We break with our usual format in today’s blog. We simply re-publish, un-edited, an article from stockbroker’s Davy’s Chief Economist, Conall Mac Coille published today, July 22nd 2015
Increase of 6% in Ireland’s minimum wage
Less than two years after exiting an IMF programme and following one of largest property crashes and economic depressions in history, a level of irrational exuberance appears to be taking hold in the Irish economy. Budget 2016 will implement a giveaway worth €1.2-1.5bn, or 0.6-0.8% of nominal GDP. The ‘Lansdowne Road Agreement’ will raise public sector wages from 2016, from €47,300 on average in 2014 – already 45% above the €32,400 level in the private sector. And yesterday, Ireland’s Low Pay Commission recommended that the minimum wage should be increased from €8.65 an hour to €9.15, a 5.8% increase.
Government ministers have already indicated that the Commission’s recommendations will be implemented, applying to all workers, of whom around 9% have earnings close to the minimum. The UK example, where the planned increase in the minimum wage from £6.50 to £7.20 applies only to over 25s, has not been followed. The report concedes that Ireland’s minimum wage is already high by international standards, with only France, Belgium, Luxembourg and the Netherlands higher among euro-zone economies.
The retail sector, employing 20% of employees earning the minimum wage, will be particularly exposed. Despite the recent strong recovery, the value of retail sales in May was still 22% off peak levels. The minimum wage will affect small and medium-sized enterprises (SMEs) which are only slowly joining in the recovery and still paying down boom era debts to repair strained finances. In the year to Q1, SMEs reduced their bank debt by an enormous 10.1%, and by 7.0% excluding property-related sectors.
Yesterday’s announcement should be seen in the context of political developments. As set out in the report we [Davy Stockbrokers] commissioned from political scientist, David Farrell, ‘Outlook for the Political Landscape 2015-2017’, the key threat to establishment political parties has been the rise of Sinn Fein, whose support base is disproportionately drawn from low-income, urban and younger voters. That is the same demographic that will tend to benefit from higher minimum wages.