Is the living wage an answer to increased costs of living?

Analysis: momentum is building for a real living wage to help Irish low paid workers deal with higher energy, transport and housing costs

By Jonathan Lavelle, University of Limerick; Tony Dundon, University of Limerick and Tony Dobbins, University of Birmingham

The cost of living in Ireland increased by 4.2% during the pandemic. Inflation is now running at 5.5%, its highest level since 2001, as we see a rise in energy costs, transport costs and in particular housing. The Minister for Finance Paschal Donohoe recently told the Dáil that people are facing cost of living increases that are rising much faster than previously.

Rising cost of living puts pressure on everyone, but particulary those defined as low paid workers. In response to these and other challenges, the Government has indicated that they are considering a number of initiatives to help support people. One of the most publicised initiatives is a one-off €100 credit towards energy costs.

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From RTÉ 1's Six One News, Government to address cost of living pressures 'in coming week or so'

Much debate is now turning to the concern that many people are simply not paid enough to live. Some families now talk of having to choose between heating or eating. Indeed, so much so, the Tanáiste Leo Varadkar suggested that employers should give their workers a pay rise to help with the soaring cost of living. This suggestion comes on the back of a commitment by the Irish Government to move from a minimum wage to a higher, 'living wage' ‘over the lifetime of the Government’. The Low Pay Commission is examining how Ireland can move towards a living wage.

Greater focus on a living wage is occurring in the context of the pandemic, and greater political and public awareness of the vital role of many frontline/essential workers in keeping society functioning (including retail and grocery delivery workers, people in caring roles). However, many people in such roles are paid below a living wage rate. But what exactly is a living wage? How does it differ from a minimum wage - and what are the potential benefits?

What is a living wage?

From RTÉ Radio 1's Today With Claire Byrne, ICTU's Head of Social Policy and Employment Affairs Laura Bambrick on the living wage

The basic premise of the living wage is to ensure that workers get paid a wage that affords them a decent standard of living. For example, the Living Wage in Ireland is defined by the Living Wage Technical Group as a wage which makes possible a minimum acceptable standard of living – that is, enables full time employed adults (without dependents) across Ireland to afford a socially acceptable standard of living. The Living Wage Technical Group set the Living Wage rate based on research identifying the Minimum Essential Standard of Living (MESL) in the country. This comprises a basket of basic essential goods (including food, housing, household bills, health, transport, education, personal care) and currently equates to €12.90 per hour.

This living wage rate in Ireland is currently voluntary, with no compulsion on employers to pay their workers this rate. Nonetheless, some leading employers in Ireland such as IKEA, Aldi, Lidl and SSE Airtricity have committed to paying their workers the living wage rate. It is not just big employers either: the Family Tree Créche in Limerick is also paying its workers the living wage rate.

Vibrant living wage campaigns have emerged in many countries including the United States, UK and Ireland, largely in response to concerns around the growing inequalities across society, such as gender pay gaps, massive housing costs, and huge remuneration packages for senior executives while average worker pay rates stagnate. Ireland ranks as the third highest in the EU for having a large section of its workforce who are defined as low paid: around 23% of people are categorised as living on low wages in Ireland. This has fuelled incidences of 'in-work' poverty, where households who have someone earning are still reliant on claiming welfare benefits to survive.

From RTÉ Radio 1's Morning Ireland, Assistant Professor of Social Policy at UCD Micheál Collins on why the living wage is rising 60c to €12.90 per hour.

Minimum wage vs living wage

There is an important difference between a government statutory 'minimum wage' rate and a real ‘living wage’. A statutory minimum wage is a legally binding minimum base line that workers must be paid. The calculation of a statutory minimum wage in Ireland is set by the Low Pay Commission, who recommend a minimum wage rate to the Irish Government. The current statutory minimum wage rate is €10.50, some €2.40 per hour lower than the living wage rate.

