Tag Archive for 'Labour'

A Bit of Perspective on the Minimum Wage

In a couple of days time, we’re going to find out the composition of our new government for the next few years, most likely in the form of a Fine Gael-Labour coalition. While a lot of media attention has been placed on the two parties’ policy disagreements over the past week, one of the few economic issues on which they agree is the reversal of the recent cut in the minimum wage to €7.65 an hour. The cut in the minimum wage was certainly an unpopular move, but with the cost of living having decreased so much in the past few years, has it really made minimum wage earners that much worse off, and is reversing it really necessary?

To investigate this, I’ve put together a simple cost of living index* for those living on minimum wage, based on my own experiences living on a similar income over the past few years. The following graph shows the real value of the minimum wage since it was brought in in April 2000, according to my cost of living index (click to see full size):


You can see that, prior to 2008, the trend in the minimum wage was quite regular; the real value of the minimum wage would gradually drop due to inflation, coupled with an increase in the nominal rate by the government every year or so, causing the overall value to slowly increase over the first 8 years of the minimum wage’s existence. Since late 2008, though, we’ve had a very different dynamic, as dropping prices (in particular the big drop in rents) have caused a big increase in the real value of the minimum wage, to the point where the €8.65 minimum wage was worth 11.3% more in January 2011 than when it was introduced in July 2007.

So, has the drop in the minimum wage (shown to the far right of the graph) made a big difference to minimum wage earners? Compared to the recent past, yes, as they’ve benefitted significantly from a large drop in the cost of living. Looking back over the past few years, though, a minimum wage of €7.65 is still very high in real terms. It’s actually worth more than €8.65 was as recently as November 2008, although it’s a little lower (by 1.5%) in real terms than when the €8.65 rate was introduced in July 2007.

The big question, though, is not so much the effect of the decrease in the minimum wage, but whether it was necessary. That is, was €8.65 an hour too high? I think we can all agree that there’s such a thing as a minimum wage that’s too high; if the minimum wage was set at a million euros an hour, no employer could afford to pay it and there’d be 100% unemployment. The question then, is how high a minimum wage can get before it starts to have negative effects. There’s no easy way to determine this, but the closest guide we can go by is by looking at the unemployment rate of the social groups most likely to work at or around minimum wage; if unemployment is high amongst these groups, it’s likely that the minimum wage is having a negative effect on employment. One group which is very likely to work at minimum wage is those under 25 years of age, so I put together the following graph of unemployment rates both of those under 25, and those over 25 for comparison (click for full size):


As you can see, there’s been a huge increase in unemployment for those under 25 over the past few years, and the unemployment rate for the group is now approaching 30%. Of course, there’s also been an increase in unemployment for those over 25, and a chunk of the male under 25s unemployment since 2008 will have been from the construction sector, which would have paid over minimum wage. Nonetheless, an unemployment rate of almost 30% for any group is still astonishingly high, and it’s very likely that the €8.65 minimum wage was having an impact on this, which would lend credence to the argument that the decrease will have a positive effect on employment, and should be left as is by the new government.

Another factor that has to be taken into account when talking about the impact of the minimum wage on employment is the similar effect of social welfare rates. Put simply, people aren’t likely to go out looking for work if they’re better off on unemployment benefits. In Ireland, this is particularly a problem when it comes to part-time work; as jobseeker’s allowance is reduced according to the number of days you work, someone working three 8-hour days at minimum wage is actually worse off than they would be if they weren’t working at all. Those working shorter shifts are in an even worse position. A smart, and relatively easy move, for the incoming government would be to link reductions in jobseekers allowance to the amount earned, rather than days worked, which would significantly increase the incentive for the unemployed to take up part-time work, and mitigate against any need for further cuts in welfare rates.

* The composition of the cost of living index is 30% rent, 20% food, 8% each for clothes, electricity and gas, and the remaining 26% being represented by the HICP (which, unlike the CPI, excludes mortgage interest). The data is from the CSO and Daft.ie, with early rental data compiled by the ever-helpful Ronan Lyons.

Ireland’s Economic Collapse And The Need For Ideological Politics

“The dangers arising from the potential bubble in the housing market are significant. […] it could turn an external shock in the Irish economy into a cause of major trauma.”

