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NERI Submission to Low Pay Commission on Minimum Wage

NERI Submission to Low Pay Commission on Minimum Wage

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Author

Tom McDonnell

Summary

The minimum wage was first introduced in New Zealand in 1894. It was introduced in Ireland over a century later in 2000 and currently stands at €8.65 an hour. Legal national minimum wages now exist in most countries (including 21 European Union countries) and where national minimum wages do not exist there are invariably sectorally agreed minimum wages which operate as wage floors. Higher wages improve workers’ welfare and diminish poverty. However, the minimum wage exists foremost to prevent exploitation, ensure minimum standards in terms of compensation and undermine a cut-throat race-to-the-bottom wage competition. It is a bulwark that protects migrant and other vulnerable groups from exploitation by employers. It also helps provide greater income equity by ensuring a minimum of equity between employer’s profits and employee’s wages.

There is a range of competing theories in the academic literature about the various impacts of the national minimum wage on outcomes such as total and sectoral employment, wages and prices, income equality and poverty. For example, one school of thought argues that minimum wages will promote efficiency and productivity of labour and therefore long-run growth. The idea is that excessively low wages act as subsidies to inefficiency preventing the rational displacement of labour by capital. A high minimum wage shifts the economy-wide competitive advantage to more productive firms and to more productive and high paying sectors and jobs.

The most common criticism of the minimum wage is that it could increase poverty by increasing the number of people who are unemployed or by reducing hours for those in employment. While the available empirical evidence is ambiguous, inconclusive and often contradictory with regard to employment effects, the conclusions of the most comprehensive meta-studies (studies of studies) strongly suggest that minimum wages exert no significant impact on an economy’s overall level of employment. On the other hand there is evidence that wage floors help reduce the degree of income inequality in society including inequality levels between women and men. Finally, increases in the minimum wage are associated with increases in production costs and prices although most studies suggest the actual size of this effect to be very small.

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