The days when the minimum wage didn’t significantly impact on employment levels are now long gone. By artificially raising wages, they are kept above the market clearing rate which would otherwise dominate. During the boom years, this effect was arguable insignificant. This is not the case in the current climate, and the government needs to take immediate action.
Considering how long full employment subsisted, clearly the legislation merely transferred returns from capital and enterprise to the worker. However, now firms are under substantially more pressure to cut costs. By keeping the minimum wage as high as it is now, the government is in danger of making jobs which could otherwise be created unviable. There is also the risk that workers will be laid off, but whom firms would have liked to keep for a lower wage. These people then accept social welfare payments, and the taxpayer suffers.
In 2006, minimum wage in Ireland was highest out of all the OECD countries – after tax, both in nominal terms and also as proportion of the net average wage. Within Europe, Ireland now has the second-highest monthly gross statutory minimum wage rate behind Luxembourg.
It is scarce surprise that Ireland is suffering so substantially in the current climate. It is not so much that Ireland could ever compete as a low-cost location, but rather that the consequences of this policy are so far-reaching. The statutory minimum wage impacts on the cost of all goods and services produced using low-skilled labour. This makes it a major component of wage demands, due to high price levels.
If the minimum wage were allowed to drop from the current €8.65, this would have a depressing effect on prices in many industries in the country. This is because of the extremely competitive environment brought on by scarce custom, which means companies would be forced to pass the savings onto consumers where they could. This could boost other industries, and hopefully depress wage demands in the entire economy.
Meanwhile, businesses would be more inclined to hire labour and the number of low-income jobs available would increase. Although many workers would be worse off as a result, these jobs would be going to people most at risk of unemployment and reliance on government hand-outs. The savings on welfare spending would not be insignificant, which would allow the government more wiggle room in terms of expenditure.
Unfortunately, such a move would damage the already dubious political position of the current Fianna Fáil government. It would doubtless be spun as placing the cost of the recession on the most vulnerable, even though that couldn’t be further from the truth.
It is questionable whether the government could communicate the benefits of lowering the minimum wage, considering the difficulty they have experienced elsewhere. It will also be difficult to generate support for leaving the market just do its work, given the recent record.
© The Free Marketeer 2009