Sensible economic commentary hasn’t been as rare as most people think over the past decade or so. The above quote, to give an example, is from the Economic and Social Research Institute’s Medium Term Review published in October 1999. The ESRI, who were set up by the government as a semi-independent body to provide research and advice, were quite clear in their recommendations at the time; abolish mortgage-interest relief, slow the increase in public-sector wages, and run a large budget surplus. Most independent economists, mindful of the fact that our membership of the Euro required a change in fiscal policies, would have given pretty much the same prescription for long-term economic stability.

Of course, I don’t have to tell you that the government ignored this advice. Since the bubble burst, many well-informed commentators have shown in great detail how successive Fianna Fail led coalitions have led the country down such a disastrous economic path. What these commentators often fail to point out, though, is just how important a role the opposition parties have played in facilitating our national downfall.

Fine Gael and Labour are currently enjoying a surge in popularity, where the main cause of this surge has been, understandably enough, their not being Fianna Fail. Indeed, opposition TDs spend most of their time these days campaigning against Fianna Fail, rather than for their own party, with the clear underlying implication that they wouldn’t have made such a complete mess of things had they been in office themselves. Unfortunately for the opposition parties, who are happy to rely on unsubstantiated counterfactuals, the evidence for this implication doesn’t really hold up. Over the past decade both parties have repeatedly promoted economic policies almost indistinguishable from those pursued by the government.

Take mortgage-interest relief as a prime example. Since formally joining the Euro in 1999, Irish interest rates have been decided by the ECB, and any sensible economic commentator would have pointed out that these rates were too low for the rapidly growing Irish economy, and needed to be offset by appropriate fiscal policy to prevent, among other things, a long-term property bubble. The ESRI and others correctly pointed out that mortgage-interest relief, the practice of subsidizing mortgage repayments, was having exactly the opposite effect; by lowering the effective interest rate, it was inflating the bubble even further. The scheme, which at its peak cost the state €500 million a year, was possibly the most damaging of any of the government’s economic policies, and experts made repeated calls for its abolition.

One would think, with Fine Gael and Labour’s claims to economic responsibility, that they have spent the past 13 years opposing such reckless policies. In fact, far from calling for the abolition of mortgage-interest relief, the two parties actually made repeated calls for its expansion, as well as promoting a wide variety of other schemes that would have inflated the housing bubble even further. Of course, these policies were always easy to sell to the electorate; with property prices rising, they all claimed to make it easier for people to afford homes, even though their real effect was far less benign.

The same pattern manifested itself in other areas of economic policy; where experts advised moderation in tax cuts and spending increases, and the running of a large budget surplus, the election manifestos of the main parties in both 2002 and 2007 consisted largely of competing claims as to which party would at the same time both tax the least and spend the most. Instead of voicing the flaws in government policy and acting as a counter to economic short-termism, the opposition parties were in fact bolstering it, by not giving the public any other option.

This almost complete homogeneity of opinion isn’t a modern phenomenon in Irish politics, either. Time and time again, studies have shown that Irish voters don’t distinguish between parties on the basis of policy. Not only is this true for Fianna Fail and Fine Gael, who have their roots on either side of an issue no longer relevant to Irish life, but it’s been shown that even the supposedly centre-left Labour Party and now-defunct centre-right Progressive Democrats attracted voters that were effectively indistinguishable from each other in terms of their stated ideological preferences.

There are likely many causes for this lack of ideological cleavage in Irish politics, ranging from the then ideological Labour Party’s decision not to contest the 1918 and 1921 elections, to our electoral system which favours local, rather than national politicians. Regardless of these, though, there can be only one solution that would provide us with a political system where parties offer genuine choice, and opposition parties effectively counter the complacency of governments, and in the end this solution relies on us, the voters.

As citizens we have failed ourselves, and our nation, for too long, voting for local fixers instead of national statesmen, supporting parties that peddle comfortable lies instead of uncomfortable truths. We must take it on ourselves to seek more from our elected representatives than simply not being the people who got us into this mess; they should be men and women of expertise and genuine conviction, and it is our duty as voters to demand this of them. If we fail to do so, we may still eject Fianna Fail from government and punish them for their failings, but we will have done nothing to tackle the political culture that allowed them to make such mistakes, and will inevitable allow future governments to do just the same.

UK Elections Under Alternative Vote: An Analysis

Both before and since the UK election in May, there has been a lot of talk of electoral reform and how it would affect British politics and the makeup of Parliament. As the Liberal Democrats have secured a referendum on bringing in Alternative Vote, I thought it would be a worthwhile exercise to develop a full simulation of how elections under Alternative Vote would work out in the UK, based on the results from May 6th.

