JIM POWER ECONOMICS LIMITED
THE NATIONAL
MINIMUM WAGE
A report prepared for The Restaurants
Association of Ireland by Jim Power, April 2015
The notion of pushing up wage costs at this juncture fails to recognise the business &
economic realities still facing the restaurant small business sector in what is still a very
challenging economic environment.
INTRODUCTION
The Low Pay Commission is set up on a statutory basis and will advise the Government on
an annual basis on the appropriate level for the National Minimum. Specifically, the key
issues that it has been asked to examine in formulating its advice to Government in relation
to the National Minimum Wage are:
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The change in earnings since the national minimum wage was last increased in 2011;
The unemployment and employment rates generally;
The expected impact of a change to the minimum wage on employment, the cost of
living, and national competitiveness;
Changes in income distribution; and
Currency exchange rates.
The commitment to form the Low Pay Commission was included in the Statement of
Government Priorities 2014-2016 agreed by the Tanaiste and the Taoiseach in July 2014. The
Minister with responsibility for small business, Mr Ged Nash, has stated that he ‘wants to
see the minimum wage increased progressively in the coming years as the economy
improves’ and that there is ‘an inevitability about pay increase demands as the economy
improves’. However, he also stated that the National Minimum Wage should only be
increased ‘where circumstances allow’.
This report will explain some of the key issues relevant to the activities of the Low Paid
Commission now and in the future, with a specific emphasis on how it could impact on the
restaurant sector. Specifically it will examine the current status of the Irish economy and the
challenges it faces as it seeks to revert to ‘normality’; Ireland’s competitive position; the
issues and challenges facing the restaurant sector; and the issue of the minimum wage.
ECONOMIC BACKGROUND
THE ECONOMY IN 2014
For 2014 as a whole, GDP expanded by 4.8%; GNP expanded by 5.2%; exports of goods and
services expanded by 12.6%; gross domestic fixed capital formation (investment) expanded
by 11.3%; and consumer expenditure expanded by 1.1%. These are strong growth numbers
and most importantly they confirm that the recovery is becoming more broadly based.
However, it is very clear that consumer spending is still the most fragile part of the recovery,
although it is showing gradual signs of improvement. Over the remainder of the year a
further improvement in employment; a continued pick up in earnings; and the impact of the
tax changes in Budget 2015 and those to be announced in Budget 2016 should combine to
support an ongoing gradual improvement in consumer spending.
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RETAIL SALES AND CONSUMER DYNAMICS
In 2014, the value of retail sales was 4.1% higher than 2013, and the volume of sales
increased by 6.3%. These are strong numbers, but are heavily distorted by car sales.
Excluding the motor trade, the value of retail sales increased by 1.6% and the volume of
sales increased by 3.7%. There is still a considerable divergence between the value of sales
and the volume of sales, which is indicative of the continued pressures on the consumer and
businesses selling goods & services to the personal sector. There is considerable and
justifiable consumer resistance to higher prices, which has considerable implications for
squeezed business margins. Price discounting remains a strong feature of consumer facing
businesses.
In the first 2 months of 2015 the value of total retail sales was 4.5% higher than the first 2
months of 2014 and the volume of retail sales was 8.1% higher. When car sales are
excluded, the value of sales was up by just 0.6% and the volume of sales increased by 4.7%.
This is a continuation of the trend in 2014; retail sales are being driven strongly by car sales
and the gap between the volume and value sales metric remains very substantial.
Figure 1: Consumer Confidence
140
120
100
80
60
40
20
Mar-15
Jul-14
Nov-13
Mar-13
Jul-12
Nov-11
Mar-11
Jul-10
Nov-09
Mar-09
Jul-08
Nov-07
Jul-06
Mar-07
Nov-05
Mar-05
Jul-04
Nov-03
Mar-03
Jul-02
Nov-01
Mar-01
Jul-00
Nov-99
Mar-99
Jul-98
Nov-97
Mar-97
0
Source: ESRI/KBC Bank
Consumer confidence continues to trend upwards and in March was at the highest level
since April 2006. Consumers are generally more confident about the economic outlook and
believe that the labour market and their personal financial situation will improve in 2015.
However, survey results are suggesting that although consumers are more confident about
the future, they are not yet feeling the impact in their pockets, and hence the higher levels
of confidence are not yet feeding through to consumer spending in a meaningful way. The
measures contained in Budget 2015 should help, but a further improvement in
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employment, some growth in earnings and a gradual easing of the personal tax burden are
essential elements for a meaningful recovery in consumer spending.
