Impact of minimum wage lessened by wage inflation in tight labour market

Ireland's new national minimum wage, introduced in April 2000, directly caused wage increases for far fewer employees than had been anticipated - according to a government-sponsored study published in autumn 2001. Wage inflation in tight labour market conditions may be the major reason.

A major study on the impact of Ireland's national minimum wage legislation, published in autumn 2001, has found that 5% of employees had a wage increase as a direct result of the new legislation - compared with an estimate made before the minimum wage was introduced that roughly 20% of employees would receive a direct pay increase. A national minimum wage of IEP 4.40 per hour was introduced in Ireland in April 2000 under the National Minimum Wage Act 2000. From 1 July 2001, the minimum wage was increased to IEP 4.70 per hour, and there will be a further increase to IEP 5.00 per hour on 1 October 2002 (IE0107170F).

The new research was commissioned by the government's Department of Enterprise, Trade and Employment and carried out by the Economic and Social Research Institute (ESRI) in conjunction with the economics department of the National University of Ireland at Maynooth (NUIM) . The study was carried out six to 12 months after the introduction of the new minimum wage, and involved 1,062 private sector firms.

A 1998/9 study before the introduction of the minimum wage found that 21% of employees earned under IEP 4.50 per hour. However, only 5% were still under the new minimum wage of IEP 4.40 by April 2000. Anecdotal evidence from outside the ESRI/NUIM survey suggests that this may be due to wage increases awarded by employers before April 2000 in anticipation of the introduction of the minimum wage - as well as to significant wage inflation due to shortages at the lower end of the labour market during the 1998-2000 period. The study found that as many as 81% of employers said that they would have increased wages for labour market reasons anyway.

The percentage of employees who had a wage increase as a direct result of the minimum wage varied from sector to sector, according to the new study. It was highest in the retail industry (11.6%), followed by hotels, restaurants and bars (8.9%) and textile manufacturing (7%). The figures for other sectors were: wholesale (5.1%); personnel and other services (3.8%); non-textile manufacturing (2.7%); banking, finance and business (2.4%); and building/contract (0.8%).

The issue of claims for pay increases from workers already earning above the minimum wage, to restore the pay differential between them and any co-workers who had received increases due to the minimum wage, had been a controversial one before the introduction of the legislation. The ESRI/NUIM study found that 12.6% of employers said that they had had to increase pay for some employees to maintain differentials. This was most common in retailing (22% of employers), with significant figures also found in manufacturing, hotels, restaurants and bars.