Notes on the Front

Commentary on Irish Political Economy by Michael Taft, researcher for SIPTU

July 15th Lunchtime: The Recession Diaries

Recession 20 The Small Firms Association (SFA) has looked deep into the problems of the economy and has come up with a solution: cut people’s wages.  Not just cut, but do a right machete job on them.  And not just any ol’ wages, but the wages of the lowest paid in society.  Wow, that’s a recipe for growth.


The SFA has called for the minimum wage to be cut by €1.  That would constitute a 11 per cent cut.  But it’s even worse.  The last increase in the minimum wage was back in July last year.  So, just to keep in line with inflation, the minimum wage would have to increase to about €9.05.  But the SFA is demanding a new minimum wage at €7.65.  So they are, in real terms, demanding a 15 per cent cut in wages. 


In support of this outrageous demand the SFA has produced a table from Eurostat.  It claims to show that Ireland has the second highest minimum wage in the EU.  This is junk-mail economics.  The SFA knows (and if it doesn’t it should be statutorily barred from uttering anything until it raises its IQ) that international comparisons of this sort only makes sense when you factor in living costs – the how-much-bread-does your-Euro-buy’ measurement (or Power Purchasing Parities).  The SFA had access to this information because it comes side-by-side in the same Eurostat release.  What does this show?


My gosh, it shows that of the countries that have a minimum wage in the EU-15, Ireland is the lowest – some 25 per cent below league leader, Luxembourg.  So much for the SFA’s junk-mail economics. But there’s more to this story.  I have written about management quality among small businessesin the past. FAS’s commentary on management skillsis devastating. Our SME skills are almost universally graded sub-standard (that’s the nice word).  Regarding human resources, SME management is graded ‘poor’.  And Patricia Callan, in her Morning Ireland interview gave an excellent example of that.  When asked if she and her colleagues in the SFA would take a similar pay cut, ‘to show a bit of an example’ she replied:


‘This is not the issue’.


Can you just see it on the shopfloor – SFA spokesperson Patricia Callan addresses the lowest-paid workers in the country:  ‘You must take a pay cut of 15 per cent, for the sake of our economy’.  ‘Okay, will you be taking a pay cut, Ms. Callan?’ asks a worker.  ‘That is not the issue,’ she replies and storms out of the meeting.  And the SFA wonders why they can’t increase productivity, can’t limit costs associated with high turnover.


And they wonder why retail sales are collapsing.  If you go around slashing people’s wages by 15 per cent, don’t be surprised to see shops closing up – shops that are members of the SFA.  I have one word of advice to those shop-owners: cancel your subscription to the SFA.  You’ll save money and hopefully you’ll bankrupt an organisation whose policies are bankrupting you.


3 responses to “July 15th Lunchtime: The Recession Diaries”

  1. Graham Avatar
    Graham

    I guess it depends on what you think the minimum wage achieves. From my point of view, there is a fairly simple economic principle that price floors will generally have no positive effect on demand for any economic resource. In particular, if wages cannot be set below some fixed level, then labour which is worth less to employers than that miniumum amount will surely not be purchased.
    I understand that there are some other more complicated side-effects of the minimum wage but it baffles me to see how all of these effects could combine favourably for the general welfare. At the same time, I could accept the potential desirability of such a mechanism in certain specific, localised, private and voluntary situations.
    In terms of the political forces at work, the minimum wage could be interpreted as a type of protectionist device designed to shield some workers from the competition of lower-cost competitors.

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  2. Michael Taft Avatar
    Michael Taft

    Graham, you certainly are addressing a complicated issue. I’m not one of those who believe that all ‘market’ problems can be solved by legislative fiat. Nor do I believe that ‘wages’ alone can provide people the standard of living that, as citizens, they have a right to. I’m aware of the growing number of empirical studies done in the US on the effect of the minimum wage and all one can say about them is that there is no consensus on hiring patterns, unemployment, etc. Clearly, the introduction and continual rise of the minimum wage didn’t deter job creation in the UK or here in Ireland – but then in our case our quickly expanding economy and levels of private consumption were a spur to employment creation.
    Even if we were to concede that in certain conditions a minimum wage has minimal effect while in other conditions it has a negative effect, that doesn’t undermine the vailidity of the minimum wage. It merely means that we use this particular instrument in co-ordination with others. For instance, the recession has not been caused by wage growth but rather a failure to establish an indigenous enterprise base capable of competing internationally, along with a property bubble and the inexorable logic of a low-taxed, low-spend economy. To scapegoat minimum wages may be convenient but it misses the target.
    The level at which a minimum wage is always a pragmatic question. For instance, had we not allowed inflation to rip – in housing, land prices, the mucking about in the electricity market – we might not need as high a level of minimum wage to achieve the same result. Similarly, if we had the public programmes – free health, subsidised transport, an equitable housing support programme (in other words, a strong social wage) we, again, might not need as high a minimum wage.
    However, this presupposes a strong, well-resourced public realm – something that the SFA is not interested in.
    By the way, I know you took a bit of a break sometime back, Graham. Along with my break, I haven’t had dropped in on your blog. But now that you’re back I’ll be sure to tune back in.

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  3. Graham Avatar
    Graham

    Hi Michael, thanks for the reply. I should warn you that things will probably remain a little quiet around ILF.
    Anyway, I can see what sort of analysis you are making, and though it’s certainly of a high quality, it’s not the type of analysis that I tend to find persuasive. In economics, I prefer to find cause-and-effect relationships which hold true in the most general situations, rather than use observations which can never be fully understood or explained to guide my prescriptions.
    So you see my problem with the minimum wage; a primitive understanding of supply and demand forces in nearly any framework would imply that this causes harm to those on the lowest rungs of the career ladder.
    I guess it might comes down to whether you believe that empirics can trump theory in a question like this. I come down strongly in favour of theory, but I guess that this is a separate discussion to the content of your article, so I will leave it open for now.

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Commentary on Irish Political Economy by Michael Taft, researcher for SIPTU