Minimum wage and economic recovery

Lockstep

http://www.irishtimes.com/newspaper/opinion/2009/0814/1224252547193.html

THE DEBATE on the minimum wage is a classic example of political economy.

The economy is at a point where the burden of a fragmented and dysfunctional fiscal regime is beginning to cannibalise its capacity to maintain jobs. This has been aggravated by the disconnection between, on the one hand, the funding that has been put in by society to rescue “covered institutions” and, on the other, how far the interests of society take second place to restoring shareholder value of these same institutions.

When the summer is over and children head back to school and unemployment climbs towards 450,000, the real pain and pressure will be felt. It may well prove impossible to frame a budget. If present policies continue, the International Monetary Fund (IMF) may intervene.

Those on the minimum wage are at the sharp end of this recession.

The domestic economy continues to contract – by up to an estimated 10 per cent in 2009. A series of reactive budget policies are draining whatever demand, and confidence, remains in the economy. And coming down the line are proposals for a property tax and carbon-related taxes.

What is euphemistically called the burden of adjustment – aka the pain and grief of adapting to these conditions – is falling squarely on the labour market.

This is the context of a seemingly appalling dilemma: should the Minimum Wage Act, 2000, be set aside? Irish Congress of Trade Unions general secretary David Begg says there is a point below which wages should not be allowed to fall. He has described the proposal as toxic. That is fair enough.

At the same time, as matters now stand, simply to hold on to a job people are working fewer hours, shorter weeks and, as the Central Bank points out in its recent 2008 annual report: “many firms in the private sector have negotiated reduction in the wage rates”.

The Central Bank goes on to argue: “The decline in wage rates, while undoubtedly painful for those concerned . . . will mitigate the decline in unemployment in the short-term and contribute to an improvement in competitiveness.”

It would be hard to find a better statement of the current orthodoxy. But it is difficult to sustain the argument that the removal of the minimum wage can make any kind of a decisive contribution to national competitiveness. The 85,000 workers on the minimum wage account for about 5 per cent of those employed. They are not, for the most part, working in high value-added activities central to a turn-around in the economy.

So, at the level of the individual, the family, and the firm, the issue of the minimum wage matters. But at the macro level – ie turning the economy around – it is distracting attention from what really needs to be done.

There are two issues underlying the debate on labour market flexibility, competitiveness and, in this context, the minimum wage.

The first is whether or not it is right to stop people who are prepared to take less than the minimum wage of €8.65 per hour. There is an argument that individuals should have the freedom to work at whatever rate they choose. This is reinforced by, first, the fact that all work has an intrinsic value: the dignity of having a job.

Conversely, there is the devastating decline in self-esteem of those who lose their job, for reasons beyond their control.

The significant increase in the number of people presenting at GPs with psycho-social stress would seem to confirm this and to reinforce the argument that individuals should have the freedom to work at whatever rate they choose.

There is the danger that unscrupulous employers will exploit the recession and an individual’s desperation for work.

The issue of incentives is central to the argument. Too high a rate will deter some employers from holding on to workers, or employing new ones, when they themselves are under pressure. Too low a rate will encourage workers into the social security system, which is under serious strain.

The minimum wage is already set at a low level: the Central Statistics Office Survey of Employment (2007) cites average hourly earnings of €18.07 in the private sector. Someone has to speak up for individuals and especially families trying to survive on such pay. The budget cut the income of one-income families with two children by 6 per cent.

The problem is reconciling an individual’s right to work with the prevention of exploitation. At the heart of this problem is the lack of trust in Ireland: we are no longer a high-trust society.

The second issue is whether removing the minimum wage would mitigate the decline in unemployment and contribute to an improvement in competitiveness.

For those on the minimum wage, it is difficult to sustain the argument that a reduction would improve national competitiveness. It would affect incentives: their already low living standard.

It is, however, almost certainly the case that for individual firms suffocated by fiscal burdens and red tape, any reduction in their costs would allow them to retain jobs.

The division between those who argue that the removal of a minimum wage would be morally reprehensible and those who believe that individuals should be free to seek work at less than the minimum wage is a false dichotomy. This is where the political economy comes in.

The Government’s “rule nothing out” approach distracts attention from the only sustainable way forward – one in which the issue of reducing the minimum wage as a potentially important factor in national competitiveness fades into insignificance.

The only way out of the growth and competitiveness cul de sac into which the economy has been driven is a strategy for growing the economy.

The Government doesn’t have one.

It is losing whatever leverage it had over covered institutions having to put national recovery ahead of self-interest.

Its core fiscal projections are the stuff of fantasy. Its commitment to the EU that the Government deficit will be reduced to 3 per cent of GDP is not tenable.

The scope for implementing the “smart economy” is stymied by a lack of scientific and technological competence within Government and – largely – within the banks.

