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‘a serious challenge that businesses and the Government must address’

Posted on January 09, 2014 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

In Northern Ireland – as in the rest of the United Kingdom – real wages have been falling since 2008. Using data from the Annual Survey of Hours and Earnings (ASHE) the UK-based GMB trade union has estimated that average earnings in Northern Ireland , when adjusted for inflation, have fallen by 12% between April 2008 and November 2013.  This is turning out to be the longest real wage squeeze in living memory. Among those at paid work, one in four workers in Northern Ireland are at risk of poverty because they are on low pay.  According to the Living Wage Research for KPMG published, last year, there were an estimated 197,000 employees below the calculated living wage level in Northern Ireland. This corresponds to 26% of all employees and is the highest of any UK region. 

As noted by KPMG, the proportion of females earning less than the 'Living Wage' is considerably higher than among males (reflecting a much higher incidence of part-time work among females where hourly rates are lower, on average, than hourly rates for full-time workers). Although data on gender are not shown separately for females in Northern Ireland it is sure that the incidence of sub-living wage pay among women is very high in Northern Ireland - probably well in excess of 33% (given that the UK average for women is 27% and for men 16% with an overall average of 21%). Young workers under 21 years of age are very likely to fall below the living wage threshold (72% for the UK and likely to be much higher again in Northern Ireland).

Percentage of workers below the living wage by UK region

BelowLivingWageNI

While there have been early, very tentative signs of recovery in the UK and Northern Ireland economies there is an enduring problem of high personal debt, under-employment and stagnant living standards. These problems are unlikely to go away any time soon and the possibility of a credit-fuelled property bubble in parts of the UK offers a sense of déjà vu. These issues will inevitably overshadow public debate in the lead-up to the UK general election due no later than 2015. As one writer put it: What good's a job-rich recovery if the workers stay poor? 

Contrast recent public pronouncements by Danny McCoy of the Irish Business and Employers Confederation (IBEC) in the Republic of Ireland with those of John Cridland head of the Confederation of British Industry (CBI) who says:

"But there are still far too many people stuck in Minimum Wage jobs without routes to progression – and that’s a serious challenge that businesses and the Government must address.”

Mapping the concept of  a 'Living Wage'

The Northern Ireland labour market forms part of a larger UK-wide labour market where, in most sectors of the economy, wages (as well as the prices of goods and services) tend to be set at UK level.  Legislation on the National Minimum Wage (NMW) in the United Kingdom applies to Northern Ireland. The legal minimum is defined with reference to an hourly rate  of £6.31 for individuals aged 21 and over . However, the minimum wage per hour is only one part of a larger story about wages and incomes as pointed out in my blog last week .  The UK Low Pay Commission established in 1998 to advise the UK Government on the setting of the national minimum wage regularly reviews on it. The rate has been increased each year since its introduction in 1999. While only a relatively small number of workers are paid at the NMW or close to it many more are paid below what many accept as the 'Living Wage' in the UK. Defining and measuring the 'Living Wage' at any point in time and in any national or regional economy is not an easy task. Typically, it has been conceptualised and measured in terms of hourly pay. This is a very limited view of the total 'Living Wage' from work over a lifetime which takes into account hours of work in any week, periods of sickness, parental leave as well as provision for retirement or periods of training or full-time education in the course of a lifetime.  The term 'social wage' has been used by some to describe those benefits flowing from all the public and private goods and services consumed by workers and paid for by their employers whether directly through gross wages at the top right-hand corner of your pay slip or through the 'total social wage cost' which includes employer social security contributions (Employer National Insurance Contributions in the UK or Employer PRSI in the Republic of Ireland). Some of the conceptual and measurement issues are touched on in my 'Monday Blog' of last week.

A good overview of the current living wage terrain in the UK is was given by Jane Willis of the University of London at a NERI seminar last year.

Notwithstanding the conceptual and measurement difficulties surrounding the NMW in any country the introduction and implementation of such a rate has helped protect the lowest paid workers. It has provided a minimum barrier of decency below which employers are not allowed to go legally. Although the evidence about the impact of the NMW on workers just above the minimum rate is mixed it is clear that many employers in sectors such as catering, retail, hospitality, security, agriculture, contract cleaning, home help, etc. have regard to the NMW in setting pay levels. To what extent hourly pay rates (and as already stated this is a very narrow perspective on the total 'wage' received by workers) is exceeded will depend on economic conditions in a given sector, existing legal provisions if any, collective bargaining power on the part of unions and some shared sense of a 'Living Wage' linked to a living income deemed adequate at a point in time and in a given economy to enable individuals or households to 'live with dignity and without shame'.

Possible downsides?

Objections are frequently raised to the establishment of a minimum wage rate and these include:

  • The impact of such a rate on labour costs for employers and, therefore, their demand for employment with negative consequences especially for young entrants to the labour force; and
  • The impact on labour cost competitiveness (and prices paid by consumers) more broadly in the economy as a minimum floor establishes a benchmark floor for all sectors and occupations.

There is a large research literature on the impact of minimum wages. While it is difficult to locate a suitable ‘control group’ for statistical comparison of applying a minimum wage, the literature is not conclusive in regards to the impact on employment. It suggests – as might be expected – that a minimum has raised earnings of low paid workers without significantly affecting their employment opportunities. Research by Riley and Bondibene using UK firm data since 1999, for example, suggests that:

“companies may have adjusted to the increases in labour costs as a result of the National Minimum Wage (NMW) by raising labour productivity and by reducing profitability; the NMW has not changed average employment or investment rates for these companies; the NMW has not had a detrimental impact on firm outcomes since the financial crisis and the recession of 2008”

Holding wages below the rate of inflation (which has averaged 18% in the UK since April 2008) or below increases in productivity or increases in GDP is likely to increase profits of individual employers and businesses but undermine demand for goods and services at the level of the local, regional or national economy. In specific cases, it may also undermine employee morale and enterprise productivity.

