The proposed reduction in the National Minimum Wage

The government has proposed reducing the national minimum wage (NMW)by €1 per hour (see discussion pp35-36 of the National Plan). This has generated a lot of comment in the media and the blogosphere. Here is my reaction.

While economics is often castigated for what it doesn’t know, it is generally accepted that the demand for labour does slope down and the supply slopes up. This means that a minimum wage above the equilibrium will increase unemployment. There are circumstances in which this does not happen (labour market monopsony) but I think the presumption should be that these are the exception in the absence of evidence to the contrary. Unfortunately, as with so many other things, we have no real evidence for Ireland. The international evidence, of which there is a lot, is mixed but one has to question how relevant much of it is to the current Irish situation anyway.

For reasons I don’t entirely understand, discussion about the minimum wage evoke visceral and often incoherent responses- see the rants on the “Irish Economy” blog of late. Even amongst the more coherent, dogma seems to lie close to the surface: those who question the merit of a NMW or advocate its reduction are accused of some ideological bias. Note that only other people suffer from ideological bias, not oneself. Clearly Vincent Browne, the Labour Party and the trades union leadership are above having any ideology. I think the probability of there being a reasoned public debate on the subject is precisely 0. Those who argue against the present proposal (& similar policies) are often motivated by a genuine concern for the less well-off, something which is to be applauded. But, in my view, they do not seem to be able to grasp that a NMW can actually help condemn someone to unemployment.

So will the policy matter? It is hard to say: like most things “it depends”. It depends on how it is implemented. The newspapers today suggest that it will only apply to new hires. This is not mentioned in the plan. If this is the policy it is both stupid and cynical. One would not expect many new hires in the present market so why bother? It looks like a cosmetic nod to the outside world – who are funding us- with a broad wink to the domestic world “Ah, we’re not really reducing it, lads”. Nobody is fooled by this. Do we really want international observers to think that we are not serious about getting our economy going again? According to one report the leader of the Green Party is trying to distance the government (& presumably himself) from the policy by claiming that Commissioner Olli Rehn required it (shades of "An older boy made me do it, sir"). There is also the possibility, if the policy applies to new hires only, that firms react to it by letting workers go simply so they can hire others at the lower wage.

The interaction between the NMW and other policies (Martin Ryan touched on this in comments below) is central. One has to compare the rate with the alternative, one element of which is the level of unemployment benefit. It is important remember that replacement rates are complex because of various social welfare entitlements (including medical cards) that the unemployed may receive. So there are policy complementarities that need to be worked out. If replacement rates remain high – as they are for some in the population- then any positive employment effects will be attenuated. Another detail is what happens to the various sectoral arrangements where a lot of the low paid workers actually are.

My guess is, the government is right to do what they are doing (assuming they are serious about it), it might do some good, is very unlikely to do much harm but the devil is in the details.