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News : Irish Economy Last Updated: Jul 23, 2015 - 7:14 AM

Low pay in Ireland; Lowest social security & corporate taxes in Europe
By Michael Hennigan, Finfacts founder and editor
Jul 22, 2015 - 9:01 AM

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Source: Nevin Economic Research Institute

The Low Pay Commission in a report published Tuesday has recommended an increase in the Irish National Minimum Wage which is only one issue in the level of low pay and poor pension coverage in Ireland. The chief of Ibec, the principal business lobby, said "it is inexplicable how such a rise could be proposed" — Irish business firms have the lowest social security and corporate taxes in Europe and several public supports that are provided free.

The commission has recommended a hike of 50 cent per hour, raising the level by 5.8% to €9.15 per hour. The report notes that in the most recent budget the UK Chancellor announced a new higher minimum wage of £7.20 (€10.12) for those over 25 years of age, to take effect from April 2016.

Three members of the 9-member commission disagreed with the recommended figure with Patricia King, president of the Irish Congress of Trade Unions (Ictu) suggesting a level of €10.

In January 2015, 22 out of the 28 EU Member States (Denmark, Italy, Cyprus, Austria, Finland and Sweden were the exceptions) had a national minimum wage (see map and data here). As of 1 January 2015, monthly minimum wages varied widely, from €184 in Bulgaria to €1,923 in Luxembourg. There was also a national minimum wage in the following candidate countries of the EU: Albania, Montenegro, the former Yugoslav Republic of Macedonia, Serbia and Turkey.

In the Euro Area (EA19) Luxembourg, France, Belgium and the Netherlands have higher national minimum wages than Ireland's current monthly level of €1,462 based on a 39-hour week. The minimum wage in Germany is €8.51, 14 cent less than the Irish rate, while rates in Spain and Portugal are lower than Ireland.

Among the EU member states with a minimum wage, the proportion of employees being paid less than 105% of the national minimum wage was above 9.0% in eight of the EU member states, namely: Slovenia (19.2%), Lithuania (13.7%), Latvia (11.8%), Luxembourg (10.2%), Poland (9.9%), France, Ireland and Croatia (all 9.2%). Spain (0.2%) registered the lowest proportion of employees earning less than 105% of the national minimum wage, while the proportion of employees in the remaining 11 EU member states earning less than this amount stood between 2.0% and 4.7%.

Danny McCoy, Ibec CEO, commented: ""Many businesses still cannot afford pay increases and turnover in sectors such as retail remains up to 20% below the pre-crisis peak. 60% of domestic services companies, for example, are not able to afford pay increases this year. The knock-on impact of a rise on wage expectations across the economy is a real concern. In the boom years Irish labour costs drifted way out of line with competitor economies. We ultimately paid a very high price in terms of job losses and business closures. We risk making the same short-sighted mistakes all over again."

The lowest earners who typically have NO occupational pension are a threat to economic stability!

Maeve McElwee, a colleague of McCoy's said: “Policy decisions must be based on hard evidence, not aspirations. It is deeply frustrating to see important policy decisions being made in the absence of the necessary economic evidence."

Danny McCoy's data on "60% of domestic services companies" who cannot afford a pay rise is not based on "economic evidence" but an unscientific membership survey while the Low Pay Commission's data on unit labour costs is heavily distorted by significant corporate tax avoidance.

Consumer prices in June 2015 were up 6.6% compared with the peak boom year of 2006 but down slightly from the 7.9% rise in June 2008 — a period when the price of crude oil was heading for a record high of over $140 per barrel while global food prices were also surging.

McCoy says the Government in next October's Budget should reduce "employer PRSI to off-set the negative labour cost implications." The social security tax is already less than half the European Union average and the lowest rate in the EU28 with the exception of Denmark which covers its social budget from general taxation.