THE LABOUR MARKET
Labour market conditions improved during 2014 and this has carried over to 2015. In the
year to December, total employment in the economy increased by 29,100 and is now 90,000
above the equivalent quarter two years ago. A breakdown of the data for the final quarter
of last year shows that with the exception of Agriculture, Forestry & Fishing, which saw an
annual decline of 10,900, every other segment of the private sector saw an increase in
employment. Construction saw an increase of 13,100; the Wholesale & Retail Trade saw an
increase of 6,300; and the Accommodation & Food Services sector was up by 1,800.
In March 2015 the number of people signing on the live register was down 42,556 on a year
earlier and has declined by 76,400 over the past two years. The unemployment rate has
fallen to 10% of the labour force, down from a high of 15.1% at the beginning of 2012.
Figure 2: Employment
2200
2100
(000s)
2000
1900
1800
1700
2014Q3
2014Q1
2013Q3
2013Q1
2012Q3
2012Q1
2011Q3
2011Q1
2010Q3
2010Q1
2009Q3
2009Q1
2008Q3
2008Q1
2007Q3
2007Q1
2006Q3
2006Q1
2005Q3
2005Q1
2004Q3
2004Q1
1600
Source: CSO
Figure 2 shows that although employment is now trending upwards, the recovery is
relatively modest and there is still a long way to go to restore ‘normality’. Policy makers
need to remain focused on encouraging growth in employment and should avoid policy
initiatives that could discourage employers from job creation.
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THE ECONOMY IN 2015
The economy has entered 2015 with reasonably strong momentum. All economic indicators
are suggesting that the recovery is reasonably robust. Exports are doing well; the labour
market is continuing to improve; construction and housing activity is strengthening,
particularly in the Dublin area; manufacturing output is strong; and car sales are making a
significant contribution to the recovery in retail sales. The main caveat to this upbeat
assessment is that excluding car sales, consumer spending is still fragile; many aspects of
activity are coming off a very low base and growth rates are somewhat exaggerated; and
the recovery has been concentrated in the Greater Dublin Area, although there is some
evidence that the recovery is spreading. Despite these caveats, the economy is doing well,
and considerably better than anybody would have predicted just two years ago.
The key risk factors and challenges facing the Irish economy in 2015 and beyond can be
categorised as external and domestic.
External:
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The Euro Zone economic outlook and the impact of quantitative easing;
A move to the hard left in Greece following the January 25 th election, with possible
consequences for its continued membership of EMU;
The Russian crisis, and the difficulties in Brazil and China;
The UK general election in May and the possibility of a referendum on EU
membership in 2017.
Domestic:
 The high level of sovereign debt;
 The high level of SME debt;
 Personal debt and particularly mortgage arrears;
 The ongoing pressure on personal disposable and discretionary incomes; and
 Political developments – an election must be held in April 2016 at the latest. There is
no guarantee that a stable government will be possible due to the growing
proliferation of Independents. Political stability has been a key factor in selling
Ireland to investors in recent years. This is a source of concern because political
instability can often result in poor policy making, with long-term negative
consequences.
The Irish economy has come through a very difficult period since 2008. Between 2007 and
2010, real GDP declined by just over 9% and despite a subsequent stabilisation and
modest recovery in activity, GDP in 2014 was still 2.1 % lower than 2007 levels.
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COMPETITIVENESS
There is considerable disagreement about how competitiveness should be measured and
even about the importance of competitiveness as a concept. However, for a small open
economy, being competitive is very important.
For a very small and very open economy, it is clear that competitiveness is especially
important, given the economy’s dependence on international trade and foreign direct
investment. Among Euro Zone countries, Ireland is particularly vulnerable to adverse
exchange rate movements as it has the largest share of trade outside the Euro Zone. With
devaluation not an option, heavy emphasis has to be placed on price and wage adjustments
to generate improvements in competitiveness.
The Central Bank in conjunction with the ECB has developed a set of price and cost
harmonised competitiveness indicators (HCIs). The HCIs are conceptually equivalent to
effective exchange rates; they track the movements in nominal exchange rates and may also
take into account movements in a chosen national deflator such as the Consumer Price
Index or the Producer Price Index. In effect these measures seek to monitor and measure
how an economy’s competiveness is developing in relation to those countries with which it
trades.
