The social wage as a mechanism for a widespread recovery in living standards

Posted on March 29, 2015 by Daragh McCarthy

Recovery has begun. However, the economic collapse and years of aggressive reductions in government spending mean the recovery is starting from a position where key public services are stretched, state-sponsored family supports diminished, core welfare rates cut for those under 26, and a lack of public investment in infrastructure around the country is hampering job creation. For workers in many sectors of the economy it is a recovery that has been characterised by an absence of wage increases and a consolidation of flexible patterns of work based on precarious terms of employment. In short, recovery in living standards has been sluggish at best.

Efforts to ensure the benefits of being the fastest growing economy in the EU are widely distributed through society should be based on actions that boost take-home pay and policies that enhance the state's capacity to provide an improved basic standard of well-being through direct transfer payments and a strengthened system of public services.

Ireland has a low pay problem. As shown in the NERI's recent Quarterly Economic Observer, there are 345,000 people (25 per cent of all employees) below the Living Wage threshold of €11.45 per hour. The issue is compounded by the strong association of low pay with low hours and temporary contracts of employment. In this context, there is a strong case to start shifting wages to a point where they are sufficient for workers to meet the essentials of everyday life at the very least.

Wages and conditions of employment remain paramount, but making important aspects of life less dependent on take-home pay improves living standards and offers economic security for workers and their families. Enhancing the non-pay returns to workers, the "social wage", involves improving standards of living through increased state support for households through transfer payments and expanded public services. The social wage can take the form of public provision of childcare services, state provided illness benefit, or enhanced support during periods of unemployment. It offers the prospect of improved access to education and healthcare services regardless of ability to pay, while allowing the state to make job creating investments in infrastructure and enterprise.

Boosting the social wage comes at a substantial upfront cost. With this in mind, it is vital the temptation to reduce income tax and the Universal Social Charge is resisted. Beyond this, Figure 1 shows the social security contribution made by Irish businesses for an employee on the average wage is the roughly half the average rate paid by employers in other EU 28 countries. This corporate welfare comes at a cost to the social wage enjoyed by employees. It follows that boosting non-pay social benefits available to households would involve Irish businesses significantly increasing their PRSI contributions.

A diminished social wage comes at a cost for both households and the wider economy. Inadequate infrastructure development damages the capacity of the economy to grow over the medium term. Reduced transfer payments increase rates of deprivation and the economic risks associated with illness and disability. An inadequate public revenue base results in households facing higher out-of-pocket charges. This dynamic has been visible across the economy over the past number of years as the government sought to reduce its expenditure by pushing higher charges on to citizens in the form of increased prescription fees, substantially higher public transport fares, and the introduction of water charges. Higher out-of-pocket payments mean households at the lower end of the income distribution will continue to struggle to gain access to healthcare services and social housing, for example. Higher levels of government revenue and spending can be made consistent with enhanced international competitiveness. All ten countries ranked higher than Ireland in the World Economic Forum's 2013 Competitiveness Index raise substantially more government revenue as a proportion of GPD than Ireland.

Unemployment, illness and parenthood are permanent features of working life. Core pay rates remain crucial, but good public services have an important role to play in helping households manage costs associated with these events. Boosting the social wage comes at a substantial cost, but implemented and spent correctly can enhance international competitiveness.


Source: European Commission (2015)

Posted in: Government Spending

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