International economist tells TASC-FEPS conference that Ireland and Europe need a pay rise to stimulate growth and avoid deflation
19th June 2015
An international economist has today said that Ireland and Europe both need a pay rise to stimulate growth and avoid deflation. Professor Ozlem Onaran, University of Greenwich, also says that research shows that low wage policies are counter-productive and lead to stagnating economies.
Professor Ozlem Onaran was speaking at independent, progressive think-tank TASC’s sixth Annual Conference in the Croke Park Conference Centre, Dublin. The conference was organised jointly with the Federation of European Progressive Studies (FEPS) on the theme Economic Inequality – What Can Be Done, and was attended by more than 100 policy makers (including An Tánaiste, Joan Burton TD), researchers and civil society representatives.
Professor Ozlem Onaran explained that the European Commission has set on a course to make the European Union one of the most competitive economies in the world through their Europe 2020 Strategy.
“Underpinning this grandiose strategy are ever more deregulated labour markets and policies that keep wages low. However, our research shows that these type of policies have delivered poor economic growth over the last three decades and have led to a declining share of wages in national income and rising inequality.”
Professor Onaran said the research shows that in Europe – including Ireland – falling wages has led to lower consumption because workers spend more as a proportion of their income compared to those who earn income from profit.”
“In fact, wage moderation policies are counter-productive and lead to stagnation of economic growth. Keeping wages low also increases the risk of deflation and, in some countries, destabilizes the economy by stimulating debt while in others it creates excessive reliance on exports.”
“In all the countries we looked at – including Ireland – a fall in wages leads to lower consumption because workers spend more as a proportion of their income compared to those who earn income from profit. The data shows that a 1% fall in the share of wages in the economy leads to 0.3% fall in GDP across the EU 15 countries.”
For these reasons Professor Ozlem Onaran says Ireland and Europe need a pay rise.
“Deflation is now a real and significant risk for the European economy and increasing wages is one of the key ways of tackling that problem. For example, a 1% rise in the wage share of national income would lead to a 1.4% rise in prices in the EU 15 and 0.6% rise in Irish prices. It’s worth noting that these inflation rates would be consistent with a nominal wage increase of 2.7% in Ireland.”
To avoid ‘beggar thy neighbour policies’, Professor Onaran argues that European Union countries should act in a coordinated way to increase wages.
“Wage policy coordination among the EU member states would not only improve economic performance but would also help tackle unsustainable growth that is either driven by debt or by being overly reliant on exports. And while a higher wage policy can be implemented in a single country, the impact would be stronger if coordinated. It would also do away with the temptation for countered to engage in wage competition with one another,” Professor Ozlem Onaran concluded.
TASC Policy Analyst, Cormac Staunton, explained that Ireland has one of the highest rates of low pay in the EU and the OECD – low paid workers are those who earn less than two-thirds of median earnings for full-time workers.
“Ireland has the third highest incidence of low pay in the OECD with more than 20% officially classified as being on low pay. Unfortunately the incidence of low pay in Ireland is rising steadily and more quickly than our international counterparts. This is not related to the economic collapse as the rate of low pay has been rising steadily since 2003.
“Minimum Wages can play an important role in reducing inequality and in supporting the wages of low-paid workers which is why the work of the Low Pay Commission is so important. In order to be effective, the Minimum Wage must be close to a Living Wage – which is calculated to be €11.45 per hour – and the low pay threshold, which in Ireland’s case would be €12.20 per hour.
“TASC also recommends that the Minimum Wage be tracked against median earnings and the cost of living. In this context, we have urged the Low Pay Commission to find ways to bring the Minimum Wage into line with the calculated Living Wage over the course of a number of years,” Cormac Staunton concluded.
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