Last March Finfacts reported on Organisation for Economic Cooperation and Development (OECD) data that showed the US and Ireland with the highest percentage of low pay jobs in the developed world. "Low-paying" jobs were ones that earn less than two-thirds of a country's median income (mid point of population or sample where half are above and half below) and the Irish ratio was 22%. See:

Low pay and high pay in Ireland

The Low Pay Commission cites a forthcoming paper by Dr Micheál Collins of the Nevin Economic Research Institute (Neri):

  • two-thirds of employees on minimum wage are female (this despite women being just over half of the workforce);
  • 39% of those on minimum wage are under 30 years of age, and 70% are under 40 years of age;
  • the two sectors where minimum wage is most common are accommodation and food (22.3%) and wholesale and retail trade (20.3%);
  • despite having just 7.5% of employees the accommodation and food sector has over one-fifth of those on minimum wage;
  • 38.7% of all those on the minimum wage have post-leaving certificate qualifications.

Neri has calculated that using a Living Wage of €11.45 per hour in mid-2014 together with data from the CSO and Eurostat, 25.6% of employees or almost 345,000 people were below the threshold.

The Irish standard of living per inhabitant in 2014 was both below the Euro Area average and below the Italian level but similar to per capita living standards in Spain and Cyprus while price levels in Ireland were the fifth highest among the EU28 countries.

Irish standard of living in 2014 below Euro Area average, Italian level; Prices 5th highest in EU28

Poor pension coverage

Besides the low corporate tax rate of 12.5%, Irish-based employers have the lowest standard social security rate on earnings in the European Union with the top Pay Related Social Insurance (PRSI) rate at 10.75% compared with a European Union average of 23.78%. The rate is at 12.8% in the UK and 7.65% in the US — 2015 global data from KPMG.

The OECD has 34 member countries — 25 are developed countries and the 9 others are emerging economies including Turkey and Chile.

Ireland and New Zealand are the only OECD countries which do not have a mandatory earnings-related pillar to complement the State pension at basic level; as a result, Ireland, like New Zealand, faces the challenge of filling the retirement savings gap to reach adequate levels of pension replacement rates to ward off pensioner poverty according to the think-tank.

More than half the private sector workforce in Ireland has no occupational pension coverage and the typical employee of an indigenous SME (small & medium size enterprises) firm does not have coverage and is not a member of a trade union.

It's striking how little attention this grim reality has got through boom and bust — but there is a simple explanation.

The folks with a firm grip on the public megaphone whether ministers, other politicians, senior civil servants, academics and media editors, have no worries about their own retirement and the issue is simply off their radar.

During the recession profitable multinationals could close guaranteed defined benefit schemes on the excuse of bad local business conditions and the Pensions Board (all again with either big pension pots or State guarantees) could only sit idly by.

PricewaterhouseCoopers (PwC) in 2012 produced a report for the Government on pension fund charges and it reported that about 17.4% were typically taken in charges.

The OECD said in a report on Irish pensions in 2014:

  • Ireland and New Zealand are the only OECD countries that do not have a mandatory earning-related pillar to complement the State pension at basic level, thus they face the challenge of filling the retirement savings gap;
  • Private pension coverage, both in occupational and personal pensions, is uneven and needs to be increased urgently;
  • Pension charges by the Irish pension industry on large occupational defined contribution (DC) plans are not too high compared to other countries, however they are expensive for small occupational schemes and personal pension schemes;
  • The existing tax deferral structure in Ireland provides greater incentives for those with high incomes to save for retirement;
  • The Irish legislation regarding the protection of defined-benefit (DB) plan members is weak;
  • There is unequal treatment of public and private sector workers due to the prevalence of DB plans in the public sector and DC plans in the private sector;
  • The State pension system lacks transparency, both with respect to the calculation of benefit entitlements and to the interplay of the contributory and non-contributory pensions;
  • The link between contributions and benefits in the Irish State pension scheme is very weak.

The issue of low pay should not be separated from pension coverage and a reliance on a State pension that is less than a third of average national annual earnings about €36,000.

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