Between October 2000 and April 2008, there was a massive loss of competitiveness for the
Irish economy:
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The Nominal HCI appreciated by 31.2%;
The HCI adjusted for Consumer Prices appreciated by 38.8%; and
The HCI adjusted for producer prices appreciated by 26.6%.
Since April 2008 there has been some improvement in competitiveness, but it is still well
above the levels of the early 2000s. Between April 2008 and December 2012:
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The Nominal HCI has improved by 7.6%;
The HCI adjusted for Consumer Prices has improved by 18.2%; and
The HCI adjusted for producer prices has improved appreciated by 8.5%.
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Figure 3: Harmonised Competitiveness Indicators
130.00
120.00
110.00
100.00
90.00
80.00
Jan-95
Oct-95
Jul-96
Apr-97
Jan-98
Oct-98
Jul-99
Apr-00
Jan-01
Oct-01
Jul-02
Apr-03
Jan-04
Oct-04
Jul-05
Apr-06
Jan-07
Oct-07
Jul-08
Apr-09
Jan-10
Oct-10
Jul-11
Apr-12
Jan-13
Oct-13
Jul-14
70.00
Nominal HCI (Monthly average)
Real HCI (Deflated by consumer prices)
Real HCI (Deflated by producer prices)
Source: Central Bank of Ireland
The National Competitiveness Council (NCC) defines competitiveness as all of those factors
affecting the ability of Irish firms to sell goods and services in international markets. It
believes that competitiveness is not an end in itself, but rather a means of achieving
sustainable improvements in living standards and quality of life.
Ireland is not doing particularly well in terms of the costs of doing business. According to the
NCC1:
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1
Gross earnings in Ireland are the 8th highest gross and net wage level in the Euro
Area-17, while net wages are the 6th highest;
Labour costs in Ireland are on the increase, with growth of 2.4% in 2012 and 0.5% in
2013. The Central Bank expects compensation per employee to rise by 2.2% in 2015
and 2015, following growth of around 1% in 2014. Unit Labour Costs increased by
around 1.4% in 2013 and 2014;
The cumulative impact of increases in income taxes, changes to bands, introduction
of the USC have weakened competitiveness since the onset of recession;
Diesel prices are 7% more expensive in Ireland than in the Euro Area;
Electricity costs in Ireland are the 5th and 6th most expensive in the Euro Area for
SMEs and large users respectively;
Landfill gate fees are the 5th most expensive out of 10 countries considered, while
non-hazardous treatment fees are 3rd highest out of 9 countries considered;
‘Costs of Doing Business in Ireland 2014’, National Competitiveness Council, March 2014.
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Ireland is the 5th most expensive location out of 16 countries for industrial water
costs;
Telecom costs are relatively competitive, but there are concerns about the quality of
services available;
New business interest rates for non-financial corporations are higher in Ireland than
in the Euro Area; rates are 31% higher for loans up to €1 million and are 27% higher
for loans above €1 million. In November 2013, interest rates for revolving loans and
overdrafts were 11.5% above the Euro Area average; and
Prices for a range of business services such as transport, postal, courier and
computer consultancy services have been increasing in Ireland over the past 3 years.
In summary, Ireland remains a high cost location for a range of key business inputs, but
the cost of labour is the most significant driver of business costs for most firms.
The NCC believes that although economic recovery is taking hold in Ireland, it remains
fragile and the international context is still very uncertain. Consequently, it believes that it is
very important that Ireland continues to build on the progress that has been made and that
maintaining and improving competitiveness will remain vital to the future success of the
country. As a small open economy, there is a requirement to constantly look to the future,
to new markets, new products and new opportunities, and competitiveness will be
essential to those objectives. It stresses the need to remain vigilant in relation to the cost
base.
The NCC makes a number of very sensible recommendations in regard to labour cost
competitiveness:2
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2
As economic conditions improve, income taxes (e.g.: credits, thresholds, rates etc.)
should be reviewed to support improvements in after tax incomes, while protecting
labour cost competitiveness;
Consideration should be given to replacing the step-effects of employee and
employer PRSI with a tapering effect that would both remove the existing
disincentive effects of applying higher tax rates to all earnings and provide an
incentive to work at all earnings levels;
The rollout of the Housing Assistance Payment is an essential element in removing
barriers to employment and reducing replacement rates. It believes this payment
should be monitored to ensure that the payment successfully reduces barriers to
employment, whilst protecting living standards; and
Reform the social welfare system so that replacement rates decline in line with the
length of time a person is out of work; and
‘Ireland’s Competitiveness Challenge 2014’, National Competitiveness Council, December 2014.