Accounting for the macro-impacts

Evidence reviewed by Howard Reed of Landman Economics in the UK and commissioned by UNISON trade union found no evidence that recent minimum wage levels in the UK had negatively impacted on employment there.  This tallies with recent evidence from the United States where econometric results from inter-state differences in minimum wage rates (above the Federal rate) have been examined. In the case of the UK, Howard Reed used a combination of data sources and modelling results to estimate the likely overall employment impact including the benefits flowing from additional revenue to government, lower welfare spending and higher consumer spending (see below). He concludes that the balance of evidence points towards a net employment gain as a result of raising the NMW to the level of a UK 'Living Wage'. The research by Howard Reed of Landman Economics suggests that the Treasury would receive over £2 billion in additional revenue as a result of a wage boost for the lower paid. For example, a ‘living wage’ norm as calculated by the UK Centre for Research in Social Policy of £7.45 outside London and £8.55 in London could save the Treasury an estimated £1.1 billion in means-tested benefits and tax credits.

Frequently missing from a debate on wages is the impact they have not just at individual or household level but at a macro-level where wages accounts for close to 50% of GDP or the bulk of personal consumption expenditure which drives most of demand (as well as household investment spending on homes to live in).  A sustainable economic recovery depends on consumption and wages as Larry Elliott writing in The Guardian makes the case recently. He writes:

“The one factor not in place is the most important one of all: an increase in real wages. If companies believe that consumers will carry on spending, they are much more likely to take the plunge on new investment projects. If they think consumer spending will stall, they will keep their plans on hold.”

Implications for the Northern Ireland regional economy of a wage increase

The research at UK level also has implications for a small regional economy such as Northern Ireland where part of consumer spending goes into local shops, businesses and trades. Not only this but the UK Government could benefit by way of additional income tax, national insurance and VAT as increases for lower paid workers would feed into Treasury coffers. Local councils could indirectly benefit as a result of higher local consumer spending and a healthier local business environment.  The share of Northern Ireland in such additional revenue is likely to be proportionately greater than in other UK regions due to the prevalence of poverty in work. It is estimated that the total revenue saving for Northern Ireland could come to £85 million of which £31 million would be accounted for by benefits and tax credit savings.

Work carried published in September 2009 for the Joseph Rowntree Foundation on comparisons of minimum income standards for Northern Ireland compared to Great Britain did not find large differences in the needs of most households based on a basket of goods and services. While domestic rates (or Council Tax in the case of GB) were lower in Northern Ireland, transport and fuel costs were higher (account was not taken of rural dwellers in Northern Ireland where transport-related costs could be higher than for urban dwellers). A lone-parent in Northern Ireland with two children (one at primary school, the other at secondary) had a higher weekly cost outlay than their counterpart in Great Britain to stay within a minimum standard (but not taking account of housing and childcare costs). The report concluded with a telling comment in regards to different household types (using the then 2009 NMW in operation):

"... the capacity of the National Minimum Wage (NMW) to meet minimum needs is dependent on the composition and working pattern of households both in Northern Ireland and Great Britain. For example, while the current NMW is £5.73 per hour, a single person working full-time requires £7.09 an hour to achieve the minimum income standard specified for Great Britain, and £7.12 an hour based on the budget for Northern Ireland. In both places most families with a single full-time earner cannot reach the minimum income standard on the minimum wage, although some families with dual earners – as well as lone parents who manage to work full time and avoid childcare costs – may be able to do so."

Clearly, the hourly NMW rate is important but constitutes only one element in achieving a level of pay that is both fair and adequate.

So what and where to from here?

A voluntary code for employers will not suffice and a decent or adequate living hourly rate is only one part of the jigsaw. A leaf could be taken (for example) from FairShop.ie used by Mandate union in the Republic of Ireland or from FairHotel.ie initiated by SIPTU (the latter addresses union membership rather than specifically wages).

A number of implications arise for Government which could be applied across the UK including Northern Ireland:

  1. A national minimum wage should rise in tandem not only with the cost of living but median or average earnings so as to directly attack low pay and poverty for people at work.
  2. A ‘living wage’ with reference not only to hourly wage rates but, also, annual average levels of protected ‘adequate’ income from work over a lifecycle should be examined and pursued as a key social policy goal for governments, employees and employers. In simple terms: A Basic Minimum Income should be linked to a Living Wage.
  3. Collectively-bargained wage levels is required appropriate to economic sector, age and skill levels.
  4. Request the UK Low Pay Commission in consultation with relevant civil society organisations as suggested recently by UNITE to review a benchmark wage.
  5. Consider the establishment of sectoral wage boards by the Northern Ireland Executive to cover vulnerable occupations and sectors.
  6. Public authorities can ensure that all contracts issued by them comply with existing wage legislation and, in addition, conform to locally accepted living wage standards.
  7. Measures to increase financial transparency at regional and national level in the case of significant size employers such as TESCO and Dunnes. After all transparency, fairness and ethics would be good for local business as well as workers at one and the same time as many employers in the UK Living Wage initiative have discovered.

Ultimately, effective legislation and collective bargaining machinery is needed in the UK and other European Member States undergirded with evidence-based research.

In the meantime, here is a list of  Living Wage Employers for the next time you are buying online or offline.

Posted in: InequalityLabour costsLiving wageNorthern Ireland

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