Can small businesses afford to pay higher wages? John Douglassays yes, while Patricia Callandisagrees with the motion

Yes:The introduction of a pay freeze would limit workers' spending power - which in turn would cause small firms to close down and more jobs to be lost, writes John Douglas

WHAT WE keep hearing from business representative bodies is that with energy costs increasing and consumer spending decreasing, businesses, including small firms, are really struggling. The fact of the matter is that these energy cost increases are borne across the whole competitive environment, so while a small firm is seeing an increase in energy costs of 17-20 per cent, so is their competitor across the road and indeed across the water in other countries.

In reality, energy costs among small firms are a relatively minor overhead and the real challenge for small firms is how to increase consumer spending.

Consumer spending is down at the moment - and that is a direct result of the current economic climate - but I fail to see how advocating a wage freeze will help small businesses in particular to recover. With energy costs set to rise for households, and most harshly for low-paid workers who spend a much higher proportion of their income on heating and essential items, then the obvious economic result will mean consumers will have less spending power.

It is important to note that most businesses will in all likelihood pass the increased energy costs on to the consumer, thereby doubling the impact on ordinary consumers. Small firms are dependent on these people, so a pay freeze will effectively result in small firms closing and jobs being lost.

What lobby groups representing small firms should be advocating is for wage increases across the board among large employers and small ones. If this option was adopted, it would result in slightly smaller profits for a lot of still highly profitable organisations while increasing the average spending power of consumers, which will support small firms and the overall economy.

At the same time, as a protection to businesses, including small firms, the trade union movement has agreed to an "inability to pay" clause, which states that if a company is in serious financial difficulties, they can avail of this and avoid paying wage increases.

Trade unions like Mandate have long advocated for a flat-rate pay increase for all workers. Essentially what this would require is an increase in pay of approximately €30 per week which, if it were applied across the board, would protect average families from the imminent threat of poverty and would lift some families out of poverty.

While it is an easy option to say that increases in pay will result in a loss of jobs, it is simply not true. There is very little evidence to support this.

On the contrary, it is quite easily proven false using Eurostat statistics. While Ireland has the second highest minimum wage in the EU, Ireland, at 5.1 per cent, according to the most recent CSO statistics, is still well below the average EU unemployment level of 6.8 per cent.

And to further prove this point, Luxembourg, the only country which pays a higher minimum wage in Europe, is well below Ireland's unemployment levels at 4.1 per cent. So it is quite clear that unemployment levels aren't directly related to wage levels.

While Ireland has seen a huge increase in unemployment during the year, it is important that we keep perspective on this. The majority of the job losses have been in the construction industry which is not a low-paid industry. These workers traditionally have had disposable income that has supported small businesses in the past.

If economic conditions now dictate that, through business representative bodies, a wage freeze or a pay pause is essential to prevent job losses, then we need to analyse this closely and establish who will take up the slack and spend more in the local economy.

While the overall rate of inflation is at 4.4 per cent, the cost of essential items is rising well above this level. For example, take a typical worker's day and the increased costs he/she incurs during it, according to the most recent data from the CSO.

Mortgage interest is up by 13.1 per cent over the past 12 months. Milk has risen by 26.8 per cent. Bread is up 16 per cent and butter is up 16.1 per cent. Petrol has risen by 13.7 per cent, while the costs of primary and secondary education are up by 8.7 per cent and 9.9 per cent respectively. Even hospital services are up 10.5 per cent.

So if we take inflation among these essential items, we're looking at a level of 14.35 per cent, before we even take in the increases in energy costs. At the same time, during the past year, wages have only increased by 3-4per cent, effectively imposing a pay cut on those who can least afford to absorb it: low-paid workers.

A €30 wage increase across the whole economy would create more disposable wealth among a large proportion of the population, rather than a wage freeze that would see a small proportion of people attaining higher profits. It is also a widely accepted fact that average and low earners spend more of their disposable income in the local economy than high earners. By squeezing low-paid worker's spending power, small businesses themselves will lose out.

So can small businesses afford to pay higher wages? I honestly don't think they can afford not to.

