12% rise in minimum wage needs to be accompanied by supports for struggling firms

We are on the eve of a significant change for both workers and employers. Up to this point, the decision by the Low Pay Commission to recommend an increase to the national minimum wage of 12 per cent, or €1.40, to €12.70 in January 2024 has received relatively muted attention. This is likely to change as we get ever closer to its implementation and the reality of increasing costs becomes apparent for businesses throughout the country.

These recommendations are part of the Government’s broader plans to replace the national minimum wage with a new, higher living wage by 2026. The living wage will be set at 60 per cent of hourly median wages in line with the Low Pay Commission’s recommendations.

This is undeniably a welcome development for many low-income earners in our society who play a crucial role in various sectors of our economy, such as retail, hospitality and manufacturing. While Ibec fully supports the rationale behind this decision, which considers the increasing cost of living and inflation, finding the delicate balance between fair wages for employees and sustainable business operations is of utmost importance.

This is against a backdrop that rising wages will impact inflation rates to unsustainable levels, something the Minister for Finance Michael McGrath must be concerned about as we get closer to the budget.

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As we approach the January implementation of the living wage rise, there is a lack of urgency in mitigating the potential unintended consequences of what will be an enormous increase in operating costs for many businesses, especially those on thin profit margins.

The Low Pay Commission itself recognised the need for a balanced approach in its 2022 report. It suggested “the introduction of an economy-wide enterprise support scheme to assist eligible businesses in transitioning to a living wage”.

Such a scheme, based on the proportion of low-wage workers in a firm’s wage bill, could provide a temporary subsidy to qualifying employers, it added.

For many Ibec members, these cumulative policy measures could potentially increase their labour costs by up to 25 per cent over the next three years

This support is vital and would be a lifeline for many businesses across the country. Unless this issue is addressed in the Budget, many businesses will struggle to sustain current employment levels. For some, their viability will be threatened.

Pro-enterprise policies

A long-standing cornerstone of the Government’s agenda has been its pro-enterprise policies. As we approach the implementation of the living wage, among other significant changes, these policies are about to face a rigorous test. The increase in the living wage coincides with several concurrent and substantial labour market changes. New and impending legislation concerning statutory sick pay, auto-enrolment for pensions, and enhanced protective leave entitlements all come with associated costs.

For many Ibec members, these cumulative measures could potentially increase their labour costs by up to 25 per cent over the next three years, in addition to the regular annual wage increases driven by productivity and the economic landscape.

The impact of these policies is magnified when we consider the broader economic context, including the recent changes to the 9 per cent VAT rate and rising energy costs. The accommodation and food sector, for example, is still struggling, with activity down 11 per cent in the first half of this year compared to 2019.

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Furthermore, a staggering 63,000 SMEs continue to grapple with more than €2 billion worth of debt warehoused with Revenue, with €1 billion of this debt concentrated in sectors that are hit hardest by the living wage and rising energy costs.

It’s not surprising that some businesses have been forced to reduce their operations to just three days a week to stay afloat.

While we wholeheartedly support the rights of workers to earn a wage that aligns with the current economic landscape, it is imperative that we protect firms and jobs operating in more vulnerable sectors

Adding to these concerns are other measures in the pipeline that could directly burden employers, such as the proposed pay-related jobseeker’s benefit scheme and further additional PRSI costs to fund future state pensions.

Ibec’s urgent ask in Budget 2024 is to ensure meaningful supports are in place to help firms adjust to these policy-driven labour cost increases. A comprehensive support programme for companies grappling with the introduction of the living wage and other employment costs must be a top priority. Measures should include the introduction of a temporary credit against employers’ PRSI bills for lower-earning workers, relative to the increases in weekly labour costs expected in 2024, 2025, and 2026.

While we wholeheartedly support the rights of workers to earn a wage that aligns with the current economic landscape, it is imperative that we protect firms and jobs operating in more vulnerable sectors. After all, the businesses most susceptible to the impact of rising costs are often the primary employers of many lower-income workers whom the living wage aims to assist.

Danny McCoy is chief executive of Ibec