Cutting Rents not Wages will save Jobs in Retail

Thursday 30 June 2011

TASC Director Nat O’Connor takes a look at the argument that cutting wages will create jobs.

Retail Excellence Ireland (REI) has released a survey of their members, which they contend shows that abolition of the JLC system would lead to thousands of jobs being created in retail. 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 c. 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’ employee is another store’s customer. If the 200,000+ 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 TASC’ confidence in the theory that while individual businesses may benefit from lower wage costs, they equally suffer from the economic effects of reduced demand.

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 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 experience of UORR is 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 c. 15,000 vulnerable jobs being saved and c. 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 RTE’ Morning Ireland programme (23 June 2011, c. 8am) 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.