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
Review social welfare supports to ensure that part-time workers have a significant
financial incentive to avail of full time employment, and that the receipt of
secondary benefits does not impede employment take-up.
IMPACT OF NATIONAL MINIMUM
WAGE
The national Minimum Wage in Ireland was introduced under the National Minimum Wage
Act 2000. It currently stands at €8.65 per hour.
PublicPolicy.ie carried out research comparing how the Minimum Wage has adjusted
compared to inflation. Figure 4 outlines how inflation and the Minimum Wage have changed
since 2000. It shows that the Minimum Wage has increased at a faster pace than the
average price level. A person earning the Minimum Wage was comparatively better off in
2012 than when it was introduced in 2000. The divergence is most dramatic from 2004
onwards. If the ratio of the Minimum Wage to the Price Level were the same in 2012 as in
2000, the Minimum Wage would be approximately €7.42 per hour.
Figure 4: Inflation and the Minimum Wage
Source: PublicPolicy.ie
In January 2015, 22 of the 28 EU Countries had a minimum wage. Denmark, Austria, Cyprus,
Italy, Finland and Sweden do not have a minimum wage. In January 2015, Ireland had the
fifth highest minimum wage of the EU-28. Figure 5 shows the monthly minimum wage,
which in Ireland translates in €8.65 per hour, compared to €8.50 in Germany.
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Figure 5: EU-27 Comparison (Selected Countries)
2500
2000
€
1500
1000
500
0
Source: EuroStat
This does not take account of relative price levels and purchasing power of the Minimum
Wage. When account is taken of purchasing power, the value of Ireland’s minimum wage
falls by 15.3%, which would give Ireland the 6th highest in the EU-28 (Figure 6).
Figure 6: Minimum Wage Adjusted for Purchasing Power
1800
1600
1400
1200
€
1000
800
600
400
200
0
Source: EuroStat
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In January 2015, Ireland’s nominal monthly minimum wage was 6% higher than in the UK,
but when adjusted for purchasing power, this differential stood at 14%.
Figure 7: Average Earnings Growth All Industries
9
8
7
6
%
5
4
3
2
1
0
-1 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2009 2010 2011 2012
-2
Source: CSO
Figure 7 shows the growth in average earnings since 1998. Between 2000 and 2007, average
earnings increased by almost 52%. This shows that the introduction of the minimum wage
at the peak of the economic cycle in 2000, helped fuel very strong growth in earnings up to
2007 and this made a significant contribution to Ireland’s loss of international
competitiveness as demonstrated by the Harmonised Competitiveness Indicator.
Figure 8: Hourly Earnings Growth in Manufacturing
12
10
8
%
6
4
2
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
-2
Source: CSO
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Between 2000 and 2007, hourly earnings in manufacturing increased by 57% (Figure 8).
Figure 9: Indicators of Competitiveness – Compensation per Employee (€)
180.0
160.0
140.0
(2000=100)
120.0
IRELAND
100.0
UK
80.0
USA
60.0
GERMANY
40.0
20.0
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0.0
Source: AMECO/CSO
Figure 9 shows the trend in compensation per employee in selected countries.
Between 2000 and 2007, average compensation per employee in Ireland increased by
48.2%; by 19.9% in the UK; by 6.7% in Germany, and it declined by 13% in the USA.
Figure 10: Indicators of Competitiveness – National Unit Labour Costs (€)
160.0
140.0
(2000=100)
120.0
100.0
IRELAND
UK
80.0
USA
60.0
GERMANY
40.0
20.0
0.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: AMECO
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Figure 10 shows the trend in unit labour costs in selected countries. Between 2000 and
2007, unit labour costs increased by 33.2% in Ireland and by 3.8% in the UK. They declined
by 2.7% in Germany and by 23.3% in the USA.
The economic boom from 2000 onwards obviously fuelled strong growth in wages in
Ireland, but this was compounded by the introduction of the National Minimum Wage. All
available evidence suggests that excessive wage growth fuelled the Irish economic bubble
and helped undermine the competitiveness of the economy in a totally disastrous manner.
This ultimately contributed hugely to the collapse of the economy from 2008 onwards.
Now that the economy is in a fragile recovery, it is essential that control of wage costs
remains a key priority. A reduction in the personal tax burden would be the most
economically positive way to put money back into the pockets of workers, and for those on
low wage, targeted social welfare measures would be most appropriate.