So why would anyone advocate a minimum wage rate that is some 18.6% below an amount that is deemed essential for a basic standard of living? In part, the answer is ideological, but also misguided. For instance, it can be argued economics is a sophisticated ‘guessing game’ – that is, trying to predict how something might play out in the real world. This is because economists do not have the luxury to conduct real life experiments with peoples’ wages so it is ‘assumed’ that too high a statutory minimum rate of wage will cause employment to fall.

However, there does exist evidence of a real-world experiment to test such a prediction. Research by Nobel Prize winner Prof. David Card and the late Prof. Alan Krueger demonstrates that there is no evidence to support claims that a rise in minimum wage rates causes job losses. Card and Krueger were able to map and compare what happened when two legal pay minima were introduced in a defined living and working metropolitan area.

From RTÉ Radio 1's Drivetime, Paul Redmond from the ERSI on what Ireland is getting right about the minimum wage

In New Jersey, the minimum wage rate was increased substantially, but it was not increased at all in neighbouring Philadelphia (part of Pennsylvania state). People lived and worked within and between New Jersey and east Philadelphia as one metropolitan area, making for as best a natural experiment as possible. The result was that both jobs and wages increased in New Jersey with its higher wage rate, but not in Philadelphia, with a lower minimum wage rate.

What are the benefits of a living wage?

Based on this and other recent research, the benefits of paying a living wage are widespread and may in fact be good for society as whole. Earning a living wage is clearly a financial benefit for individuals, for example, as it puts more money in their pocket and reduces their dependence on welfare benefits.

But there are a range of other non-financial benefits that may accrue from being paid a living wage. These include greater self-esteem, greater self-confidence, improved feelings of self-worth and identity, career development, promotion and improved health and well-being.

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From RTÉ Brainstorm, the low-paid workers who kept Ireland open during the pandemic

Paying a living wage may increase labour costs for employers, but these costs are offset by a range of other added benefits. For example, these benefits include greater staff retention, improved organisational commitment, motivation, morale, productivity, organisational trust, recruitment, lower levels of turnover, absenteeism and enhanced employer reputation.

Finally, and perhaps most important of all, is we all benefit from a more enlightened and happier society, with several wider gains as to how we all live and treat one another. A living wage can help reduce wage inequality, tackle one of the growing problems of ‘in-work’ poverty, gender pay gaps, and spiralling social welfare spends.

A living wage also has a multiplier effect resulting in greater spending in the local economy. In summary, there is a moral argument, supported by a strong business case, for paying a living wage.

The benefits of paying a living wage are widespread and may in fact be good for society as whole

The bigger picture

A progressive and generous statutory living wage could be a key instrument in improving the lives of workers, narrowing inequalities, as well as tackling labour shortages and recruitment problems in low paid sectors post-Covid. The Irish Government are committed to moving towards a living wage and there is also the potential introduction of an EU Directive on adequate minimum wages.

But important issues remain, including whether there should be distinct living wages for Dublin and the rest of the country, to reflect higher living costs in the capital. Moreover, a living wage is not a magic bullet, especially as a standalone policy measure. Wider public policies need to be considered holistically as part of a new ‘social contract’; including provision of sufficient living hours to sustain a socially acceptable standard of living (say, a minimum of 16 hours per week), and the vital importance of addressing long-standing structural problems (like lack of affordable housing and national childcare infrastructure) to lower living costs for the lower-paid, in particular.

Dr. Jonathan Lavelle is a Senior Lecturer at the Department of Work and Employment Studies at the Kemmy Business School at the University of Limerick. He is a former Irish Research Council awardee. Prof. Tony Dundon is Professor of HRM and Employment Relations at the Department of Work and Employment Studies at the Kemmy Business School at the University of Limerick. He is a former Irish Research Council awardee. Prof Tony Dobbins is Professor of Employment Relations and HR Management at the Birmingham Business School at University of Birmingham.

The views expressed here are those of the author and do not represent or reflect the views of RTÉ

What is a living wage?

Minimum wage vs living wage

What are the benefits of a living wage?

The bigger picture

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