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Minimum wage a tool for equality but no panacea for poverty

John Fitzgerald: Ireland’s lower-paid workers are not always from poorest households

When a minimum wage was first proposed in Ireland in the late 1990s, there were concerns that it might do significant harm as well as good. Basic economics might suggest that, if wages go up employment will fall. However, many studies of minimum wages in other countries show that reality can be different from simplistic interpretation of theory.

With rising numbers of immigrants and low levels of unionisation across much of the private sector, there were real concerns that vulnerable workers were being exploited – something that the minimum wage could be effective at remedying. However, there were also concerns that a minimum wage could lead to significant job losses in low-income employment, leaving those let go worse-off.

However, research conducted before the minimum wage was first introduced suggested that if it was implemented in an appropriate way, negative employment effects would be limited. When the minimum wage took effect in 2000, the Irish economy was booming. Jobs growth was strong, and continued to be so until 2007. That masked any possible negative effects of a minimum wage on employment. In this environment, it proved possible to steadily increase the minimum wage up to 2007.

Subsequent Economic and Social Research Institution work showed that, post-2000, following the introduction of the minimum wage, there was a big reduction in the gender pay gap at the bottom end of the income distribution. Interestingly, the almost simultaneous introduction of a minimum wage in the UK had no such benefit. The researchers suggest that this reflected higher levels of both compliance and enforcement in Ireland than in the UK.


Economic crisis

When the economic crisis hit in 2008, the question of whether the minimum wage should be cut was considered, given the rapid rise in unemployment. It was an issue regularly brought up by the troika on their visits to Dublin. However, it was clear the jobs being lost were in sectors such as building and construction, where the minimum wage was not relevant. It was also not obvious that reducing the minimum wage would lead to any significant increase in low-paid jobs to compensate. Given that evidence, the government left the minimum wage unchanged.

As the economy began to recover from 2012 onwards, employment also began to grow rapidly, at a pace that has continued for the last seven years, bringing us back to pre-crisis job numbers. Against this backdrop, the Low Pay Commission was established, which has overseen regular reviews of the minimum wage. Their reviews are based on evidence about the state of the labour market. Since January 2016, this has resulted in a steady rise in the minimum wage – increasing from €8.65 an hour to €9.80 today and over €10 next year.

ESRI researchers recently returned to look at the effect of these increases in the minimum wage. They found that if there had not been the change in the minimum wage in 2016, approximately 10 per cent of workers would have been at earnings of €9.15 or less per hour. However, following the increase in the minimum wage, just over 6 per cent of workers had hourly earnings in this range. So this suggests the rise in the minimum wage was associated with a 4 percentage point reduction in the proportion of workers earning at or below €9.15 an hour. Another consequence was an average 2 per cent increase in wages for workers on or below €11.50 an hour. Importantly, the findings also suggested that there had been no negative effect on employment.

Benefit to women

Thus the minimum wage has been effective at providing some protection for poorly organised workers, who have a very weak bargaining position. At least initially, it seems to have particularly benefited low-paid women. There also seem to be no significant negative side effects in terms of reduced employment.

However, while the findings show the value of the minimum wage in reducing inequality in the labour market, the research also suggests that it is not a very effective tool for tackling poverty. A lot of the benefit from the increased earnings involved has gone to households higher up the income distribution, rather than to the poorest. This is because lower-paid workers are not always from the poorest households – for example students with part-time jobs in shops – and because many of the poorest households have nobody in work.

Two other strategies are more important in taking people out of poverty. First, our welfare system, which is highly effective in offsetting inequalities in market incomes. And second, raising the proportion of the population with a job.