The case for flat rate pay increases…

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How is inequality growing if we’re winning pay increases? Maybe it’s to do with the type of pay increases we’re winning?

RENTS have gone through the roof. House prices are unaffordable for the vast majority of the working population. Insurance premiums are increasing year on year. Yet for low paid workers, pay increases are meagre and do not keep up with the real cost of living.

Over the last decade the number of adults living in poverty who have a job has grown at a steady pace.

In 2009, there were 91,407 workers living in poverty and by 2013 this had increased to 100,133.

By 2016, when the Government declared a “recovery” there were 104,011 workers living in poverty. The following year we saw an extra 5,000 added to the working poor at 109,000.

Overall we’ve seen an increase of 20% in the working poor between 2009–2017 — or 17,593 more workers living in poverty today than in 2009.

Many of those workers have vulnerable dependents which is why 230,000 children are now in poverty. Worse still, the number of lone parents in poverty doubled between 2012–2017. And the gap between the rich and poor is growing every single year and one reason for this, I would argue, is the use of percentile pay increases.

Some people point to the Gini coefficient as evidence that inequality is falling, but that measurement — instituted by such a trustworthy body as the World Bank — is drastically flawed.

For instance, a worker on €20,000 receiving a 2% pay increase will receive €400 per year. A worker on €1 million per year will receive €20,000 for the same 2% pay increase. That’s hardly fair.

That’s why trade unions need to discuss a new system of pay increases that compensate all workers for cost-of-living increases, while ensuring the economic inequality gap reduces and poverty is eradicated. One such method is flat rate pay increases.

Since the introduction of the decimal system in 1973, most trade unions have used a percentile pay increase system. A union will negotiate a pay increase worth 2% or 3% and all workers receive the negotiated sum. This means drastically different outcomes for different incomes of workers. For instance, a 2% pay increase for different incomes is listed below.

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Can you hear the millionaire crying that he only got a 2% pay increase?

This wasn’t always the way. Before the decimal system was introduced, many trade unions — including Mandate’s predecessor union, IUDWC — would publish new pay scales on an annual basis which afforded different grades a flat rate pay increase. They would effectively institute a new payscale every year with an appropriate increase for all workers. [as shown in ‘Our Own Union’ image setting out a 1960’s pay settlement below]

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IUDWC pay agreement from 1968

While some workers are afforded higher pay increases than others, all workers have access to the highest point on the pay scale meaning they will achieve the full wage once they have obtain sufficient service.

The Consumer Price Index (CPI) is often used as the method for calculating the pay increase necessary to compensate workers for increased costs of living. The problem with this is that, say, a 3% increase in the cost of any product affects high earners and low earners very differently.

For instance, the price of a pint does not go up by a percentage of your income. It goes up by a set amount. The average price of a pint of stout in 2012 was €3.96. Today the price of a pint is €4.65 — a hike of €0.69c.

So whether you are rich or poor, your cost for a night out has gone up by the same amount, but a different percentage of your disposible income. So why does the worker who is already earning a higher wage deserve an even larger pay increase?

Maybe a ham sandwich is a more appropriate example. Between 2012 and 2019 the price of a loaf of bread, a tub of butter and a kilo of cooked ham increased from €20.37 to €22.70 — or 11.5%.

So for rich people and for poor people the cost is now €2.33 more than it was almost a decade ago. For a worker earning €20,000 per year, that’s 0.6% of their income, whereas for a worker earning €100,000 it’s 0.12%.

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Percentage increase in cost of ham sandwich as a proportion of income

What sense does it make to give all workers a 2% pay increase to compensate for such a cost-of-living increase, meaning a worker on €100,000 per year receives an extra €2,000 and a worker on €20,000 per year €400? It’s not like richer people eat more ham sandwiches or deserve to drink more pints than the rest of us? As illustrated by the below chart, percentile pay increases mean a significantly higher proportion of any pay increase goes to the higher earners (income gain in red).

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The CPI is not a measurement of cost-of-living increases, according to the CSO. The Vincentian Partnership for Social Justice argues that instead of using the CPI as the measurement for cost-of-living increases, we should be using the Minimum Essential Living Standards (MESL) index.

This system “places an emphasis on ‘needs, not wants’, and produces comprehensive, transparent, itemised lists (of more than 2,000 items, goods and services) detailing what is required to meet minimum needs and enable an acceptable minimum standard of living.”

The CPI, by contrast, measures the price of 53,000 goods and services. If the cost of a BMW goes up or down, it can skew the results, but it doesn’t necessarily reflect the real world for working people.

The CPI increased by approximately 7% between 2010 and 2019. The MESL (including housing and childcare) increased by almost 16% during the same period of time.

If we use this as a benchmark, it means low paid workers need to achieve significantly higher percentile wage increases in order to keep up with real inflation. One way to do that is through flat rate pay increases.

Let’s say the cost of living for essential goods has increased by €1,000 per year. A retail company has 50 staff members. There are 35 shop assistants earning €20,000, 10 supervisors earning €40,000, four managers earning €60,000 and a CEO earning €100,000.

If all workers receive a 3.4% pay increase (as recommended by NERI in 2019) it will cost the company €51,000 extra in salary costs. Under the percentile system, the 35 shop assistants will receive €680 each and will be €320 worse off when they factor in cost-of-living increases (€1,000 per year), but the CEO will receive €3,400 and be €2,400 better off after cost-of living increases are applied.

With a flat rate system all workers receive €1,020 and everyone is €20 better off in relation to increases in essential goods and services.

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Difference between percentile pay increase v flat rate pay increase

One other reason the gap between rich and poor has been increasing in real terms is because tax cuts over the last five Budgets have disproportionately benefited high earners.

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Tax cuts based on income levels for single earners

The combined effect of tax cuts that benefit higher income earners and annual 2% pay increases can be seen in below.

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Real income benefit based on annual 2% pay increase and tax cuts over last 5 years

Ireland has among the highest levels of market inequality in the OECD. Only Greece has higher levels of inequality in the EU. And the Institute for Public Health in Ireland estimates there are 5,400 preventable deaths on the island every year due to economic inequality.

On the flip side, evidence shows that more equal countries tend to do better in terms of all of the key social criteria.

More equal countries have lower crime rates, lower murder rates, improved mental health and lower mental illness levels, lower obesity rates, reduced incarceration rates and levels of trust are higher. Equality is better for all.

Trade unions are the key institutions for driving the battle against economic inequality, but it has to be two-pronged.

We need:

  1. More progressive and less regressive taxation; and
  2. We need to update our pay and benefits strategies.

For its part, Mandate has already commenced pay equalisation claims which include flat-rate pay increases in Tesco Ireland and Dunnes Stores.

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Mandate pay claim for Dunnes Stores workers, 2019

To achieve this, we need to use our two strong arms: our industrial arm and our political arm.

Continuing with the same failed policies that have contributed to record levels of poverty, homelessness and inequality is doomed to not only failure, but also societal unrest, including increases in racism and violence.

We need to develop a new pay strategy now.

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