Ibec policy brief
Monday 28 September 2015
Ireland’s Living Wage
By Maeve McElwee, Head of Industrial Relations and HR
A voluntary living wage charter is being proposed for Ireland. What does
this mean?
A legally enforced minimum wage, designed to prevent workers from being exploited, has been in existence
since 2000. The simplicity of the national minimum wage is one of its strengths. Unfortunately, the same
cannot be said for the broader concept of a so-called ‘living wage’, an idea which has been borrowed from
some US states and, more recently, the UK.
The purpose of this briefing paper is to inform you of the proposals for a living wage, the definition of a living
wage and to encourage you to support Ibec in seeking to mitigate the risks for business arising from the
introduction of a voluntary living wage charter. We explain how the living wage has been calculated, examine
the source of the economic research and explain why we believe the concept of a living wage is not fit for
purpose. Finally, we consider some of the other strategies more appropriate to securing improved pay.
What is a ‘living wage’?
A living wage has been defined as an hourly wage rate that should provide employees with sufficient income
to achieve an agreed acceptable minimum standard of living for themselves and, where appropriate, their
dependents. The basic principle is that the living wage will increase as the cost of living increases. Living
wage advocates have focused on different demands. Some have called for Government to increase the
national minimum wage to the level of a ‘living wage’. Others aim to ‘encourage’ employers to pay a ‘living
wage’ by holding them to account, cajoling them or, where relevant, employing pressure through all forms of
procurement / purchasing in public and private sectors through supplier codes.
The number of assumptions that need to be made in order to translate a wage (an hourly rate of gross pay for
an individual worker) into a weekly rate of net (disposable) income for an individual or family, in order to arrive
at a ‘living wage’ figure, mean that the resulting amount will be unlikely to match any individual worker’s actual
circumstances. At each stage various assumptions must be made about: who someone lives with (or not); how
many hours they work; what their housing costs are; whether they have to pay childcare costs (and if so how
much); and how many earners are in the family.
Circumstances are also affected by geography, most notably by the higher costs associated with living in
Dublin. And, in theory, if taken to its logical conclusion, the living wage approach to low pay could mean
different pay rates in each region in Ireland.
Who are the Living Wage Technical Group? Has Government validated
their findings?
The Living Wage technical group are an advocate group made up of 2 representatives from NERI (Nevin
Economic Research Institute), 1 from Social Justice Ireland, 3 from Vincentian Partnership for Social Justice,
and one each from TASC, SIPTU and Unite the Union. All are trade union backed or of similar ideology.
There has been no business or government input into the formulation of this rate of €11.50 per hour.
28 September 2015
Living Wage 1
Ibec policy brief
What is the proposed rate for the Living Wage in Ireland?
The Living Wage Technical Group has proposed at rate of €11.50. However, the challenge of
setting this rate is clearly illustrated by the Expenditure & Income Tables 2014 produced by the
Living Wage Technical Group1. The group concluded that a focus on a single-adult household
was the most practical approach in calculating a ‘living wage’ of €11.43 per hour. However it
also provides family living incomes for six other household compositions across four regions
(Dublin, Cities, Towns, Rural). In effect, it suggests 28 versions of the ‘living wage’. These
range from €11.25 per hour for an adult living alone in a rural area to €25 per hour for an adult
with two children living in Dublin.
The ‘family wage’ is also based on a single (usually male) breadwinner model which is
increasingly removed from the reality of the labour market and does not deal adequately with
dependence within the family. So if the main earner has a wage that is seen as sufficient to
maintain their family, it would be acceptable either for the other adult to be out of the labour
market, without an independent income of their own, or for them to be paid ‘pin money’ if they
have a job. The reality is that hourly low-paid workers are more likely to be working part time,
rather than full time; women, rather than men; and young, rather than older. Their wage may
not be the main source of income coming into the family (e.g. young people living with their
parents).
What elements of remuneration are included in the calculation of
the living wage.
