Andy: Higher Wages Are Good for Business (Long-Term)

The Black Death of the fourteenth century was one of the worst disasters ever to hit Europe: it wiped out up to one-third of the continent’s population.

Probably among the few people who could find a silver lining in that sort of catastrophe are economic historians, whose reasoning is as follows: the death toll led to labour shortages; the shortages pushed up wages; the higher wages prompted employers to substitute machines for labour power; the demand for labour-saving machines acted as a stimulus to innovation and invention; and subsequent technological advances paved the way for the Industrial Revolution.

This example may be extreme, but it highlights an important point: higher wages are not necessarily bad for business (long-term). Conversely, when employers can rely on low wages and poor working conditions to maintain profitability and competitiveness, it may work okay for the employer in the short term, but they have little incentive to be technologically enterprising and boost the productive base of the economy.

The economic success of countries like Finland and Switzerland – regularly reckoned among the most competitive in the world – has certainly not been built on low wages. Indeed, researcher Ben Selwyn makes the case that the success of trade unions in improving the lot of their members has acted as an active motor force to economic development across Latin America, Africa and Asia.

And yet the low(er) wage route looks like the direction our neighbour the UK is heading in the wake of its Brexit vote. As it seeks to negotiate separate trade and investment deals with other countries it may no longer be able to offer potential foreign investors the carrot of access to the EU market. Instead, it might well seek to compete, at least so long as the Tories are in charge, by further debasing its wages and working conditions (and tax levels).

For Irish agribusiness especially, as economist Kevin O’Rourke has noted, Brexit could be very damaging: the UK might not only open its markets to cheap products from other food-producing countries, it could relax environmental standards (chlorinating chickens is an obvious example) and thus put Irish exporters to the UK market at a further disadvantage (the weakness of sterling already poses problems for them).

But the wider point is that reliance on low wages and poor working conditions (while much loved by individual employers) is not a recipe for broad-based economic success, as the UK will likely discover. It can seek to cut its wage costs and social protections ever more deeply, but the fact that it is competing with low-cost businesses from poorer countries means that the model is ultimately unsustainable.

That sustainability lesson is one even Michael O’Leary may yet be obliged to take to heart. The Ryanair debacle of cancelled flights has shown that, even for an individual company, paying higher wages, offering secure contracts, and treating workers decently (pilots especially in this case) is actually good for business.

For those of us who were never enamored of O’Leary’s pronouncements vis-à-vis, for example, Dublin’s striking Luas drivers (“I would have sacked the whole lot of them”), there is some satisfaction in watching skilled workers have him, in effect, over a barrel.

Yes, Ryanair passengers will ultimately pay more for their flights. But I suspect most people would be okay about paying a few quid extra if it meant better guarantees of service (most importantly, that the flight will actually take off) and some reassurance that their cheap travel was not built on the backs of severe worker exploitation. (That it is also built on the back of global warming probably does not fully enter the calculations of most travelers to date – myself included, I guiltily confess.)

The point about wages has broader applicability to the Irish economy as a whole: the Irish Business and Employers Confederation continues to claim that wage rises threaten employment levels, but more nuanced understandings of the economy’s competitiveness lay at least much stress on factors such as escalating property prices (themselves only partly driven by wage costs) and infrastructure such as broadband (or the lack of it).

We do not have to wish the Black Death on Irish business in the hopes of boosting our long-term economic prospects. But improved wages and working conditions in Ryanair (where O’Leary probably regards trade unions as the equivalent of the Black Death) would be a step in the right direction.