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Minimum wage and carbon taxes

During the comments on my decision to join Fine Gael, the minimum wage was mentioned, and the fact that George Lee is not in favour of abolishing or lowering it. I agree that this is to his discredit; of course, I was for four years a member of the Progressive Democrats, the party that introduced the minimum wage. I find it to be fundamentally a bad idea as a policy, and I discussed it today with Barry Walsh, President of Young Fine Gael, while he was on Nassau St with Enda Kenny and Leo Varadkar, before I introduced myself as a new member. They were launching a policy to incentivize youth employment, and I asked if they had considered doing anything with the minimum wage. He answered that it would be wrong to reduce the wages of those at that level.

There are two points to that. The first is that with rising unemployment, many of those who are now without work would rather work for less than €8.65 than not to work at all. They would get more than they would through welfare payments, with the dignity of working. We have one of the highest minimum wages in Europe. This was sustainable during the boom years, where it was near enough the market price for low-skilled labour. But with profits going down across all sectors, the work of some employees will be worth less than €8.65, but both firm and employee would be better off if a wage of, say, €7.65 was legal. It is low-skilled workers who will most suffer from these measures, the very group that it is ostensibly trying to protect. While, it is not accurate to argue conclusively that the minimum wages will always, on balance, cause unemployment and reduce welfare, our current level is unsustainable. Given that it is politically sensitive to lower it, perhaps the next time it is lowered, it should also be pegged to a measure such as GDP or the average wage.

The second is that if the state, and we as a community, believe that there are certain minimum standards of income that should be met, it does not follow that it should be the employer who should provide this. Their role works best when they compete for workers and the market for their product. Why should the costs of welfare fall on the employer? We should rather step in and top up the wages through taxation. One of the simplest method for this sort of redistribution is Milton Friedman’s negative income tax, where workers earning below a certain amount have their wages topped up by a level proportionate to the tax credit which they would otherwise receive.

On the subject of provisions that could help employment in small businesses, after two years in government, it is a shame that the Greens have not made any progress in achieving the carbon tax to replace all or most of PRSI payments, as advocated by Greg Mankiw with his Pigou Club, and proposed in their 2007 manifesto. Were such a proposal implemented, it would have the environmental benefits generally associated with carbon taxes, as well as helping small firms, who pollute at relatively low levels and workers, who would find a small bit more in their payslips and find it marginally easier to find employment. If they want to find some way to make a lasting change during what time this government has left, I hope they do consider this.

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