THE RESTAURANT SECTOR
The SME sector is incredibly diverse. It ranges from single person operations to operations
with up to 500 employees; and from trout farming, to car sales, to engineering, to
restaurants & hotels, and a lot more besides. Despite the wide diversity within the sector
the issues are very similar at the moment. The SME sector accounts for around 54% of total
employment in the Irish economy, and 70% of total private sector employment.
The restaurant sector is categorised as part of the SME sector. The SME sector accounts for
around 54% of total employment in the Irish economy, and 70% of total private sector
employment.
In Q4 2014, employment in the Accommodation & Food Services sector stood at 137,500,
accounting for 7.1% of total employment in the economy. This represents an increase of
1,800 or 1.3% over the same quarter a year earlier.
Figure 11 shows the trend in employment in the sector dating back to 2008 on both a
seasonally adjusted and non-seasonally adjusted basis. Given the seasonal nature of the
sector, the seasonally adjusted figures are more informative.
Between the Q1 2007 and Q1 2011, employment in the sector declined by 23,500 or by just
over 17%. It is now in recovery mode and employment in the sector in Q4 2014 was 19,200
higher than two year earlier. Given the importance of employment creation in the economy,
it is essential that policy towards the sector remain as favourable to job creation and activity
within the sector as possible.
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Figure 11: Employment in the Accommodation & Food Services Sector
150
140
(000s)
130
120
110
100
90
(N/A)
Q314
Q413
Q113
Q212
Q311
Q410
Q110
Q209
Q308
Q407
Q107
Q206
Q305
Q404
Q104
Q203
Q302
Q401
Q101
Q200
Q399
Q498
Q198
80
(S/A)
Source: CSO
Figure 12 shows the trend in consumer prices within the sector since 2008. In March 2015,
the average price of Restaurant & Hotels was 4.5% higher than in January 2008; Restaurants
& Café prices increased by 6.8%; and Restaurants, Cafes, Fast Food & Take Away increased
by just 1.6%.
Figure 12: Consumer Price Trends
108.0
106.0
104.0
102.0
100.0
98.0
96.0
Restaurants & Hotels
Restaurants &Cafes
Jan-15
Oct-14
Jul-14
Apr-14
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Jan-12
Oct-11
Jul-11
Jan-11
Apr-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Jan-08
Apr-08
94.0
Restaurants, Cafes, Fast food & Take-away food
Source: CSO
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The ability to increase prices is still very limited in the sector and with many of the costs of
doing business under pressure, the sector continues to be characterised by tight margins
and challenging trading conditions.
The lack of demand in the economy over the past few years has obviously been the biggest
issue for the restaurant sector. While some recovery in domestic demand is being
experienced, those businesses that interface with the consumer are still operating in a
challenging environment. It is very clear that once car sales are excluded from consumer
spending, the underlying picture is still extremely challenging. Wages have been stagnant at
best for some time; the personal tax burden has been increased in dramatic fashion; the
price of many items of essential expenditure such as car insurance, education and health
insurance have increased sharply in recent years; the labour market is still challenging; and
many in the personal sector are more interested in paying doing debt than spending at the
moment. This creates a challenging environment for consumer facing businesses and the
ability to protect or grow margins through price increases, is very limited.
Given the still fragile nature of Ireland’s economic recovery and the still very difficult
environment for the restaurant sector, the notion of increasing the National Minimum
Wage, which would have a push through effect on wages up the line, does not make any
sense. It would increase the cost base for business and would undermine the cost
competitiveness of the economy. It would fly in the face of the aspiration to make Ireland
the ‘best small country in the world in which to do business’ and the aspiration to preserve
and improve the competitiveness of the economy.
The tax and welfare system should be used to put money into people’s pockets, rather than
facilitating and encouraging an economically damaging upwards spiral in wages. The notion
of pushing up wage costs at this juncture fails to recognise the business realities in what is
still a very challenging economic environment.
The restaurant sector is highly labour intensive and so wage costs account for a significant
part of total operating costs. It is estimated that in the Hotel & Restaurant Sector labour
costs account for 50% of total input costs and around 11% of workers in the sector are on
the minimum wage. So while an increase in the minimum wage would not add significantly
to the cost base directly, it would add to wage demands up the line and add significantly to
total input costs. For a sector that is starting to experience a gradual recovery in business
performance and which plays such an important role in national and regional employment,
adding to operating costs at this juncture would be premature and potentially damaging.
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