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The problems with Labour’s minimum wage proposal

Before taxes, this proposal to jack up the minimum wage would be worth €96 per week to a person working full-time on the minimum wage. It is not, therefore, something to sneeze at, and we should take it seriously:

The counterpoint, of course, is that for a retail outlet – say your local corner shop – which employs 4 people on the minimum wage, this proposal would cost €384 per week. And that’s before employer’s PRSI and other costs of employment are added. The minimum wage is not like social welfare, in that it is paid by employers, not the state. When the Government increases the minimum wage, it takes money directly from employers, and puts it in the pockets of employees. A rational employer, faced with this, will do one of two things:

First, he (or she, but we’ll use “he” here for convenience) may simply raise prices. A corner shop, or a pub, or whoever it is that needs to find an extra €400 per week in revenue to pay for additional staff will simply raise their prices across the board to generate that money. Because most goods sold are subject to VAT, he will actually have to raise the cost to the consumer by more than €400 in order to be sure of bringing in the extra sums he needs to pay the wages.

Second, he may simply lay one worker off and restructure his workforce so that three people can do the work of four. In that scenario, everybody who remains gets a pay rise, costs to the consumer do not rise, and everybody works a little harder for their money. But one person, of course, loses out.

There is a third scenario, obviously. That scenario is the one that Deputy Bacik and Labour and those who support this proposal will say is the most common: That the employer is making so much money already that an extra €400 a week in costs is nothing to him, and he can pay it comfortably without making any changes.

In response to this idea, it might be useful to ask what you, dear reader, would do if you were the employer. Nobody’s watching, so you don’t have to say it out loud in front of a crowd.

The other problem here is the timing: Deputy Bacik is quite right to say that Ireland is in the midst of a cost-of-living crisis. That is true. The issue with this proposal however is that it does not actually do anything to address the root cause of that crisis, which is rising prices. Ireland does not have a cost-of-living crisis because wages have fallen, but because prices have risen. It is likely that this proposal would make that situation worse, by driving up labour costs, and, as a result, prices.

And perhaps that’s a price Labour are willing to pay. After all, in our PRSTV electoral system, they do not need to represent a majority of the public, or, necessarily, to look after the needs of the majority. They can simply say “we are for the people on the minimum wage, and we are going to get them more money”. Hopefully those people then vote Labour, and someone else can worry about the employers and the people doing their weekly shop.

It is certainly true, after all, that inflation is hitting the poorest hardest.

In general, though, the minimum wage is a poor policy. There are many reasons for this, but one obvious one is that a minimum wage is nearly always set based on the cost of living in the most expensive part of the country: It is much more expensive to live in Dublin than it is to live in, say, Tipperary Town or Carrick-on-Shannon. Rent costs are higher, food tends to cost a little more, and so on. And yet a minimum wage naturally drives prices up in places where prices are already low because all of a sudden, employers in these towns have to pay Dublin wages.

In the United States (which is, of course, a much larger country) they get around this by allowing each state to set its own minimum wage. The minimum wage in Texas, for example, is $7.25 per hour. In Massachusetts, where the cost of living is higher, the minimum wage is almost twice that, at $14.25 per hour. And yet, many more people are moving to live in Texas than are moving to live in Massachusetts, because prices are lower.

This idea of Bacik’s, then, seems unlikely to solve any problems. If we want to fix the cost-of-living crisis, we need to get costs and prices down. We shouldn’t be encouraging employers to put them up.

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