All of these are more important in terms of competitiveness and flexibility than reducing the minimum wage. Indeed, the whole rationale for developing Ireland’s knowledge-based smart economy is at variance with seeking national competitive advantage from amending minimum wages.

The Government needs a tenable strategy for growing the domestic economy while reducing the size of the State. By listening to calls for a Lenten fast for an already emaciated economy in the interests of “fiscal sustainability”, we have lost time, credibility and revenue and jobs.

We have got things the wrong way round. Restoring the public finances will require maintaining employment, giving priority to entrepreneurship and maintaining domestic demand. The most striking feature of the IMF’s summary data on Ireland is the precipitous decline in the real economy compared with the Government sector.

The remit of the McCarthy review group should have been extended to cutting back rent-seeking State interventionism that stultifies risk-taking and the rebuilding of competitiveness. It could still be done.

A combination of the rigour of Colm McCarthy, the ruthlessness of Michael O’Leary and the vision of Graham O’Donnell (the entrepreneur behind the Spirit of Ireland initiative – which really does have the capacity to transform Ireland’s competitiveness) should take about three weeks.

This will mean more borrowing.

The most telling indication of just how far we have to go was the inclusion of an Enterprise Stabilisation Fund of €100 million, over two years and knee-deep in caveats, in the last budget – at a time when the Government was diverting €7 billion to banks.

This takes us back to the political economy of the minimum wage. Too much politics, too much kite-flying, too little real economics. If things don’t change – and soon – it will be time for the boys at the IMF in Washington DC to begin making travel arrangement before a once-proud, now broken-backed economy triggers a contagion across the EU.

Ray Kinsella is author of the forthcoming Rebuilding Trust in Banking: Regulation, Corporate Governance and Ethics (Vonier Press, www.vonierpress.com)

Thoughts?

AlmightyCushion

kickoutthejams wrote: »

Thoughts?

It's 12:30. No way in hell am I gonna read all that.

j1smithy

Its not just the minimum wage see. Everyone is paid relative to one another. For example the carpenter thinks his skill per hour is worth twice as much as the shop assistants. If you reduce the minimum wage, the relativity of wages will become disjointed, therefore there will be another real pressure to reduce wages across all levels by a similar amount even after those on higher pay have already taken cuts.

This is the real debate. While it would reduce costs for the relatively small number of employers that apply the min wage to their workforce, the real opposition is in the precedent it sets.

Quazzie

Tl;dr

there might be more chance of reading it sober in the morning.

Princess Consuela Bananahammock

kickoutthejams wrote: »

http://www.irishtimes.com/newspaper/opinion/2009/0814/1224252547193.html



Thoughts?

I'm thinking of getting breakfast.

couch13

Wages need to go down ofr improve effiiciency.

DaveSlats

Our real problem here is the Euro.

If we had our own currency and by implication control of our interest rates it is hard to imagine that it would not have fallen at least as much as Sterling over the last six to eight months.

Instead we are locked into a cost base that is massively high by international standards.

Talk of reducing minimum, or indeed all, wages will reduce the cost base (to an extent, slowly and only if employrers act responsibly) but will not have any of the other benefits of a currency devaluation - for example making exported goods and services immediately more attractive.

The Euro is the problem

Dravokivich

minimum wage should reflect standard of living... current minimum wage doesnt meet that...

-Drav!

j1smithy

DaveSlats wrote: »

Our real problem here is the Euro.

If we had our own currency and by implication control of our interest rates it is hard to imagine that it would not have fallen at least as much as Sterling over the last six to eight months.

Instead we are locked into a cost base that is massively high by international standards.

Talk of reducing minimum, or indeed all, wages will reduce the cost base (to an extent, slowly and only if employrers act responsibly) but will not have any of the other benefits of a currency devaluation - for example making exported goods and services immediately more attractive.

The Euro is the problem

I believe the opposite to be the case. If the Punt was still the national currency, it wouldn't have devalued by 33% like sterling, but it would have gone through the floor like the ISK. What we would have been left with is stagflation, and a lot of very unhappy investors. Who would buy Irish Government Bonds, when the ones existing (denominated in punts) are almost worthless?

The reason the euro seems strong is because the UK government has successfully carried out "beggar my neighbour" against the euro, to boost exports. There is a hidden cost, the UK will be hit by high inflation especially when the results of quantative easing becomes apparent.

Devaluing and wage reduction are two different means to the same end. Its just one is more difficult to understand for the ordinary person than the other, while wage cuts are more difficult to implement.

Princess Consuela Bananahammock

couch13 wrote: »

Wages need to go down ofr improve effiiciency.

Who was that said: In order to make the poor work harder, you pay them less; and in order to make the rich work harder, you pay them more?

couch13

With lower wages growth is achieved through competetiveness, its obvious.