The Proposed Introduction of The Living Wage
Could Represent a 30.5% Increase On The Current National Minimum Wage (NMW) Over The Next 4 Years*
In 2021, The Low Pay Commission (LPC) was requested to examine the Programme for Government commitment to “progress to a living wage over the lifetime of the Government” and make recommendations on how best to achieve this commitment.
The LPC made several recommendations including:
Adopting a fixed threshold approach for the calculation of a living wage (LW) and setting the fixed threshold at 60% of the median wage in the economy.
Progressing to a living wage over a period of no more than five years.
After the 60% of the median wage target has been reached, (subject to an assessment of the impact of the progression to the 60%), the Commission should assess the economic practicality of gradually increasing the targeted threshold rate towards 66% of the median wage.
The decision to set the LW at 60% of the median wage is a major policy decision that is not based on any significant body of research as to its impact. In fact, there are significant assumptions being made regarding its impact at the 60% level. The Government Press Release accompanying the announcement states “Research carried out by the National University of Ireland, Maynooth, for the Low Pay Commission includes evidence that a statutory wage floor set at 60% of the median wage of all workers could be implemented without substantial effects on employment.” There is no significant body of research evidence to support this assertion. There is limited initial research from the UK but all the other evidence is largely based on the application of a national Minimum Wage at levels below 60% of median pay. The full range of impacts that setting a LW set at 60% may include, reduced employment, reductions in working hours, higher barriers to entry into the Labour market for younger workers and higher inflation/prices.
The ‘fixed threshold’ approach for the calculation of a living wage (LW) does not currently take account of any possible distorting effect of Multi-National Companies (MNCs). Furthermore, the introduction of the LW at the proposed fixed threshold and age will act as a real disincentive to employing people in entry level jobs. In the UK the LW applies to people aged 23 and over, with those under 23 continuing to benefit from minimum wage legislation.
The Department of Enterprise, Trade and Employment is proposing a 4-year timeline for phasing in the LW. By way of contrast, The Department of Social Protection, is proposing the phased introduction of Pension Auto Enrolment over a 10 Year period, with both employer and employee contributions starting at 1.5%, and increasing every three years by 1.5% until they eventually reach 6% by Year 10 (2034). This is to allow time for both employers and employees to adjust to the new system. The proposal for the LW contains a much more aggressive timeline with little regard to its impact on employers.
Under a 4 Year phase in (2023 to 2026) and assuming a 3% average increase in the nominal median wage, a living wage set at 60% of the median wage would equate to €13.70ph in 2026. This would represent a 30.5% increase over the current NMW of €10.50 per hour and would require an average annual increase in the minimum wage of €0.80 (or 6.85%). This level of pay increase would be very difficult for certain businesses to bear and disregards the impact it will have on employers, staffing levels, hours worked, service levels and necessary price increases.
Merits of Continuing with Some JLC’s?
There are no sectoral variations in the proposed LW. It is apparent from the NUI Research that certain sectors will be more affected by a LW than others. The most impacted sectors are likely to be:
Agriculture, Forestry, Fishing & Mining
Accommodation and Food
Arts & Entertainment
These sectors are likely to need support from Government as they transition towards the LW. This also raises questions about the merits of continuing with the JLC structure for certain sectors that are currently below the level of the LW including security and contract cleaning. Otherwise, there will be an inevitable pressure over time to start fixing pay levels in these JLC’s above the LW which was never the intention.
This proposal is coming at a time when many employers are dealing with multiple threats including the ongoing impact of Brexit, the war in Ukraine, a slowdown in the domestic economy, high inflation and the introduction of Statutory Sick Pay and Pension Auto Enrolment.
Some employers will need a longer timescale for implementation including support in the form of a wage subsidy during the transition. Any move to introduce a LW should be on a much more phased basis and with annual impact assessment by the LPC before moving to the next stage.
While its impact will be most felt in specific sectors that are largely trading in the domestic economy, it could also have knock on effects in employments where employees seek to maintain existing differentials and on the price of contracts in such areas as cleaning, catering & security.
Liam Doherty PhD | Senior Partner
‘Strategic Employment Relations’
T: +353 (0) 1 2936748
M: +353 (0) 87 2236476
Disclaimer: The information in this article is for practical guidance only and does not constitute legal or case specific advice. The answers to specific situations will vary depending on the circumstances of each case. This is not a substitute for specific professional advice relevant to individual circumstances facing your business.