Owners, and their representatives, have been highlighting the challenges to businesses.
- A poll of 250 SMEs reported that more than two-thirds of SMEs believe there is a “possibility” they will have to shut next year, while nearly half said it was at least a “moderate risk”.
- ISME warns that the minimum wage increases next year and the plan to move to 60 percent of the median wage by 2026 will have a ‘serious economic and social cost’.
- A recruitment agency has warned that implementing the Sick Pay Act (which provides all employees of three pay-related sick days next year) will lead to an acceleration of the number of companies falling into insolvency.
Sounds grim. But we must distinguish between claims made by owners and the actual impacts on businesses. It may well be that business can ‘afford’ wage increases and social benefits, but owners fear constrained profits; therefore, they use the rhetorical device of ‘business can’t afford it’ or ‘this will lead to job losses’.
But what owners and their lobby groups miss is the elephant in the room; namely that Irish consumer spending lags well behind our peer group – other high-income economies.
In the year before Covid, consumer spending (private consumption) in Ireland would have had to increase by 17 percent, or €17 billion, to reach the average of our peer group. That would mean a lot more spending in businesses throughout the economy. The main problem for Irish business is the relatively low level of consumer spending.
There are several explanations for this poor outcome; for instance, high savings – though this wasn’t the case in Ireland prior to Covid.
Low wages or purchasing power will also impact on the levels of spending.
Irish nominal wages are slightly below average. However, when we factor in living costs, Ireland falls to the bottom, well behind all other peer-group countries.
There are other factors. Chief among them, which is hard to rank, is high levels of personal expenditure on essential public services. If we are spending more on rents (and mortgage interest which is the second highest in the EU), we’re spending less on market goods and services. Ditto for childcare, health and education. If we are saving more for fear of unemployment, illness, family caring and retirement, then we are spending less. The weakness of our public services and social protection system is costing business a considerable amount of turnover.
So what is in the best interests of Irish business (as distinct from owners)?
First, higher wages and greater wage equality. Higher ages mean higher spending (all things being equal). And higher wages for low-income groups is better yet as these groups have a higher propensity to consume. On this behchmark, Ireland has unfortunately a lot to do. Our levels of wage inequality are quite high.
In our peer group Ireland has the highest level of wage inequality (the higher the number, the greater the ratio).
What is needed is a living wage and a strong legislative collective bargaining framework – both at the enterprise and sectoral level – to both drive up wages and to help equalise them.
Second, an expansion of the public sector so that it can provide essential services for free or at below-market rates. This could redirect resources into the business economy. For instance, the Government’s proposed reduction of childcare fees by 25 percent could result in savings up to €2,000 for full-time care. This savings is now available to spend in market sectors. Similarly, the Government’s elimination of schoolbook costs for households with primary school children is another example. What is needed is an identification of other services which can be provided for free or at below-market rates in the health, education, public transport sectors to list a few.
Third, a strong social security system can help free up resources for spending. If you believe you may become unemployed, you’ll likely reduce spending since unemployment benefit payments are so low. A pay-related unemployment benefit (e.g. at 70 percent of your wage) could help maintain a higher level of consumer spending. This holds for sick pay and family supports (e.g. maternity/paternity benefit, parental leave, etc.) and, in particular, old-age pensions. A strong safety net protects households and business turnover.
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What does business need? What should employers and their representatives be calling for?
- Higher and more equal wages – facilitated by universal wage-setting structures
- Expansion of free and affordable public services
- A strong social insurance system with pay-related benefits that can help maintain consumer spending
I await the sight of business owners marching behind an IBEC or ISME banner at a cost-of-living march chanting these demands. They would be welcomed.