The Progressive Post

EU minimum wage – why now?

Impossible just a few years ago, the search for an adequate EU role on incomes is linked to the effort to correct the economic governance mechanism and make the EPSR real

Nobel laureate in economics, University Professor at Columbia University, founder of Initiative for Policy Dialogue (IPD)

Ten years after the launch of the Europe 2020 strategy, we can observe that poverty has not been substantially reduced, but on the other hand, inequality has been on the rise in many EU Member States. The lack of adequate minimum wage increases, or coverage, is part of the problem. The establishment of the statutory minimum wage in Germany (2015) is a major step forward from an all-European point of view, and the time has come to make a decisive step forward regarding minimum wage coordination to foster cohesion and convergence. Besides boosting aggregate demand and the purchasing power of working people, EU level action would need to help stamping out controversial practices that have been recorded in the past decade (minimum wage reduction in times of fiscal adjustment, generational discrimination, not providing full minimum wage for public workers etc.).

The minimum wage has proven to be an effective tool in the fight against poverty. Economic benefits have also been demonstrated in the countries where it was introduced. Whether the European Union should be responsible for setting the minimum wage, is a critical question. Due to the diversity and uneven development levels of EU Member States, defining an EU minimum wage in absolute terms (a single minimum wage expressed in euros applying in all Member States) is a flawed concept. On the other hand, an EU intervention to help social partners and governments in Member States defining and maintaining a decent wage floor is possible, and it would represent a major step forward.

What went wrong with wages?

Wages and wage-setting represent an area where the EU has no direct competences but in various ways the issue has gradually come under EU influence too. Already in 1996 the EU ruled that posted workers must receive at least the minimum wage of the country where they actually work, and more recently EU legislation gave them the same level of remuneration that applies to all workers in the host country.

There are, however, negative examples as well. Ten years ago, the EU crisis response put pressure on Member States towards a decentralisation of wage-setting mechanisms, triggered disruption of pre-crisis collective agreements, and even a downward adjustment of the minimum wage (in Greece). This came in addition to a longer-term trend of a declining wage share in a number of countries. 

“Insufficient wages are among the reasons of large-scale emigration and population decline.”

The question therefore is what EU minimum wage coordination would mean in the context of the Single Market and the Economic and Monetary Union (EMU). The two dimensions have different implications, but they are equally important.

Within the EU Single Market, countries with uneven productivity levels and diverse welfare systems are interconnected. It is mainly among the so-called new Member States (those who joined in 2004 or after) where wages are not only lower in absolute terms, but minimum wage levels are also well below average. Trade unions in these countries are rather weak to fight for better salary dynamics, or for a different growth model. This means that economic convergence is not coupled with social convergence, which creates a material basis for social dumping notwithstanding the significant progress in legislation on posted workers. Insufficient wages are among the reasons of large-scale emigration and population decline.

Concerning the EMU, the need for wage coordination has been highlighted by Olivier Blanchard, Andre Sapir and others. In the absence of exchange rate adjustments, decoupling between productivity growth and wages has contributed to major imbalances. When surplus countries are reluctant to increase wages, while deficit countries are instructed to reduce them, the outcome is detrimental for the community as a whole. The decline in wage share, resulting in sluggish aggregate demand and absence of “wage inflation” even became a headache for central bankers, and calls for reorientation of macroeconomic policy thinking. Protection of minimum wages by the EU can play a role in that.

Finally, the consequences of low or absent minimum wages on the gender pay gap should also be highlighted. Since women are overrepresented among the low earners (e.g. in retail or health sectors), if minimum wages are lagging behind the average, the gender pay gap tends to be greater. And we know there are very few practical tools today to reduce the gender pay gap. Greater wage transparency, which is on the agenda of the European Commission, will not suffice alone.

Calling for EU action

How to facilitate upward wage convergence and a coordinated wage rise is the central question today, and some concrete proposals have already been outlined. For example, in order to counter the above negative trends, European trade unions launched a campaign for a European Wage Alliance in 2018. This campaign already pointed to an EU role regarding the minimum wage. Esther Lynch, ETUC Confederal Secretary said: “Minimum wages are far too low“, and she continued: “The EU should set a target date for statutory minimum wages to reach at least 60% of the median wage, and then living wages.”

