9 September 2014

An economic analysis of the Living Wage in Northern Ireland

Ian Mulheirn

Director of Consulting

Contents

2

1. Aims of the study

2. Economic and political context for the Living Wage debate

3. Who is paid less than the Living Wage in Northern Ireland?

4. Who would ultimately pay for an increase in the minimum wage?

5. Quantifying the economic impact of the Living Wage

6. Are the assumptions realistic?

Study objectives

3

This report aims to quantify the economic impact of introducing the Living Wage as a minimum wage across all employers in Northern Ireland by:

• Determining the incidence of a higher minimum wage across different sectors of the NI economy;

• Estimating the implications of a higher minimum wage on the public finances;

• Understanding the possible microeconomic channels through which Living Wage introduction might be felt; and

• Modelling the economic impact of a move to the Living Wage, in terms of employment and output, under a set of assumptions.

Economic and political context

4

…combined with substantial cuts to financial support for working families as part of the government’s deficit reduction plan, leading to falling living standards among lower-paid.

-1%

0%

1%

2%

3%

4%

5%

6%

2009 2010 2011 2012 2013

Consumer price index Retail Price Index Adult Rate of NMW

Source: Oxford Economics, ONS, www.gov.uk

Annual percentage change of prices, earnings and the NMW in the UK from 2009 – 2013

Growing concerns about stagnant wages…

Who is paid less than the Living Wage?

% earning below the Living Wage by age in 2012

Employees paid below the Living Wage tend to be young…

% earning below the Living Wage by skill level in 2012

…and relatively low-skilled.

Which sector’s employees would benefit from the Living Wage?

0 20 40 60 80

Wholesale and retail tradeAccommodation and food service

Health and social workManufacturing

Administrative and supportConstruction

Other servicesArts, entertainment and recreation

EducationProfessional, scientific and technical

Information and communicationTransportation and storage

Agriculture, forestry and fishingReal estate activities

Financial and insuranceActivities of households as employers

Source: Oxford Economics£ (Million)

Gross Wages generated by introducing the Living Wage in NI, by sector, 2012

If all low paid employees’ wages were raised to the level of the Living Wage, with no impact on labour demand, there would be an £221 million increase in gross wages paid to NI workers.

Where could the money come from?

How would the Living Wage

ultimately be paid for?

Reduction in employment

Reduction in other Labour

Costs

Increased prices

Lower profits

Higher workforce

productivity

Firms could accommodate the increased wage cost associated with the Living Wage through several channels – some better than others

Quantifying the economic impact of the Living Wage

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Living Wage Introduced

Gross Wages increase:

£209m–221m

Small Employment Reduction?

Indirect impact £8m

Consumption boost

£124m-£132m

Exchequer: £83m-88m

The introduction of the Living Wage could be expected to have a positive economic impact on the economy of NI. However, the magnitude of such an effect is likely to be modest

Tracing the economic impact

Total Impact

GVA:£79m-£84m

Employment:1,200-2,500

Induced impact £9m

Leakage out of NI

Direct impactup to £68m

The literature findings on the other payment channels

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Channel 1 – Reduction in employment? • UK studies have tended to no, or very small, overall job losses from the National

Minimum Wage.

Channel 2 – Reduction in other labour costs?• firms may employ same number of people for fewer hours each; • little evidence that firms cut non-wage benefits to pay higher minimums; • no real exploration of impact on wages of higher paid.

Channel 3 – Increase prices?• Small absolute price effects have been detected, but evidence unclear.

Channel 4 – Reduction in profits? • Some evidence that this occurs, but may be dependent on sector.

Channel 5 – Increased productivity?• OECD has concluded that higher minima do improve productivity, although the

mechanism is unclear.

Thank you