SMALL FIRMS ASSOCIATION Submission to the Low Pay Commission on the National Minimum Wage April 2015
INTRODUCTION The Small Firms Association is the voice of small business in Ireland and internationally, with 8,500 members and 7 affiliated organisations in all sectors and parts of the country. We specialise in the provision of valuable business focused advice, developing connections for our members, and effective public representation of small business issues which allow us to influence government policy. Ireland is a nation of small businesses. We have 200,000 businesses in Ireland, of which 97% have less than 50 employees (small) and 84% have less than 10 employees (micro). We provide 56% of private employment that s jobs for some 863,175 people. An additional 49,195 people are self-employed. Each year in the region of 13,000 new businesses start-up. Small businesses truly are the engines of our economic recovery. We have a vital role to play in terms of employment generation, especially in regional towns and villages and rural Ireland. Artificial inflation of wages, unrelated to the free market, will not only dampen this recovery, but will ultimately lead to both the prevention of job growth and to job losses across the sector. THE LOW PAY COMMISSION The SFA welcomes the establishment of the Low Pay Commission. The concept of an independent evidence-based assessment of the National Minimum Wage (NMW) rate, independent of politics, is desirable. It is essential that any recommendation emerging from the Low Pay Commission, is transparent as to how the decision is reached based on the review methodology set down in the National Minimum Wage Act, 2000, rather than simply arriving at a figure, as has been the experience in the past when the Labour Court issued such recommendations. THE REVIEW METHODOLOGY Under the National Minimum Wage Act, 2000, there is a clear review methodology set down, namely inflation; movement in the earnings of employees; level of unemployment and employment; national competitiveness and relevant exchange rate movements. The Economic Indicators Inflation At the end of 2014, the cost of living in Ireland was 0.6% below 2008 levels, and as such the minimum wage has actually increased in real terms over that period. Where prices have increased, this has been driven by tax and regulatory changes (eg excise, health insurance and education fees), not by extra profits at firm level, which might make it affordable for firms to pay more. Given the dramatic reduction in oil prices, possible further reductions in mortgage interest rates and likely deflation in the eurozone area this year, means our forecasted inflation rate for 2015 is just 0.4%. In real terms, the minimum wage in Ireland is now 19% above the level at its introduction (up 54% in nominal terms). If it had risen in line with inflation it would now be just 7. This compares with a decrease of 2.3% in the real value of the UK s minimum wage and a 28% fall in the real value of the US minimum wage. Therefore there is no justification to increase the minimum wage on this ground.
Movement in earnings of employees The CSO estimates that 4.7% of the workforce were paid at the NMW level in Q2 2014, which has dropped from their 2007 estimate of 4.9%. Therefore despite the pressures of the recession, it is clear that employers did not engage in a race to the bottom. Wage rates in the private sector generally have fallen during this time with many owner-managers not paying themselves the minimum wage at all in an effort to keep their businesses open and their employees in jobs. The NMW is currently 48% of median wages in Ireland which compares favourably with other countries with high median wages internationally, for example to the US which is at 37%. The closer the minimum wage is to the median wage then the greater the probability that the employer will have to offset additional increased wages with job losses or non creation of new jobs, as the effect on their overall wage bill is greater. This is particularly important in sectors such as hospitality, retail/wholesale and other services who are more reliant on low wage workers (53% of the total Forfas, 2010) and for whom labour costs are a higher proportion of their input costs. These are also the sectors that are struggling most in the recovery with turnover in the retail sector for example still 15% below its peak. There are also regional variances to consider. A higher minimum wage would have a disproportionate impact on small businesses outside Dublin where the minimum wage is effectively 52% of the average wage in Ulster, 48% of the average in Connaught and 43.4% of the average of the state (OECD). Given the urban/rural imbalance already being experienced in the recovery, this is of particular importance. Increases in the NMW have also in the past put pressure for wage increases across the board, as other workers seek to maintain their relativities vis-à-vis new entrants into the employment. The economy is still 3.5% below its peak in volume terms and 7.5% in value terms and therefore many businesses are still stabilising and unable to afford broad-sweeping pay increases. Level of Unemployment and Employment Whilst the economy has stabilized over the last two years and employment growth has returned in small firms, we still have a phenomenally high unemployment rate which we forecast will still be 9% at year end. More importantly in actual employee number terms, we will still be a full 180,000 jobs short of our mid-2007 peak due to emigration and general falls in labour market participation. The majority of those now on the live register are low unskilled and in long-term unemployment. An increase in the minimum wage at this point would lock these people out of the labour market along with young people, as it becomes unaffordable to train them up. Small businesses have the capacity to continue to generate employment but any increase on the entry level of wages will prevent them from doing so. National Competitiveness From an international perspective, Ireland faces severe challenges of diminishing competitiveness. In order for the Irish economy to obtain reasonable growth levels into the future it is vital that competitiveness is restored and maintained. The NMW in Ireland is currently the 5 th highest in Europe (Luxembourg is an outlier with Belgium, Netherlands and Germany having only marginally higher rates). When taking purchasing power (adjusting for the prices of goods and services in the country) into account, this is broadly the same picture. However, the low levels of relative taxation on Ireland s minimum wage increase its net value significantly. For example, the effective tax rate on minimum wage earners in Ireland is 3.3% vs. the UK 6.6%, which means the net take home pay of a UK worker is actually less than the equivalent in Ireland. If our minimum wage levels are significantly higher than our export markets and competitor economies, then it is more difficult to win and maintain market share. Therefore international benchmarking is essential to the review process. Any increase in the NMW has the potential to