In the UK charter, only guaranteed non-deferred payments can be included in the Living Wage
rate. Non-guaranteed payments such as productivity or sales related bonuses cannot be
included. Equally, pension payments made by an employer cannot be included as they are
classified as a deferred payment and so does not help the employee with the cost of living at
the current time. As such a living wage does not consider the total remuneration package,
including may valuable employee benefits which contribute to a fair and decent work
environment.
The Living Wage has gained traction in the UK – Why not
introduce it here too?
There are many reasons why a living wage, even on a voluntary footing, is not appropriate for
our labour market:
Structure of the Irish labour market: Signatories to the UK’s Living Wage charter are
predominantly public service organisations, financial institutions and consultancies and few of
them have low paid staff. Clearly, it is reasonably easy for companies to adopt the living wage
if they have high margins and a low headcount; it will be more difficult for businesses with low
margins and high employment intensity.
Government policy fundamentally impacts on the calculation of a living wage: Living
wage advocates ignore the responsibilities of government in key policy areas. The reality is
that Government policies will have a profound impact on the ‘living wage’ that might be
required. Again, drawing on the Living Wage Technical Group tables for Dublin, expenditure on
areas related to government policy (health, education, transport, housing, energy and
childcare) amounted to 69% of total Minimum Essential Standard of Living (MESL) cost while
housing and childcare alone accounted for 58%. The ‘living wage’ campaign is an unhelpful
distraction to fundamental policy challenges around housing supply and childcare costs.
However, if income tax is reduced, and/or benefits and tax credits are increased the level of
the living wage required to attain a certain level of income will decrease. However, there is no
practical reality for employers to translate this into the employment contract.
1
http://www.livingwage.ie/images/Documents/2014/Living_Wage_2014__Expenditure__Income_Tables.pdf
28 September 2015
Living Wage 2
Ibec policy brief
Tax and Employment: Advocates argue that the state is the major gainer from the
introduction of a living wage. This somewhat simplistic commentary suggests that as the
income of low income households increases, they will pay more income taxes and social
insurance. They are likely to spend a larger proportion of their income and the government
gains through additional indirect tax revenues. This ignores the social welfare costs
associated with job losses or jobs not created by small firms and businesses with low
margins and high employment intensity. In a competitive market anything that artificially
raises the price of labour to a significant extent will curb demand for it, and the first to lose
their jobs will be the people that intervention is supposed to help – the least skilled.
Will the living wage alleviate poverty? In short, no, the introduction of a living wage will
not address the real poverty challenges. For example, Ireland has a high level of household
joblessness compared to other European countries, almost one quarter (23 per cent) of
households in Ireland were described as jobless (in 2010). The next highest countries were
the UK and Belgium at 13 per cent, with an EU-15 average of 11 per cent. A distinguishing
feature of Ireland’s jobless households is the likelihood that they contain children. While
fewer than 30 per cent of adults in jobless households live with children in other EU15
countries, more than half do in Ireland at 56 per cent. Ireland already has the second lowest
risk of in-work poverty in the EU15, with only Finland having a lower risk. A living wage will
do nothing to alleviate poverty and may potentially reduce employment opportunities.
What about ability to pay? Efficiency wage theory suggests that well-paying firms can
encourage staff to be more productive by improving morale or by making it costlier for them
to risk being made unemployed. Many of the firms that have been awarded the UK’s Living
Wage Employer Mark have significant operations in Ireland. They are aware of the potential
for enhanced reputation, lower rates of staff turnover, cost savings on recruitment and
induction training and reduced absenteeism that come with paying higher wages. However,
there are many alternative strategies to improve low pay levels (e.g. minimum wage) It is
self-evident that the ‘living-wage takes no account of business’s, particularly small firms,
ability to pay. Therefore it should remain voluntary and reporting on it isn’t appropriate. To
ensure competitiveness each enterprise must have the ability to set its own pay rates.
What are the concerns for business from a voluntary living
wage charter?
Voluntary? While the living wage is pitched as a voluntary initiative, the expectation
created by its existence is challenging for businesses of all sizes. The UK charter states
that to acquire accreditation as a living wage employer, the business must, over an agreed
timeframe, ensure that all its third party contractors also sign-up to pay the living wage.
This removes the voluntary aspect for very many contractors seeking work with larger
companies and potentially the public sector.