“How to facilitate upward wage convergence and a coordinated wage rise is the central question.”

However, the deadline without a mechanism would not have the slightest chance to produce the desired outcome. What should the mechanism be? For example, agreement could be sought on a guaranteed wage floor in each country, based upon a coordinated approach towards minimum wages at EU level and ensuring that the levels are set above the poverty threshold and represent decent pay for the work undertaken. 

To define the desired level, one can take a “living wage” approach, and follow the definition given in the European Pillar of Social Rights (EPSR), which says that “adequate minimum wages shall be ensured, in a way that provides for the satisfaction of the workers and his/her family”. A more concrete definition is possible as a percentage of some relevant wage level: median or mean for example. Defining a goal at 60% of national median wage is most frequently observed. 

Besides boosting aggregate demand and the purchasing power of working people, EU level action would need to help stamping out controversial practices that have been recorded in the past decade (minimum wage reduction in times of fiscal adjustment, age discrimination, not providing full minimum wage for public workers etc.). On the other hand, it should provide encouragement to maintain and develop collective bargaining, as a best practice of wage setting in Europe and beyond.

Sceptics – and why they are wrong

While there are clear arguments in favour, there are also various concerns around the idea of minimum wage coordination by the EU. First of all, some may question whether there is a legal base at all for progressive intervention. Others may fear that by moving further into wage coordination, the EU would limit the autonomy of national economic policy making. And it is also heard that minimum wage coordination would substitute trade unions, and eventually weaken them.

Concerning the legal base, it is clear that references to general EU goals (solidarity) or even the Social Charter (“dignity in working conditions”) would be insufficient. According to Sacha Garben and Ana Aranguiz, an oft-overlooked social legal basis can be found in the Treaty on the Functioning of the European Union (TFEU) on economic, social and territorial cohesion. Article 175 of the TFEU may offer a route to adopt a fully-fledged minimum wage directive to diminish the social and economic disparities that are hampering a harmonious development of the Union in both economic and societal terms. “The main advantage offered by Article 175 TFEU, as compared to the other contending alternative legal basis found in the flexibility clause of Article 352 TFEU, is that it allows the EU to act through the ordinary legislative procedure rather than requiring unanimity while maintaining a social focus.” 

Some might fear that EU intervention in minimum wage setting would bring further limitation to the autonomy of economic policy making. However, the current rules in economic governance function as an open invitation to wage restraints and to solve all problems by containing or reducing workers’ incomes in times of crisis. This would indeed be a limit, and arguably a more sensible one than self-imposed debt ceilings that prevent badly needed public investments even when the interest rate would be zero.

Another typical Brussels agony is that a small step towards uncharted territory would put the EU on the slippery slope, and in this case, it would open the door to an avalanche of ideas in the field of income policy. In this case the point is that the further proposals that would help stabilising incomes and protect workers from poverty are already on the table. Most importantly, an unemployment reinsurance initiative is being prepared by two EU commissioners, while experts are discussing further possibilities (guaranteed minimum income, universal basic services, helicopter money from the ECB etc.). And after the crisis experience and the decade long wage stagnation, there is no neutrality option for the EU. If it does not act in favour, it will be seen being against rising wages and income stability, with unpredictable political consequences.

Fast forward to Social Union

This debate on wages and minimum wage coordination by the EU would not have been possible just a few years ago. The EU only started to advocate national minimum wages in the 2012 April Employment Package, which was followed by the first tripartite exchange of views on wage setting (1 February 2013). Somewhat later, and to some extent thanks to encouragement by the EU, the largest EU Member State, Germany, introduced statutory minimum wage in 2015, following the return of the Social Democrats (SPD) into the Grand Coalition led by Angela Merkel.

The search for an adequate EU role on incomes is linked to the effort to correct the economic governance mechanism, but also the need to make the EPSR real. The debate has been moving relatively fast, maybe exactly because it became so obvious in the aftermath of the recent economic crisis this is a crucial component of a viable European Union that can meet the expectations of the citizens and reinforce the European Social Model.

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