If it ain’t broke, don’t fix it

Even though the intentions from the EU Commission for a European Minimum Wageare noble and well-intentioned, the consequences for the Nordic labour market models can be far-reaching. Based on past experiences, the opposition is therefore well-founded.

I am the proud owner of an old Swedish sailboat with an equally old Swedish inboard diesel engine. A simple design, yet steady and reliable. I teach and do research within the academic field of industrial relations at Aalborg University, Denmark. So, obviously, I am not a trained marine mechanic (nor an expert on EU policy processes), yet, I felt the urgent need to do some modifications to my inboard engine. I will get back to the result later

“The Nordic opposition against any legal interference in wage settlement is not a reflexive, emotional answer but rather one based on past experiences with EU regulation on labour market issues.”

To the point: in January 2020 the European Commission launched the highly anticipated formal consultation with the social partners ahead of advancing a policy proposal to ensure ‘fair minimum wages’ across EU Member States – one of the Commissions ‘100 days in office’ initiative. The proposal immediately trigged a strong response from the Nordic countries – Finland, Sweden and Denmark – who, along with Austria, Cyprus and Italy, are the only EU Member States without a minimum wage set by law.

The Nordic opposition has not gone unnoticed. In a contribution to the Social Europe website, Amandine Crespy characterises the ‘defensive stance’ from Scandinavian trade unions as ‘emotional’ without ‘convincing arguments about why precisely EU action would be bad’. But the Nordic opposition against any legal interference in wage settlement is not a reflexive, emotional answer but rather one based on past experiences with EU regulation on labour market issues. EU legislation based on mainly individual rights shaped by case-law collides with the long-standing Nordic tradition of collective bargaining as the main form of regulating the labour market.

Understanding the Nordic opposition 

First, it is important to understand that the opposition against EU regulation in terms of wages are not only found among Scandinavian workers and their trade unions but equally among employer associations and politicians (left and right). Second, social partners in the Nordic countries have past experiences with EU regulations on labour market issues that cause scepticism even when political guarantees are given by Brussels. This is the case for example with. the Working Time Directive.

Collective agreements conducted at sectorial level in the Nordic countries are in many regards very informal and broad, leaving room for interpretation at the local level. The idea is that agreements on wages and working conditions needs to be settled as close to where the work is conducted as possible. This gives a high degree of flexibility creating strong cooperative adaptation to changes in international markets – an important ability for small open economies like the Nordic countries.

Some companies in the private sector are not covered by collective agreements in the Nordic countries. Seen from an EU legal perspective, these areas must be missing important regulations securing rights for workers. However, research showsthat these areas with no collective agreements are for the most part not missing minimum wage floors or provide a low quality of work. In fact, one of the reasons why the collective bargaining coverage in Sweden and Denmark is not higher is that many employees in the private sector with a higher education prefer individual wage settlement. In terms of employees with low level of education research also shows that collective agreements often have ‘spill-over effects’ to the uncovered labour market. Companies without collective agreements will often refer to the wage levels set within sectoral agreements in the face of competition to attract qualified employees.

Wage settlement is a complicated matter

Wages and wage settlement are key features in any labour market. Yet wage formation is a relatively complicated process in most countries involving both negotiations and regulations.The 27 EU Member States have found hugely different solutions to labour market regulations including wage settlement. These differences are deeply rooted in historical traditions, institutions, and practices – many of which date back to the early industrialisation in the late 19th century, creating different industrial relations systems, as a consequence.

“In the Nordic countries, minimum wages are set by collective agreements at sectorial level negotiated voluntarily by the social partners with little or no intervention from the state.“

In most EU countries, the minimum wage is determined by legislation in the form of a statute or a regulation. However, there are great differences in the way this process works. In most EU Member States, the social partners are consulted but the level of involvement varies a great deal. In some countries, the level is set on the basis of bargaining between the social partners (Belgium, Estonia and Greece). In other countries, the level is set through tripartite arrangement (Bulgaria, Poland and Slovakia), where the governments decide if the social partners fail to come to an agreement. Additionally, in some EU Member States the minimum wage is adjusted on the basis of automatic indexation.In the Nordic countries, minimum wages are set by collective agreements at sectorial level negotiated voluntarily by the social partners with little or no intervention from the state.

What is the best way to secure a high minimum wage?

Looking at the wage structure and wage levels, research clearly shows a rather compressed wage structure in the Nordic countries. Blue colour workers with low levels of education in the Nordic countries have rather high wage levels compared to other EU Member States. The share of employees with low wages – those earning less than two thirds of the national median wage – is rather low as a consequence.

In the OECD Outlook 2018, Denmark is the top performer in Earnings Quality. Research findings connect this wage equality with independent, collective bargaining conducted voluntarily by strong social partners. Research also clearly shows that wage systems based on collective bargaining reduces the number of persons with lowest wages compared to a statutory minimum wage system.

If it ain’t broke, don’t fix it

Back to my inboard diesel engine. It did not go well. I managed to short-circuit the electric system. The lesson learned: if it ain’t broke, don’t fix it. Wage settlement in the Nordic countries is based on sensitive compromises and negotiations between employers and employees with very little intervention from politicians. This has been the blueprint for the Nordic labour market models for more than a hundred years and the output in terms of performance is well documented.

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