price many small Irish businesses out of international markets as government imposes on them greater operating costs than their competitors. Relevant Exchange Rate Movements Ireland is distinctive amongst eurozone countries in having such an open economy and so is more vulnerable to exchange rate movements. Whilst there has been recent depreciation of the Euro vis-à-vis sterling and the dollar, which has assisted competitiveness temporarily, this cannot be relied upon to compensate for competitiveness slippages in other indicators in the economy. For example, the Stg 6.50 NMW in the UK was 7.86 this day a year ago compared with 9 today. In addition to these considerations, we believe that at a very pragmatic level it is necessary to also examine the profitability of small businesses to see if they are capable of absorbing labour cost increases without productivity gain. From an examination of the 2012 average gross (pre-tax) profits in small businesses in the sectors with the majority of NMW workers, it is clear that they would not be able to offset NMW increases against profits, as in micro firms (1-10) employees which are 84% of all businesses in Ireland, average pre-tax profits in Accomodation and Food Businesses were 14,549; in Retail were 21,470 and Other Services were 16,582. This means that they would have no choice but to offset NMW increases against reductions in hours or jobs, job growth or capital or skills investment. THE CASE FOR MAINTAINING THE NMW RATE FOR 3 YEARS On the basis of all the economic indicators set out above, which according to the National Minimum Wage Act, the review must be based on, the SFA believes that there are substantial grounds for the Low Pay Commission to issue a recommendation to maintain the current rate of the NMW at 8.65 per hour. We would go further and argue that a commitment should be given to maintain this rate for a 3-year period, in order to give small businesses who are just starting on the recovery path, certainty over their labour costs, which is essential in particular to businesses operating in the sectors and regions most affected by the NMW. This would also insure that job creation efforts are realisable for the low-skilled workers still on the live register who need an entry point into work and upskilling from where they can develop their skills and increase their wages relative to their productivity levels. It is the SFA s firm conviction that it is imperative for the competitive position of Ireland that wage levels are decided in a competitive labour market and are not constrained by an artificial blunt legal instrument such as the minimum wage. Indeed, in practice, if employees do not feel it is worth their while to go to work on the NMW, then they won t and the labour market itself will move to a rate that is realistic for both employer and employee.
THE LIVING WAGE CONCEPT The SFA believes that the formula of allowing business to operate in a competitive environment, thereby increasing returns to the Exchequer, and consequently allowing the Government to adapt taxation and welfare systems to match perceived social needs, is to be recommended over simply increasing the cost of production, which has a negative economic impact. It is not the job of business to redistribute wealth, but to create wealth, which can be redistributed by Government. A living wage as currently proposed by the trade union movement or indeed a minimum wage that is higher than the strongest economies in the world simply allows the Government to renege on its responsibility for social equity, which should be achieved by prudent management of expenditure and tax reform; not by making or keeping people unemployed. The delivery of desired living standards of the low paid should be done by Government, through real reform of the tax and social welfare systems to always make work pay. The most significant cost increases for households over the past 5 years have been government driven through increased taxes and charges, which has reduced disposable income and negatively effected demand in the domestic economy. Small businesses throughout Ireland cannot be compared to public sector bodies and financial powerhouses in central London, which form the majority of the 900 companies which have signed up to the Living Wage in the UK (which is a paltry number in comparison to the size of the UK economy) and many of whom in fact have very few low paid workers to begin with. The market value of worker productivity must be reflected in wage rates particularly in a very small open economy such as Ireland operating in a globalized world. CONCLUSION Small business owner-managers are close to their businesses and their employees. They recognise the value of employee contribution and generally display much lower employee turnover when compared to large business. Small businesses will respond to market trends in wages but in generating employment, they cannot respond to unjustified business cost increases imposed upon them by Government. An ill-considered review of the National Minimum Wage will cost jobs. Small businesses are taking tentative steps to recovery and in many cases growth. The job of Government is to make sure these steps can be taken with confidence and with the necessary supports in place. On the basis of all these considerations, the SFA strongly advocates that the Low Pay Commission recommends that the NMW be maintained at its current rate for a further 3 years. For Further Information, please contact: Patricia Callan, SFA Director, Tel: 01-6051602, e-mail: patricia.callan@sfa.ie or Tweet: @SFA_Irl, www.sfa.ie