LAST WEEK THE Living Wage Technical Group published an update of the living wage in Ireland. The living wage calculates the wage needed to live a minimum acceptable standard of living.

The technical group, comprising various civil society organisations and academics, bases its findings on VPSJ research gauging ‘what members of the public believe is a minimum standard that no individual or household should live below’.

€11.90 per hour

The group calculated the living wage for 2018 to be €11.90 per hour, a 20c increase on the previous year. At €2.35 above the current minimum wage of €9.55, it represents a wage increase of almost a quarter for those, mostly women, at the bottom rung of the pay ladder.

This, no doubt, is likely to be vociferously opposed by employers in the lower-pay sectors, namely hospitality, retail, and others.

So how feasible is such an increase? First of all, few advocate that the minimum wage should suddenly jump by 25%, but rather increases would be phased in over a number of years. Margins in the Irish wholesale and retail sector, which numerically account for the highest number of minimum wage employees, are high by European standards.

This suggests that employers can easily absorb wage increases without adverse employment effects.

Labour costs

The hospitality sector is more challenging. Despite the fact that labour costs in the sector are well below EU-15 standards, the share of labour in value-added is actually high. This means that once businesses pay their other, non-labour costs, workers get a relatively large share of the remaining economic pie.

There are, however, a number of ways through which higher labour costs can be absorbed. For one, as an economy recovers and expands, sales increase, and hence so do profits.

After a post-crisis tumble, profitability in the hospitality sector is well above 2007 levels. Higher wages may also increase productivity through greater effort, reduced employee turnover and absenteeism, among other ways.

Forthcoming research by TASC on income inequality, moreover, indicates that the distribution of income in the hospitality sector is significantly more skewed in Ireland than it is in other European countries. This suggests some, though arguably limited, scope for redistribution between relatively high and low income workers.

Collective bargaining

Some might argue that the heavy hand of the State imposing pay increases without due consideration for local conditions is likely to do more harm than good. Ireland, however, is an outlier in terms of its high levels of low pay, so other countries seem to manage fine with decent wages.

It is also worth noting that access to collective bargaining allows employers and workers to negotiate pay and conditions together, including inability to pay clauses when necessary.

Higher wages are likely to translate into somewhat higher prices. Importantly, though, the technical group notes that increases in housing costs are almost wholly responsible for the rise in the living wage. As well as putting the pinch on would be homeowners, soaring house prices result in business owners indirectly subsidising landlords as rent increases translate into rising pay.

The difference in this case is that much of the pay increase is absorbed by rising accommodation costs, so that businesses can expect to see less of the usual satisfaction and loyalty gains that often accompany wage increases. We all end up running in quicksand.

A high cost economy

This points to a general phenomenon that, except for labour, Ireland is a high-cost economy. Public interventions through investment in housing and health, reform of professional services such as the legal, insurance and other sectors, are much needed to bring costs down and align Ireland with other European economies.

As well as giving businesses more space for pay increases, it simultaneously mitigates the very need for rising pay in squeezed sectors, as workers’ living standards are now higher.

In recovering Ireland, though, the principal obstacle to achieving the living wage appears to be political.

Robert Sweeney is an economist and policy analyst at TASC.