While there are full methodological details below, the model I’ve developed is a full and thorough simulation of AV, modeling every round of transfers in all 650 constituencies, based on educated estimates of the transfer rates between different parties. I’ve run the model twice, under slightly different assumptions. In the first version of the model (which I’ll refer to as the simple model), I have assumed that the votes cast on the 6th of May would be the first preferences of voters in an AV election. This is a nice simple assumption to make, but it doesn’t take into account that people vote tactically in first-past-the-post (FPTP), and often won’t actually vote for their preferred candidate if they don’t think he has a chance of winning. AV would remove the incentive to do so, so you would expect that first preferences would be different than votes cast under FPTP.

In an attempt to account for this, I’ve also run a second version of the model (which I’ll call the adjusted model). One of the notable features of the recent election is how different the actual result was from what people were saying to pollsters right up to the day before the vote. It’s a reasonable hypothesis to say that the polls were reporting the actual preferences of voters, and that the shift on election day was the result of people voting tactically due to FPTP. As such, for the adjusted model, I’ve applied a proportionate adjustment to the first preference votes in each constituency, to make the national tallies add up to what the pre-election polls were predicting. It’s hoped that this adjusted model can better capture the true first preferences of voters than the simple one.

Anyway, on to the results. After running through the model for each set of assumptions, here are the predicted seat totals for the simple AV model (AV-Smp), the adjusted AV model (AV-Adj) and the actual election results for reference (FPTP):

Con 307 285 (-22) 269 (-38)
Lab 258 245 (-13) 207 (-51)
LD 57 94 (+37) 148 (+91)
DUP 8 8 8
SNP 6 6 6
SF 5 5 5
PC 3 2 (-1) 2 (-1)
SDLP 3 3 3
Green 1 0 (-1) 0 (-1)
Alliance 1 1 1
Hermon 1 1 1

What’s immediately obvious is that, as would be expected, the Lib Dems gain the most benefit from the new system, as they’re the party most disadvantaged by FPTP. What might be surprising, though, is quite how much they benefit from it when you look at the adjusted model. It’s often pointed out that AV is not a truly proportional electoral system, which is quite true. However, my model suggests that it would be far more proportional than the current system, with the Lib Dems winning 23% of the seats on 27% of the vote, rather than the current 9% of the seats on 24% of the vote.

The model also suggests that coalition government could well become the norm under AV, as under both simulations a government would need any two of the big three parties to form a majority. Nonetheless, this simulation is being applied to an outlier election in the first place, and it’s still entirely possible for parties to gain an overall majority under alternative vote.

It’s worth pointing out that this isn’t developed as a predictive model of elections under AV; it’s a simulation of what might have been on May 6th, not what will happen in future elections. I might amend it in future to analyze likely results in the next election (if it’s held under AV), but the output will be unlikely to closely reflect what you see above, due to changes in political dynamics between elections. The Lib Dems, for example, are likely to lose out on transfers from Labour and independents after going into government with the Tories, but will be more transfer-friendly to Tory voters.

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Some Hung Parliament Hypotheses

Hypothesis 1: Any meaningful electoral reform in the UK would effectively prevent the Tories from ever having an overall majority again. Because of this, the Tories, whatever overtures they may be giving Clegg at the moment, can never credibly commit to real electoral reform.

The Tories have been a minority party in UK politics for three-quarters of a century. That may seem odd, given that they’ve come out with an overall majority of MPs in nine elections since, but you have to go all the way back to Stanley Baldwin in 1931 to find the last leader of the Conservatives to lead the party to get over 50% of the votes in a general election*. Even in Margaret Thatcher’s 1983 landslide, the Tories only managed 44% of the vote, but won a large majority of seats as the opposition vote was split between Labour and the SDP/Liberal Alliance. Winston Churchill, now considered one of the greatest Prime Ministers of all time, never even actually won an election on the popular vote. During his three elections as Tory leader, he managed to win a majority of MPs in just one, and even then with a slightly lower percentage of the national vote than Labour.

The Conservatives know all this, and David Cameron, a former student of politics, knows it as well as an of them. The history of the Conservative party since universal suffrage has been of a declining popular vote, mitigated only by the gradual split of the center-left between Labour and the Liberals. With the UK’s first-past-the-post electoral system, this had been good enough to secure frequent parliamentary majorities for the Tories, but under any even remotely proportional system their hopes for an overall majority would almost completely disappear. Their choices would either be eternal opposition, or a shift to the left for occasional coalition governments. Neither are particularly appealing to die-hard Tories.

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