Economics or politics? The longer game

Tom McDonnell: The reported decision to go well beyond the recommendations of the Duffy-Walsh report, coupled with the tax cutting emphasis of the recent 'jobs initiative', provide clear signals of the Government's vision for restructuring the economy.

As the Independent Duffy-Walsh report makes clear, the employment effects of cutting the wages of low-income groups are not significant. What this implies is that the impact on the public finances will be negative overall (as well as the direct taxation effects, there will also be increased Family Income Supplement payments and reduced VAT receipts). The real effect will be that the exchequer will be subsidising employers.

So why might a Government target low-paid workers? Although the economics of the move are shaky, it does make sense politically. Any Government facing into years of unpopular measures which are sure to alienate and anger various groups requires a 'narrative' to justify its actions. If such a Government can point to its 'resolve' on this issue and to its success in reducing wages, then it becomes very difficult for other groups to credibly argue about the 'inequity' of a measure or the hardship caused by future taxes or pay cuts.

If the Government is coming under pressure to shy away from a particular tax increase or spending cut it can simply play its new 'we're all in this together' card. It will point to the wage reductions it has engineered in the low-pay sectors and then tell the specific group hit that everyone has to 'contribute'.

Thus, while the economics may not make sense, in political terms the policy of going after low paid workers in the short-term can be seen as a strategy for softening the resistance to particularly controversial austerity measures in the medium-term.

Posted in: Politics • Labour market

Tagged with: Wages • politicalstrategy

Dr Tom McDonnell

Tom McDonnell is senior economist at the NERI and is responsible for among other things, NERI's analysis of the Republic of Ireland economy including risks, trends and forecasts. He specialises in economic growth theory, the economics of innovation, the Irish and European economies, and fiscal policy. He previously worked as an economist at TASC and before that was a lecturer in economics at NUI Galway and at DCU. He has also taught at Maynooth University.

Tom obtained his PhD in economics from NUI Galway.