Low pay in Ireland: causes, consequences, and solutions

Cian McMahon: This blog provides a brief overview of TASC’s recent submission to the Low Pay Commission on the level of the national minimum wage and the high proportion of women on the minimum wage. Our contribution highlights the economic and social consequences of low pay in Ireland, while also advocating for a progressive policy response.

At 23%, Ireland has among the highest incidence of low paid jobs in the OECD. The low paid are mainly women, who represent 60% of all low paid workers in Ireland. This high level of low pay amongst workers contributes to Ireland’s high level of gross (pre-tax-and-transfer) income inequality.

With few exceptions, women workers have a higher incidence of low pay than do men across the OECD countries. This holds true in the case of Ireland, where 29% of female workers are in low paid jobs, in comparison to 19% of male workers. This can be explained by the greater preponderance of women in part time, low hours, and precarious work – jobs that tend to be lower paid. Inequality in the burden of unpaid caring and parental responsibilities, and the associated lack of affordable and flexible childcare, are important factors influencing this outcome.

The growth of low paid work and gross income inequality in Ireland over recent decades requires a greater role for the tax and transfer system in order to level the income distribution. Such redistribution is increasingly necessary via state funded welfare and income supports for lower income and jobless households. The rise in gross income inequality also signals a shift in the balance of economic and political power within the workplace and wider society, where the influence of the wealthy makes it increasingly difficult to maintain, let alone increase, levels of taxation and social provision.

In addition to the well documented negative social consequences of growing income and economic inequality (Wilkinson and Pickett 2009), recent research also highlights the destabilising impact of growing inequalities and low pay on economic performance. A shift in the distribution from lower to higher income groups – to those who consume a smaller proportion of their incomes – depresses aggregate demand and encourages financial deregulation to plug the spending gap. This very process lies at the root of the global financial and economic crisis of 2008.

It is clear from the figure below that the distribution of gross incomes in Ireland has become significantly more unequal since the 1980s, driven by a decline in labour’s share of national income and the related widening of wage inequalities (see here from Paul Sweeney, Chair of TASC's Economists' Network).

Total gross income increased by €21bn between 2011 and 2016. Of this, more than half (€11.8bn) has gone to the top 10% and nearly 18% of the total has gone to the top 1%.

It is within this context that TASC proposes increasing the minimum wage of €9.15 to move over time in line with the living wage, which has been calculated at €11.50 by the Living Wage Technical Group. This would ensure a socially acceptable minimum standard of living for all workers. Concerns over ‘ability to pay’, competitiveness, and employment effects can be assessed in practice and addressed through the design of appropriate mechanisms such as sectoral bargaining agreements. However, the most comprehensive international evidence suggests that, within reason, the effects of a change in the national minimum wage on employment, whether positive or negative, are likely to be small or non-existent. This reflects the reality that wages are not only a cost of production for individual firms, but also a source of demand for all firms in the wider macroeconomy.

A living wage is best conceived of in terms of a sufficient weekly, monthly, or yearly wage, as there are also serious issues of low hours of employment in low paid sectors of the economy. Basing assessments of the adequacy of the minimum wage on just the hourly wage rate is therefore inadequate.

Increased minimum wages are, however, only one plank in a much broader strategy required to significantly reduce income inequality and economic inequality in resources more generally. TASC argues that this process requires a more holistic consideration of income, wealth, public services, taxation, personal capacities, family composition and the cost of goods and services.

Standard measures of income inequality are often cited as evidence that economic inequality is not a significant issue in Ireland. Ireland’s net Gini coefficient, for example, is 30.8, as compared to a net Gini of 30.9 in the EU 18. Ireland’s net Gini has been relatively stable over the past decade or so, if increasing somewhat in recent years. However, standard measures of income inequality such as the net Gini coefficient and the income quintile share ratio are blind to the structure of the economy – in particular, the balance between the public and private provision of necessary goods and services and the associated levels of poverty and material deprivation. A given net income will go a lot further in meeting people’s needs in a country where vital goods and services are heavily subsidised or provided free of charge via the state. Ireland’s high cost of living (25% higher than the EU average according to Eurostat) and poor public provision of basic necessities – childcare, healthcare, education, housing, and transport – means that resources are more unequally distributed than the standard measures would suggest.

Reducing levels of low pay and low hours work has the added advantage that it frees up resources previously needed to subsidise inadequate incomes. The tax and transfer system can then be redirected towards the social provision of public goods and services.

A sustainable recovery requires coordinated policies to reverse the fall in wage shares and the rise in inequality on a national, regional, and global scale. In particular, a sustainable Irish and European growth model requires a wage-led recovery in individual countries and across the region. This calls for both pre-distributive labour market policies and redistributive tax and transfer policies – tackling inequality at both ends. Such an approach could also foster a reorientation towards progressive macroeconomic and industrial policy more generally.

The role of the welfare state, tax policy, and, ultimately, the bargaining power of working people through collective bargaining in countering the power of wealth and reducing economic inequality has recently been highlighted by leading authorities such as Wilkinson and Pickett, Thomas Piketty (2014), and Anthony Atkinson (2015).

A recent IMF staff paper makes the case for trade unions and collective bargaining as a powerful means for keeping inequalities in check. The paper points out that trade unions and collective bargaining not only tend to reduce inequalities by pushing up wages at the lower end of the pay scale, but also limit the income share captured by the top 10% of income earners. Moreover, the IMF research finds that high trade union membership also influences the extent to which the tax system and the welfare state redistribute revenues in a more equal way.

Key policy changes that are required to address growing economic inequality therefore include: