Tom Ferris

Tom Ferris is a Consultant Economist specialising in Better Regulation. He lectures on a number of PAI courses and contributes blogs regularly to PAI. He was formerly the Department of Transport’s Senior Economist.

Introduction

What constitutes a living wage? Put simply, a living wage is the minimum income that a worker requires to meet basic needs. The modern living wage movement emerged in Baltimore in 1994, when that city passed a local law requiring firms to pay employees a rate above the minimum wage while working on city contracts.[i]

In Ireland, a Living Wage Technical Group was set up in March 2014 and it has been working to establish a methodology for calculating the living wage. The Group is chaired by Dr Michéal Collins of the Nevin Economic Research Institute (NERI) and it is supported by:

  • Nevin Economic Research Institute;
  • Social Justice Ireland (think-tank and justice advocacy organisation);
  • SIPTU Trade Union;
  • TASC (think-tank for action on social change);
  • Unite Trade Union; and
  • Vincentian Partnership for Social Justice.

The Group has concluded that

“In principle, a living wage is intended to establish an hourly wage rate that should provide employees with sufficient income to achieve an agreed acceptable minimum standard of living. In that sense it is an income floor; representing a figure which allows employees afford the essentials of life”.[ii]

 

Programme for Government 2016

The Programme for Government 2016 does not refer specifically to the living wage. It does, however, give a commitment to reducing poverty levels by supporting an increase in the Minimum Wage to €10.50 per hour over the next five years. It also gives other related commitments, such as

“working with the Oireachtas we will cut Employers’ PRSI for low income workers to mitigate the cost of minimum wage increases, in order to protect jobs. We will tackle the problems caused by the increased casualisation of work that prevents workers from being able to save or have any job security. We will strengthen the role of the Low Pay Commission in relation to the gender pay gap and in-work poverty. We will strengthen regulation on precarious work”. [iii]

Living Wage versus the National Minimum Wage

It is important to distinguish between the living wage (now €11.50 per hour) and the national minimum wage (currently at €9.15 per hour; soon to be raised by 10 cent per hour). The living wage has no statutory basis. It is an informal benchmark, not a legally enforceable minimum level of pay, like the national minimum wage. In reply to a Parliamentary Question on 13 January 2016, the Minister for Finance, Michael Noonan T.D. stated that

“…it is important that Ireland’s statutory National Minimum Wage and the Living Wage concept are not merged together. The Living Wage is a voluntary societal initiative centred on the social, business and economic case to ensure that, wherever it can be afforded, employers will pay a rate of pay that provides an income that is sufficient to meet an individual’s basic needs, such as housing, food, clothing, transport and healthcare. The Living Wage is voluntary and has no legislative basis and is therefore not a statutory entitlement and cannot be imposed on suppliers or contractors”.[iv]

The most common argument in support of the minimum wage is that it protects the workers at the lowest rung of the socio-economic ladder. These workers, many of whom represent marginalised groups (women, minorities, youth workers, the disabled etc.) do not have the bargaining power to fight for a minimum living wage without government intervention. In Ireland, that intervention arose with the establishment by Government of the Low Pay Commission in 2015, under the National Minimum Wage (Low Pay Commission) Act 2015[v]. The principal function of the Commission is, once each year, to examine the national minimum hourly rate of pay and to make a recommendation to the Minister in respect of the rate, ensuring that all its decisions are evidence-based, fair and sustainable, and do not create significant adverse consequences for employment or competitiveness. The current national minimum hourly rate of pay for an adult worker is €9.15. This rate came into effect on January 1st last following Government acceptance of the Low Pay Commission’s first recommendation of July 2015 to increase the rate from €8.65 per hour – see my blog on PAI website.[vi]

As well as accepting the recommendation, the Government adjusted the PRSI system in Budget 2016 to ensure that the benefit of the increase was not lost to the employee and that the effect of the increase to €9.15 per hour on employer’s PRSI liability was mitigated. The Commission’s second report recommends a rate of €9.25 as the national minimum hourly rate. This recommendation was accepted by the Government as part of Budget 2017. The Minister for Jobs, Enterprise and Innovation, Mary Mitchell O’ Connor TD, announced on 11 October 2017 that

“Today the Government has accepted the recommendation of the Low Pay Commission to increase the National Minimum Wage to €9.25 and welcome the increase in the new 2.5% USC band to €18,772 to ensure minimum wage workers are kept within this new lower band”. [vii]

 

The Extent of Low Pay

What proportion of workers are considered low earners? In the European context, low-wage earners are defined by Eurostat as those employees earning two-thirds or less of the national median gross hourly earnings. In a recent publication, Eurostat calculated that one in every six EU employees is a low-wage earner.[viii] Put another way, 17% of EU employees were low wage earners in 2010. In Ireland, 20.7% were low earners. Tim Callan and Caitríona Logue, in a recent ESRI paper, produced more up-to-date figures using the Eurostat definition.[ix] They examined the period 2005–2013 and showed that the median wage increased between 2005 and 2013. They also showed that the proportion of low wage employees was broadly stable, at around 20%, for the years 2005, 2008 and 2010; it increased to 23% in 2013. The figures are reproduced in Table 1.

Table 1: Employees earning Defined Low Wages (%)
YearLow payLow pay cut-off
Proportion (%) * ⅔ median wage Minimum wage
 (€) (€)
200520.0%9.007.65
200820.6%10.508.65
201020.1%11.208.65
201323.0%11.408.65
* % of employees earning less than ⅔ of the median wage (€)
Source: ESRI, ‘Low Pay, Minimum Wages, and Household Incomes,
Evidence for Ireland’, T. Callan and C. Logue,
Budget Perspectives 2017, Paper Number 3, June 2016

 

Calculating the Living Wage

The Living Wage Technical Group (LWT Group) has done interesting work in calculating the Living Wage for Ireland.[x] The calculations are based on research undertaken by the Vincentian Partnership for Social Justice on the Minimum Essential Standard of Living (MESL) in Ireland. This research established a consensus on what members of the public believe is a minimum standard that no individual or household should live below. Working with focus groups, the minimum goods and services that everyone needs for an MESL were identified. With a focus on needs not wants, the concern is with more than survival. Accordingly, the MESL is a standard of living which meets physical, psychological and social needs, at a minimum but acceptable level. Box 1 sets out the key assumptions that LWT Group uses in calculating the living wage.

Box 1: What is the Living Wage?

 

The Living Wage Technical Group concluded that the living wage is a wage which makes possible a minimum acceptable standard of living. It is evidence-based and grounded in social consensus.

Moreover, the living wage is:

  • based on the concept that work should provide an adequate income to enable individuals to afford a socially-acceptable standard of living;
  • the average gross salary that will enable full-time employed adults (without dependents) across Ireland to afford a socially-acceptable standard of living;
  • a wage that provides for needs, not wants;
  • an evidence-based rate of pay that is grounded in social consensus and is derived from Consensual Budget Standards research that establishes the cost of a Minimum Essential Standard of Living in Ireland today; and
  • unlike the National Minimum Wage, which is not based on the cost of living.

In principle, a living wage is intended to establish an hourly wage rate that should provide employees with sufficient income to achieve an agreed acceptable minimum standard of living. In that sense it is an income floor; representing a figure that allows employees afford the essentials of life. Earnings below the living wage suggest employees are forced to do without certain essentials so they can make ends meet.

Source: The Living Wage Technical Group, http://www.livingwage.ie/

 

In essence, the construction of the estimated Living Wage is based on an examination of single adult households and the cost for a basket of goods. In recognition of the fact that households with children experience additional costs that are relevant to any consideration of such households’ standards of living, the LWT Group proposes to publish estimates of a Family Living Income each year. Focus Groups and expert opinion informed the decision of which items were deemed essential for a minimum standard of living. The items examined include food, furniture, housing and transport. Separate costs were calculated for individuals living in rural areas, towns, cities and the Dublin area. The national living wage was then calculated by averaging the minimum income needed to afford the essential living standard in each of these four regions, weighted by the proportion of the labour force resident in each region.

 

Some Final Observations

Not everybody would be in favour of placing the living wage on a statutory footing. There are employers who would resist such a move, arguing that it would raise labour costs, threaten economic recovery and erode Ireland’s competitiveness. And yet, individuals working full-time should be able to earn enough income to enjoy a decent standard of living. Of course, it should be recognised that agreeing the living wage would not of itself ensure a significant reduction in the level of poverty. Action is required on a much broader front, starting with education. Improving the education system can mean people will be better prepared to earn high-wage jobs. Policy initiatives in the areas of housing, health and social welfare also have an important role to play in reducing poverty.

One organisation has introduced the living wage in Ireland. In October 2015, Lidl became the first Irish nationwide employer to introduce the living wage – see Box 2.

Box 2 : Lidl and the Living Wage

Lidl introduced the living wage in October 2015. At the time, 80% of Lidl’s team were already earning in excess of the living wage so this move brought the remaining 20% up to an hourly rate of €11.50.

In a statement to PAI, Aoife Clarke, Head of Communications, Lidl Ireland & Northern Ireland, pointed out that

“At Lidl we are in a fortunate position that the last few years have seen our business go from strength to strength in a difficult economic situation. Key to this has been the dedication and commitment shown by our team, so for us this move is a way of recognising that commitment and investing in future-proofing our business. From our perspective, attracting and retaining the best employees will mean we’ll have an even better proposition for our customers which will help us continue to grow market share as we build a bigger business more deeply rooted in communities across the country”.

 

The advent of the living wage at Lidl did not go without criticism. On 8 October 2015, the then-President of the Irish Farmers Association, Eddie Downey, said that “…everyone is entitled to a living wage, but not at the expense of someone else in the supply chain”[xi].

There is no doubt that the living wage debate generates different responses from different sectors. One thing is certain: introducing the living wage is not a panacea. There are other actions that need to be taken across a range of policies. If those below the poverty line are to be “lifted up”, then many social problems need to be tackled, especially ensuring that the education system up-skills more people to qualify them for higher paid jobs. There is also the matter of increasing economic growth so there are more jobs available.

But no single solution will work on its own. The living wage is just one ingredient. In the meantime, the minimum wage is the official benchmark on pay here in Ireland.

Notes


[i] http://www.epi.org/publication/bp170/

[ii] http://www.livingwage.ie/about/the-living-wage-technical.html

[iii] http://www.merrionstreet.ie/merrionstreet/en/imagelibrary/programme_for_partnership_government.pdf

[iv] http://oireachtasdebates.oireachtas.ie/debates%20authoring/debateswebpack.nsf/takes/dail2016011300077?opendocument#WRQ00750

[v] http://www.irishstatutebook.ie/eli/2015/act/22/enacted/en/html

[vi] https://pai.ie/2015/07/1809-low-pay-commission-recommends-an-increase-in-the-national-minimum-wage/

[vii] https://www.djei.ie/en/News-And-Events/Department-News/2016/October/11102016.html

[viii] http://ec.europa.eu/eurostat/statistics-explained/index.php/Wages_and_labour_costs

[ix] https://www.esri.ie/pubs/BP201703.pdf

[x] http://www.livingwage.ie/

[xi] http://www.ifa.ie/lidls-living-wage-will-ring-hollow-for-farmers-and-fresh-produce-suppliers-ifa/#.V_OYGOgrKhc