• John Douglas is general secretary of the trade union Mandate

No:Irish workers are among the highest paid in the EU, and many employees in small firms accept that the real issue is maintaining as many jobs as possible, writes Patricia Callan

THE SMALL Business Forum Report, published in 2006, stated that there were 250,000 businesses in Ireland, of which 98 per cent were small, employing less than 50 people each. In total, they employ almost 800,000 people or half the private-sector workforce.

Small businesses are created by ordinary people, who are extraordinary in that they have the vision, determination and the willingness to take risks to deliver on their ideas by establishing their own business, creating employment, hopefully generating profit and enabling the Government to raise income through taxation to redistribute to fulfil the social needs of our economy.

Small business owner-managers have demonstrated repeatedly that if the Government creates the right economic conditions, they will invest, to the ultimate benefit of everyone in society. They are not the faceless enemy of the working classes.

If they did not exist, 800,000 people would be without a job. In the good times, they reward their people as much as possible. In tougher times, they need employees to pull with them and trust them if, to survive and expand in the future, aspirations for even higher pay have to put on hold.

There is no doubt that every single small business in this country is grappling with issues arising from our sustained loss of competitiveness over the last number of year. Central Bank figures show that our national competitiveness has declined by 40 per cent in the past seven years. The exposed sectors of the economy that trade in international markets have been particularly affected by this.

But with the fall in surplus cash and domestic demand, all businesses throughout the economy are suffering and now have to focus on reducing their cost base. For some, this has meant the difficult decision to shut down entirely or to implement a certain number of redundancies.

For others, it has involved short-term measures such as layoffs, short-time, or negotiated pay freezes or pay decreases. Those pay increases that have been implemented are less than inflation. Employees have acquiesced to this, not because they are fools. Through working in a business, they know what a serious situation it is facing. In the year to July 2008, there has been a 36.5 per cent increase in the Live Register, with 63,647 more people signing on.

Statutory redundancy figures are also running at 36 per cent ahead of last year, with 20,392 jobs lost to date. With small business only expecting to create 8,875 new jobs this year, the net effect is clear for all to see.

Much of the input from the trade union movement has chosen to ignore the realities of the countless economic indicators, company closure and job loss announcements, as they continue to prosper in their ivory tower. It was extraordinary recently to hear them state that they were laying a pay claim for the one million lower paid workers in the economy. To whom and on behalf of whom? Given that the overwhelming majority of these people have voted with their feet and their money and chosen not to waste it on trade union dues, the reality is that trade unions consequently have no idea how these people feel.

Real employees in small businesses around the country, who are daily in direct discussions with their owner-managers at the front line, accept the reality that we are all well paid vis-a-vis our competitor economies, and that the issue is not about what the next pay rise will be, but rather how do we maintain as many jobs as possible.

It is self-evident that Ireland is now a high-waged economy, with average wages at €45,000 in 2007, some 17 per cent higher than the euro-zone average. Over the past five years, wages in Ireland have grown at double the average in the euro zone, at the clear expense of Irish competitiveness.

Irish workers have also benefited from generous tax cuts in recent years. A recent study from UBS found that Dublin provided workers with the third highest after-tax wages of 190 cities worldwide, after taking into account cost of living factors. Irish workers on average earnings now benefit from the lowest effective income tax rate in the OECD. Thirty five per cent of lower-paid Irish workers in fact pay no tax whatsoever. On a take-home pay basis, Irish workers are the second highest earners in the EU. These facts demonstrate that Irish workers are well-paid, even taking into account cost of living indicators. High pay has conversely put our longer-term prospects of having a job into jeopardy, as small businesses struggle to compete in a more globalised economy.

Unfortunately, as we were caught up in the euphoria of the Celtic Tiger and a misguided property boom, we forgot how to compete as an economy, believing instead that the world owed us a living. We believed that we could pay ourselves more than anyone else simply by increasing our prices and that no one would notice. It is time now to come down from the high towers and focus clearly on reinventing our future together.

• Patricia Callan is director of the Small Firms Association"It is time now to come down from the high towers and focus clearly on reinventing our future