The challenges of creating a European standard on wages.
“I want to ensure that work pays. In a Social Market Economy, every person that is working full time should earn a minimum wage that pays for a decent living. Therefore, we will develop a framework, of course in respect of the different labour markets.”
– Opening Statement Ursula von der Leyen at the European Parliament (16 July 2019)
On 28 October 2020 the Commission released their proposal for a directive that establishes an adequate minimum wage across Europe. As wage policy is a competency of Member States, always wary of European encroachment on their national sovereignty, it is no surprise that the idea of a European minimum wage has been controversial. Despite being a significant milestone in legislative action, the introduction of such a directive faces a number of legal and political hurdles.
Today minimum wages are an established instrument of labour market regulation in all European Member States. However, important points of difference can be drawn between the determination, scope and level of minimum wages in different countries. Firstly, a fundamental distinction can be drawn between universal/statutory and sectoral minimum wage regimes. In the EU, 21 Member States have a universal minimum wage characterised by the setting of a general wage floor, normally at national level, which – with possible exceptions – applies to all workers. In contrast, sectoral systems (primarily used in Nordic countries) do not establish a general wage floor, but define minimum wages for specific sectors or professional groups. Although the sectoral system does not establish a universal standard, it is widely recognised as an effective means of protecting workers, with a significantly higher minimum wage standard compared to the universal system across all sectors.
The contrast between the two minimum wage regimes represent a complex hurdle towards implementing a unified European wide minimum wage standard and regime. The Nordic countries are characterised by relatively high unionisation rates and high collective bargaining coverage, and thus, on a whole reject the idea of a European wide minimum wage. The idea is that a minimum wage is not to be decided by politicians – “It is the unions and the employers who negotiate collective agreements every year or two years or whatever length is, and that has worked very well,” Hans Dahlgren, Sweden’s European affairs minister. The Commission has repeatedly stressed that it does not intend to establish a “one-size-fits-all” system that would set salaries at a certain level or harmonise existing minimum wage regimes. Rather, the aim is to ensure that all existing systems are “adequate” and have proper updating mechanisms in place. The question now is, what is adequate?
People living on less than 60% of the average household income are generally considered to be at risk of poverty in the EU. This threshold of 60% for minimum wage standards is often criticised as being too low – a problem of the current proposal. However, several Member States, including ‘wealthy’ nations like Germany and Luxembourg, fall below this 60% standard, highlighting this as an issue that faces the EU as a whole.
Germany’s introduction of a minimum wage in 2015 offered a unique opportunity to assess the impacts of a minimum wage policy on workers, firms and an economy. For employees earning less than the minimum wage, increases on average of 14 percent were seen in the two years leading to 2016, and impacted about 15 percent of the German workforce. At a macroeconomic level, employment was positively impacted by the introduction of a minimum wage. Predominantly regular jobs remained unaffected, however, there was a significant decline in part-time employment (Minijobs). For businesses, overall profits were not negatively impacted, nor were there negative effects in terms of increased competition or negative exits.
Why do we need a European minimum wage?
The current COVID-19 crisis exemplifies a number of reasons why many workers, particularly low wage workers, would benefit from a meaningful minimum wage floor. Low-income earners usually lack sufficient financial buffers and therefore are more dependent on state assistance, which in many cases is insufficient. Ensuring decent living standards through adequate wages for all workers is crucial not only during the crisis, but also for a “sustainable and inclusive economic recovery”. The pandemic has not created these issues but highlighted a need to address the issues of in-work poverty and social inequality at a European level.
Within the EU, significant wage gaps exist between the east and west, north and south, as well as among individual Member States (from 312 euros per month in Bulgaria to 2.142 in Luxembourg). Although direct comparisons are hard to make due to differing living costs, labour mobility has no doubt facilitated the brain drain and movements of essential workers from east to west for higher pay. Member States in the north fear a race to the bottom in labour costs and cross-border social dumping in a competition-based system. Common standards for wages across the EU could help address the root causes of some of these problems, establishing a level playing field and promoting convergence between the east and west.
Recent structural trends like digitalisation, globalisation and the increase in non-standard working arrangements are reshaping labour markets towards increased wage polarisation. Increased rates of low-income earners coupled with the weakening of traditional collective bargaining systems has inadvertently led to a rise in in-work poverty. In 2018, 9.5% of all EU workers lived in households on the threshold of poverty, indicating that minimum wages need to be raised towards in order to be considered an adequate living wage.
The proposal: room for improvement?
The Commission’s proposal aims to guarantee adequate working and living conditions for workers across the EU, with the underlying goal of developing resilient economies that see adequate wages as an essential component of the EU social market economic model.
Impact assessments of the proposed directive are based on a hypothetical increase of minimum wages to 60% of the gross median wage. While results from this hypothetical assessment are significant; between 10 and 20 million workers across the EU would benefit from these improvements, this standard is not suggested anywhere in the directive. This makes it difficult to assess the potential economic benefits of the proposal where no concrete aims are in place.
A major hurdle to introducing a common minimum wage in Europe is that the EU lacks sufficient legal competences. Explicit in the Treaty on the Functioning of the European Union (TFEU) is that the EU has no competencies concerning wages. The proposed directive attempts to overcome this hurdle by finding its legal basis in Article 153 (1) TFEU, prescribing the EU to support and complement Member State activities in the field of working conditions, within the boundaries of the principles of subsidiarity and proportionality. As the directive does not aim to harmonise standards, it overcomes the legal hurdle by having only an ‘indirect effect on pay’.
The Commission has made a significant step by recognising that current levels of minimum wages and their enforcement in many Member States are inadequate. Without levels or obligations in place with regard to wages, the potential impact of the directive in alleviating the current issue of in-work poverty is questionable. A balance must be struck between a policy that has a genuine impact on improving wages and fairness across the European labour market, and a policy that is politically viable and recognises the differing minimum wage regimes across the EU.
The problems of in-work poverty, social inequality and shortcomings in workers’ safety net can only be properly addressed by defining more explicitly an appropriate minimum wage that references a living wage. A living wage is defined as “guaranteeing workers and their families a decent level of living and social participation in response to the inadequacy of income for many working households reliant on existing statutory minimum wage rates”. While no Member State should or can be forced to introduce a specific statutory minimum wage, the introduction of appropriate thresholds to meet in the next five and ten years would be beneficial in the move towards a European norm. This norm could promote the transition to a European standard that prioritises a living wage, truly enabling workers to have a decent life regardless in which country they work.
Future improvements to minimum wage standards in Europe need to embrace the flexibility of adjustment and continuous incremental improvements so that collective bargaining is strengthened, and wage-setting systems are transparent. Without enforcement mechanisms in place to ensure minimum wage standards are met, the Commission’s proposal will be largely ineffective. Perhaps the use of soft instruments like the sharing of best practices between Member States and the exposure of withdrawals from collective agreements could incentivise Member States to comply.
Niamh has obtained a degree in international relations from Monash University in Australia and is currently pursuing her double masters degree in European Governance at both Utrecht University and Konstanz Universität.
Featured image: Shutterstock