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Analysing The National Minimum Wage

Published on Sep 22 2015 10:23 AM in Features tagged: National Minimum Wage

Analysing The National Minimum Wage

In March, Caroline McEnery, managing director of the HR Suite, was one of nine experts appointed to the government’s Low-Pay Commission, set up to examine the national minimum wage (currently €8.65). As she explains, on an annual basis, this new body will advise the government on the appropriate rate.

The national minimum wage (NMW) was first introduced in April 2000, set at £4.40 (approximately €5.58). The government’s commitment to introduce a minimum wage at this time was in an effort to tackle poverty and marginalisation in Ireland.

As one of six commission members who backed the proposal to raise the rate by 50c in April 2016, the Commission considered the regional aspects and the cost of living in a three-tiered economy made up of Dublin, major cities like Cork and Limerick, and then the rest of the country.

Out of the nine experts and economists, the three who were trade-union leaders and rights activists disagreed with the recommendation, and pushed for the rate to jump to €10 per hour.

As a member of the Low-Pay Commission, the fundamental concern is to balance a basic, fair statutory minimum pay rate with one that is sustainable and that allows employers to continue to create lasting quality jobs.

State Of The Market

The Commission has examined employment and unemployment rates generally, how earnings have changed since the minimum wage was last increased, and what impact a change to the minimum wage would have on employment, the cost of living and national competitiveness.

It found that just over 70,000 workers, or 4.4% of the workforce – two thirds of whom worked fewer than 35 hours a week – were on the minimum wage. Two thirds of those were female, 39% were under 30, and 70% were under 40.

Many of the employees on the minimum wage are those within the services sector, e.g. hotels, restaurants and retail, and there lies the biggest challenge for employer wage-cost management, where their wage bill constitutes one of their largest overheads.

It has been recommended by the Commission that any increase be implemented later next year, to give seasonal employers a chance to get through the early (and often quieter) months.

The rate has been viewed by the Commission as a sustainable increase, and it is hopeful that the government will implement it in the upcoming October Budget.

The Commission made strong recommendations to the government that the anomalies that currently exist for both employees and employers in relation to PRSI and taxation variances need to be addressed if a wage increase is to make a difference in real terms for employees and employers.

Currently, PRSI is applied as follows: 0% on earnings up to €352 per week and 4% on entire earnings where earnings exceed €352 per week. Employer PRSI is applied at 8.5% on earnings up to €356 per week and 10.75% on entire earnings where earnings exceed €356 per week.

Market Implications

The implications for an increase in minimum wage will be very significant for both employees and employers, if it comes into effect as things currently stand.

This would result in greatly increased costs for employers arising from adjustments to the minimum wage that would bring employees over the aforementioned thresholds.

It is therefore evident that an increase in the national minimum wage must be accompanied by an appropriate adjustment to the PRSI system.

The Commission has therefore recommended reform of the PRSI system to address these issues. A moderate increase in the current minimum-wage rate without appropriate modifications in employer PRSI would have a major impact, particularly on small businesses. These steps will need to be addressed before any decision can be made.

It is of huge importance that the tax system is effective and ensures sustainable job creation from an employee and an employer point of view, and includes incentives to work additional hours. It is also essential that the rate agreed is not only what is fair for the worker to earn, but to find a rate that employers can afford to pay.

As stated in the OECD Employment Outlook for 2015, minimum wages can help underpin the income of low-paid workers, but this is conditional on two important factors.

Firstly, minimum wages should not be set too high, otherwise they can lead to job loss and a loss of income for low-paid workers.

Secondly, there needs to be coordination with tax-benefit policies in order to ensure that increases in the minimum wage translate into higher take-home pay while limiting the rise in labour costs for employers.

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