The idea that work should pay is a key component of our social contract. Without adequate pay, the ability to live a life that is independent and dignified is reduced. At the same time, low pay is associated with other measures of low job quality such as precariousness, repetitiveness, among others. As such, integral to a definition of quality work is a quality and decent wage. This short essay discusses the issue of low pay, its relevance in an Irish context, and the Living Wage and other policy levers to tackle low pay.
The structure of advanced economies has changed markedly over the last number of decades, forcing new pressures on wages and the cost of living. For most of today’s developed nations, though not Ireland, the so-called Golden Era of Capitalism of the 1950s and 1960s was one of unprecedented and shared prosperity. Large improvements in living standards were supported by real wage increases – economic growth was both egalitarian and sustained. This was made possible by a confluence of factors: economies were very much manufacturing based; growth was led by an expansion of goods markets whose demand had not been saturated; organised labour was much stronger. This meant that falling goods prices due to productivity improvements led to increases in real wages as demanded by unions, but without reducing profits as overall output continued to grow. Regarding the latter point, suburbanisation and the growing demand for home appliances were key.
Today, primarily due to automation, the structure of advanced economies is very different. Labour saving technical change means that across the developed world the share of the workforce employed in manufacturing has shrunk, and employed in services has risen. Other drivers of deindustrialisation are the moving of production to lower-cost, emerging countries, demographic factors, and a greater demand for services as societies become more affluent. Though many of the new jobs in the service sector are high-skilled and well-paying occupations, many are not. The entry of women, especially young and working-class women, into the workforce has meant that many of the activities traditionally performed in the home are, by necessity, now performed outside it. The growth in restaurants, laundry services, and paid child- and eldercare are obvious examples.
This has important implications for the sustainability of wage increases towards the lower end of the labour market. Take the example of care work, which is responsible for much of the growth of services. Being a face-to-face service, the potential for non-labour cost reductions/productivity improvements is limited. If wages in the childcare sector, for instance, were to increase inordinately, it necessarily translates into costs increases. Households have the capacity to provide the care themselves when the cost of external care becomes unaffordable. Thus, large improvements in the pay and conditions in the sector would most likely result in employment losses as cost increases lead to care being provided in the home. Good conditions and pay on the one hand, and high employment on the other can be reconciled only if considerable public subsidy or provision of care is provided, as is done in the Nordic countries.
The current climate makes the fight for pay and conditions of low-pay workers even more challenging. The wage of a worker is determined not only by skill-level and bargaining power but also by the profitability of the sector in which the worker operates. Not only is organised labour in a weaker position than before, but companies and governments have increasingly outsourced lower-end jobs to service firms. A classic example is the cleaning service firm which must bid against other firms for work from the larger firm or bureaucracy, reducing the capacity of the low-wage employer to pay decent wages. Many governments have attempted to relieve the plight of low-paid workers through increases in the minimum wage. Statutory increases, however, have generally been well below what is considered the minimum needed to live a dignified life. It is in this context calls for a living wage have been growing louder, especially in the Anglo-Saxon world and economies where living costs have been rising.
Ireland’s development trajectory and economic structure on the one hand, and labour market institutions on the other predispose it to high rates of low pay (23% of full-time workers) and high living costs. These two factors combined make the need for a living wage all the more urgent. Regarding its labour market institutions, trade union membership is relatively low, as is the share of the workforce covered by collective bargaining agreements. It is also comparatively easy to fire people. Labour, then, is in a comparatively weak bargaining position to demand increases in pay towards to low end.
Regarding Ireland’s development path, the traditional model of industrialisation involving the expansion of indigenous manufacturing base was largely bypassed. To simplify, Ireland went from an agrarian economy to an export and FDI-based economy. The share of the workforce employed in hospitality, retail, and agriculture is thus high in comparison to other high-income European countries. Similarly, the absence of urban industrial centres and the proliferation of small towns has bequeathed the country with state structures more attuned to local, parochial politics than is the case elsewhere. The state has seemed unwilling to correct large market failures, most notably in the provision of housing and healthcare, which are key drivers of living costs. In what is already an island economy on the periphery of Europe, this contributes to Ireland having one of the highest costs of living on the continent. Without wages to match, in-work deprivation is high.
The Living Wage Technical Group is a group formed by academics and civil society organisations to calculate the Living Wage each year in Ireland. The Living Wage is the “wage which makes it possible to live a minimum acceptable standard of living”. The calculation is arrived at by surveying members of the public on what they believe is an acceptable minimum standard of living and what no individual should do without. The Living Wage for 2019 was calculated to be €12.30 per hour, up 40c from 2018. The main driver of increases in the Living Wage in recent years has been the cost of renting. For comparison, the minimum wage for 2019 is €9.80.
The Living Wage figure is based on a single adult household where the adult works full time. The single, headline figure is a weighted average for the whole country, with different living wages calculated for Dublin, rural, and urban regions. Further calculations are performed to calculate the Living Wage for households with children, which factor the number of children, the current level of social supports, and are again presented as different figures according to location. For two parents with one infant child, the so-called annual Family Living Income for 2019 ranged from €19,930 (rural areas) to €26,640 (Dublin) per adult. The latest calculation observes that provision of childcare and social housing would “notably reduce these income requirements”.
Given Ireland’s high levels of low pay, implementation of the Living Wage would benefit large sections of the workforce. At a minimum, those currently earning less than the Living Wage would then be on the Living Wage. As employers desire to maintain the earnings hierarchy, it would also move some workers’ pay above the Living Wage. The most likely beneficiaries would be those currently earning slightly above or below the Living Wage threshold. The demographic profile of people earning below the Living Wage in 2013 was female (60%), under 40 (65%), with at most a leaving cert education (56%). Interestingly, slightly more than half (51%) are in households in the upper part of the income distribution.
Implementing the living wage is challenging. For instance, even with more strategy and resources devoted to industrial policy, economic structures change only slowly over time. Moreover, the hospitality sector in Ireland is large and profit margins in it are slim. Challenges to implementing the Living Wage are, however, not insurmountable if appropriate interventions are made. It is not true that all sectors with high levels of low pay have low profit margins, such as the retail sector. Statutory increases in the minimum wage above what we have seen in recent years are therefore manageable. Beyond changes to the minimum wage, bringing down living costs, and hence the level of the Living Wage, through public interventions in the health and housing sector is similarly well within the reach of the state. Unions and civil society organisations can also alleviate inadequate pay. Sector-by-sector collective bargaining is a mechanism through which wages can be raised with due deference to the different circumstances that pertain in distinct industries. Firms could then be encouraged to take the “high road” to profitability that involves investments in productivity-enhancing training as is common in Northern and continental Europe, rather than the ‘low road’ Anglo-Saxon reliance on low-cost and precarious employment. In short, policy options are available to tackle low pay which should be examined if the government is serious about its commitment to high quality jobs, now and in the future.
This essay was part of the Carnegie UK-Trust-TASC Ensuring Good Jobs collection and was also published on the Carnegie UK website here: https://www.carnegieuktrust.org.uk/blog/ireland-low-pay-and-the-living-wage/
Robert Sweeney @sweeneyr82
Robert Sweeney is a policy analyst at TASC and focuses on issues surrounding Irish political economy and distribution. He has a PhD in economics from University of Leeds, which concentrated on financial markets and investors, banking, international macroeconomics, and housing. He is also interested in debates on alternative schools and methodology in economics, and ownership.