Knock-on pay claims: Where employers adopt the living wage, potentially giving
significant increases to employees on the first points of an existing pay scale, it is realistic to
expect that pay claims to restore relativities will be received from employees. Individuals
who hold positions of responsibility, seniority or expertise will naturally seek for these
aspects of their roles to be recognised in a salary re-alignment. Inability to achieve this
realignment has the potential to create disharmony in the workforce.
Underemployment: The payment of the hourly rate of €11.50 does not imply that the
individual in receipt of the rate will ultimately earn a living wage. The correlation between
an hourly rate and a living wage is dependent on the individual achieving sufficient hours of
employment at that rate to secure a weekly wage. Where employers (particularly in the
contracting space) are forced to adopt the living wage to win contact work, the potential
arises for a reduction in the hours of work being offered to employees.
28 September 2015
Living Wage 3
Ibec policy brief
Youth unemployment: With youth unemployment at its highest level for a generation, we must
also take great care not to price young people out of a job. Obliging employers to offer an
unrealistic wage for entry-level jobs is yet another barrier to them deciding take on a young
person
Is there an alternative to the Living Wage?
Job design: Good job design and upskilling provides dignity and meaning to work and leads
to improved pay: Ireland’s ability to compete globally will depend on it developing innovative
ideas and bringing them to market more quickly. This requires the availability of a skilled and
productive workforce. It means improving both specific and transferable skills. This approach is
more likely to deliver sustainable and well-paid employment.
Reform childcare costs: A medium- term strategy is needed to ensure affordable childcare in
the country. While government expenditure on childcare is relatively low by international
standards, we make up for this by giving cash transfers to parents in the form of Child Benefit.
Currently the state spends €1.9 billion on Child Benefit payments and €260 million on childcare
services giving a total budget of €2.16 billion. The Government should aim to rebalance this
budget away from direct payments in favour of childcare provision so that there is a 50:50 split
between the two by 2020.
In order to begin this rebalancing, the Government should firstly adopt a two tier child income
support as outlined in the Mangan report. While the Mangan report envisaged that the total
amount distributed under a revised Child Benefit scheme would remain the same by increasing
payments to low income families and paying less to high earners, we propose that the total
budget should fall, and this burden should fall on high income families. A universal payment
would still remain, which would be lower than the existing payments. A second payment would
then be made to families whose incomes fall below a certain threshold. Under this scheme low
income families would still receive the same amount as their existing payments, but those on
higher incomes would receive less and the funds thus released would be assigned to subsidise
childcare including after and before-school programmes. The overall sum released from the
current Child Benefit Scheme would be put towards providing assistance for childcare and the
overall package would be cost neutral.
The Early Childhood Care and Education (ECCE) scheme grants a free year of pre-school care
for children of a certain age and costs the state approximately €171 million. The Government
should aim to redistribute €200 million of child benefit expenditure in the 2016 budget using the
two tier system suggested above. Part of this released funding should then be used to extend
the ECCE scheme so that it covers two years of childcare costs. The remainder should be used
to subsidise after and before school childcare costs for children who do not fall into this age
group. The State should continue to redirect 10% of the child benefit budget to the funding of
childcare provision on an annual basis. By 2020 funds should be split evenly between child
benefit and childcare services.
Address the housing shortage: Housing is a critical part of a country’s physical infrastructure,
and continued shortages of affordable housing in Ireland threatens to undermine the
achievement of many other policy goals. These include attracting of overseas investment into
Ireland, the promotion of third-level education and maintaining Ireland’s international
competitiveness. Delay in the supply of new housing is a consequence of a lack of financing
into the property development sector, high regulatory costs and delays in the planning process.
Ibec has welcomed the provisions of the Urban Regeneration and Housing Bill (2015) and the
Planning Bill (2015) which are intended to encourage the delivery of high-quality and
sustainable housing developments through reduced regulatory costs and planning reform.
Budget 2016 must continue movement on these issues and demonstrate a whole-ofgovernment commitment to tackling the supply side problems in the housing sector.
28 September 2015
Living Wage 4