Minimum wage rises bad for economy

Comment: According to United States Department of Labor data, the average hourly industrial wage in the US now virtually equals that in the Republic, at close to $20 (€15.42) per hour. In the Czech Republic, a sophisticated and centrally-located European economy, it is $4.50.

This stark fact lends added urgency to the debate over the Irish National Minimum Wage (NMW) and illustrates the cost competition that our domestic manufacturers are facing. As the NMW review process is currently structured, rises have a very real impact on overall salaries in the Republic. We must address this situation if we are to maintain our economic competitiveness.

The Labour Court's suggested 9 per cent increase bears no connection to the rate of inflation and coming, as it does, towards the end of a national pay agreement, will cause a serious distortion in the labour market.

Less than 12 months ago, businesses were hit with a 10 per cent increase in the minimum wage, which cut across the timing of general wage increases.

If approved, then the new minimum wage will have increased by 20 per cent since January 2003. This proposal once again clearly bucks the trend on general wage levels in the Republic.

The SME sector is struggling greatly against international competition. The top 4,000 indigenous companies in the Republic employ more than 140,000 people and generate expenditure in the Irish economy in excess of €17 billion. These companies are tied into national pay agreements that mandate increases in the order of 6 per cent over the course of the agreement.

These have been agreed to and budgeted for. Many SMEs employ staff on salaries "built on" the NMW such as NMW plus 30 per cent. It follows that if an increase in the minimum wage is sanctioned, then this will have inflationary impacts on these firms' bottom line as staff can demand and possibly expect increases in their own salaries to compensate them.

Any proposed increase can only be paid for in three ways: selling more products - again a difficult task in a manufacturing sector suffering from extreme price competition; raising prices - difficult to do in a tough international market, especially with the onward advance of Chinese exports; cutting jobs - a painful experience for all concerned.

A recent Forfás report has noted that these businesses are not making the margins of their IDA-attracted counterparts (Irish-based firms exports sales total €10 billion; IDA-backed firms equal €65.2 billion). As a result, they are less able to deal with and accept this onward cost inflation. It would seem obvious that job cuts are the only solution available to many of these firms.

Whenever the minimum wage debate arises, the issue of poverty is inevitably raised. The Chambers of Commerce of Ireland have always backed the idea of a minimum wage as a measure of social solidarity but it was never intended to be an instrument of wealth redistribution. Poverty cannot be resolved using the crude instrument of the minimum wage. As we have seen, all other salaries are benchmarked in relation to the NMW. In addition, if the NMW is set too high, then it will price lower-skilled workers in lower-skilled jobs out of the market. Their jobs will simply be abolished.

Union leaders also argue that the minimum wage needs to be raised sufficiently to attract non-national workers to our shores. While we do need these workers, if costs are set too high for business, then although they may come, there will be fewer jobs for these new immigrants.

The root of this problem lies in the failure of social partnership to properly address competitiveness and the need of business for stability when planning and budgeting.

According to our calculations, if the timing of an increase in the NMW was directly linked to that of the next round of the national pay agreement, then it would cause fewer problems because its impact would be direct and easily calculated and accounted for. In that instance, this increase would conservatively cost business in the region of €100 million.

If an increase is implemented in May, as is currently proposed, then it will cut directly across a national wage agreement and will push up the salaries which were already increased under Sustaining Progress just last September.

The direct result of this change will be an increase of up to €500 million in business costs. Such a rise would be a cause for worry.

The indications of this are clear: the key issue of a minimum wage is not 5 cent more or less per hour on a minimum wage. It has to do with the manner and timing of the implementation of any increase in the NMW.

If the Republic is serious about maintaining competitiveness and enabling indigenous manufacturing industry to survive and remain globally competitive, then the minimum wage must be negotiated and agreed at the beginning of and as an integral part of each and every national pay agreement.

The level should be fixed at that time and should only be changed in line with the terms of the national pay agreement throughout the life of that agreement.

The Chambers of Commerce of Ireland is calling on the Government through Mr Tony Killeen (Minister of state with responsibility for labour affairs) to make the right decision for the Republic's competitiveness and to ensure that any increase in the NMW is synchronised with agreed rises in the national pay agreements.

Complacency is a killer for any economy all one has to do is look at the current troubles of Germany. The Labour Court's recommendation suggesting a raise in the NMW that is not timed to occur in tandem with agreed rises in the national pay agreements raises concerns about complacency here also.

John Dunne is chief executive of the Chambers of Commerce of Ireland.