is a clearer picture of the effects of the last increase and the position of the global economy for