Minister for Jobs Richard Bruton sparked controversy last month when he proposed cutting retail workers’ wage entitlements under the JLC system – which he argued would create jobs. Here Nat O’Connor, director of economic think-tank TASC, writes that there is a much better way.

RETAIL EXCELLENCE IRELAND (REI) has released a survey of their members, which they contend shows that abolition of the JLC pay rates system would lead to thousands of jobs being created in retail (Press Release, 15 June 2011). There are good reasons to believe that this is a mistaken point of view.

REI got responses from nearly half their members, 342 companies which operate 4,445 stores, who said that if the JLC system was abolished that they would save 2,896 vulnerable jobs and create another 2,888. Treating this as a representative sample, REI estimate the total number of jobs created would be four times this, as there are around 25,000 stores in Ireland.

There are three problems.

Firstly, good business sense does not add up to good economics. Say one business cuts the wages of its staff – that business has saved money and, all things being equal, should become more profitable (although staff performance might also fall). However, one stores’s employee is another store’s customer. If the 200,000-plus generally lower-paid workers protected by the JLC system all suffer pay cuts, that is going to lower demand in the economy; i.e. they are all going to have less money to spend in the local economy. And people on low wages spend most or all of their money. (All of this is basic economics). Hence, the companies consulted by REI might believe today that they could save and create jobs – but if demand falls, as it surely must from cutting the JLC system, than the same stores will find that they cannot expand employment after all.

Secondly, we cannot be sure if the 342 companies that responded to REI are in fact a representative sample. These companies have an average of 13 stores each, but there are many one-off stores among Ireland’s 25,000. We do not know if these stores would be in the same position to save or create jobs. So, REI’s multiplication by four might be over-stating the probability of job retention/creation.

Thirdly, the international evidence is broadly against any strong relationship between cutting wage levels and job creation. The strongest studies are of US states, and even counties within those states. These studies compare two areas side by side (with similar workforces, similar industries, etc) where one of them cuts wage protection and the other does not. Over time, no great difference in job creation is shown. This evidence strengthens our confidence in the theory that while individual businesses may benefit from lower wage costs, they equally suffer from the economic effects of reduced demand. (See references below)

Therefore, it is fairly safe to assume that cutting the JLCs will neither save nor create jobs in retail.

There is hope however.

REI also found that the companies surveyed would save 7,791 vulnerable jobs and create 5,072 new jobs if the Upward Only Rent Review (UORR) was abolished. Unlike the JLC system, which affects the demand that retail so badly needs, there is no such effect with rents. Most commercial landlords are higher-income individuals or companies that save rather than spend most of their incomes. Therefore, cutting those incomes will not greatly affect retail demand as they are likely to cut their saving rate before they will drop their lifestyles (spending habits).

However, we still don’t know if the multiplier of four would apply or to what extent these 4,445 stores’ experiences of UORR are representative of others. In fact, city centres (where rents are highest) tend to be dominated by chain stores. So, it is possible that many one-off local stores are less affected by UORRs; although excessively high rents can be a problem for any business.

We could be more conservative than the REI and suggest merely doubling the survey findings to estimate the likely employment effects. That would mean abolition of UORRs could lead to around 15,000 vulnerable jobs being saved and 10,000 new jobs being created.

On REI’s website, there is a banner headline stating: “High Rents Are Killing Retail Jobs”. In a similar vein, Declan Ronayne, MD of DSG Ireland (Currys, PC World, etc) spoke on RTÉ’s Morning Ireland programme (23 June 2011) that the focus on JLCs was a mistake, and that rent levels was a much more pressing issue.

Economic theory and evidence concurs with this perspective. Cutting rents, not wages, is indeed likely to save and create jobs in retail.

Nat O’Connor is the Director of TASC, an independent think tank dedicated to addressing Ireland’s high level of economic inequality and ensuring that public policy has equality at its core. This article was originally published with references at Progressive Economy.