The Progressive Post

Minimum wage – the endgame

FEPS Secretary General
01/12/2021

Four years have passed already since an informal gathering of European leaders in the Swedish city of Gothenburg proclaimed the “European Pillar of Social Rights”. Some, including leaders of the host country of the 2017 conference, still believe that the EU itself does not need to do much for its actual implementation.

The notion that everything “social” is for the member states keeps coming back in EU-related discourse. Adding to the ambivalence is that while the European Commission launched an Action Plan and held a social summit in Porto last spring, Commission President Ursula von der Leyen did not find it important enough to mention it in her last speech on the State of the Union. The impression was that “social” is a seasonal matter for Brussels.

One could think that the engine of Social Europe runs out of steam again. But one of the most important initiatives that concerns Europe’s social dimension – the directive on adequate minimum wages in the European Union – received an enormous boost from the European Parliament, which voted in favour of the version previously adopted by its Employment Committee, and signalled its readiness to engage negotiations with the Council, which is the co-legislative body. A potentially pivotal piece of the EU’s social dimension is entering the legislative endgame.

With a massive majority in favour of the directive (for: 443, against: 192, abstentions: 58), the EP strengthened even further what the Commission had proposed initially. For collective bargaining coverage that puts a country above the proposed mechanism, the EP defined 80 per cent of collective bargaining coverage rather than the 70 per cent originally proposed by the Commission. Member states will be obliged to develop a national action plan, with concrete measures and a clear timeline to reach this target. Trade unions will be responsible for collective bargaining and not, as the commission had very vaguely proposed, ‘workers’ organisations’. Joining a union and collectively bargaining will be confirmed as a fundamental right.

The importance of the EU minimum wage directive, championed by Commissioner Nicolas Schmit, is highlighted by what has been happening simultaneously in Germany, and with more immediate effect. The new German government coalition plans to raise the national minimum wage to 12 euros. About 2 million German workers will soon receive a 20 per cent wage rise. This also puts upward pressure on wages around and below the average, and will indirectly affect large sections of the German workforce, as well as the labour markets of neighbouring countries. But it took a long, long time for Germany to arrive at this point.

Apparently the incoming government of Olaf Scholz cannot do everything that would be needed to correct the flawed macroeconomic framework of Germany. But it can indeed turn the page on the age of wage stagnation, which the strongest European economy imposed onto itself two decades ago – despite an impressive growth in productivity. And the notorious current account surplus generated by excessive wage moderation (in both Germany and the Netherlands) will connect the debate on wages with the effort of reforming the Economic and Monetary Union.

The wind of change from Berlin should open a window of opportunity in Brussels, progressively leading to a better functioning EU that responds better to the needs of citizens and delivers more solidarity in times of crises.

The coalition agreement of three new ruling parties of Germany shows that they are keen to move away from the status quo within the country but also at the EU level, and the minimum wage initiative should be a beneficiary. However, the opposition to the EU’s ambition to play a more concrete role in minimum wage setting and the promotion of collective bargaining comes from two corners: one with concerns about the impact on economic performance, and the other one with fears for advanced social models of certain member states, Scandinavian in particular. 

Concerning the economic effects, those advocating for minimum wage have received support by a recent decision of the Royal Swedish Academy of Sciences, that awarded the Nobel memorial prize in economics to Berkeley professor David Card (alongside two other distinguished academics). Card’s research from the 1990s on minimum wages of fast-food workers deepened the understanding of how labour markets operate, and continues to be relevant today, against the backdrop of a renewed focus on the conditions of low-wage workers.

Most regretfully, the co-author of Card’s most important book (Myth and Measurement: The New Economics of the Minimum Wage), professor Alan Krueger, could not live to share the pride (and perhaps the prize too), having committed suicide in 2019. But Card’s Nobel prize comes at the best time when more people can hear that in addition to various well-known benefits of a decent wage floor, it can also boost rather than reduce overall employment in a country. The harmful employment effect of the minimum wage is a myth rather than reality.

The Scandinavian scepticism towards deeper European integration is not restricted to the question of having or not having a statutory minimum wage and whether to coordinate such trends at EU level. It started 30 years ago, with the Maastricht Treaty, which was almost buried by the Danish referendum in 1992. It continued with Sweden’s decision not to join the euro area, even though, having joined the EU not before 1995, the country was obliged to do so. The method Sweden has used to maintain the national currency is not considered to be entirely clean by many.

But even if we concentrate on the question of wage setting, there is an inherent contradiction in the Nordic position. They insist that wages should not be set by law but by collective bargaining alone. Still, in the previous legislative cycle of the EU, they emphasised that the EU law was interfering with the wage-setting method of posted workers (employees sent by their employer to perform temporarily in another country within the single market). It is a bit disingenuous to consider political wage setting a good tool when one asks for it, but to deem it unacceptable if someone else within the same community would benefit from it.

Finally, and most importantly, wage-dynamics, and more specifically wage-convergence, has to be taken seriously by all those concerned with social dumping. For a decade or longer, the concept of social dumping has been discussed exclusively in the narrow context of posted workers, which is a minority even within the category of the mobile workforce. In reality, the fact that wages are not growing fast enough in the EU periphery, especially in the East, also represents social dumping in a wider sense, especially if the problem is examined together with the divergence in other aspects of working conditions. This is part and parcel of the so-called middle-income trap, which drains industrial investment from the core regions of the EU, and instead returns poor migrants who are desperate to leave their ‘competitive’ home countries in the absence of decent incomes and adequate public services.

Nordics, and other countries with high social standards, should pay more attention to this, and they should be keener to find the complex solutions in which progressive incomes policies and social investment strategies can play their part. This also means that the coordination of minimum wage schemes in an EU context is just one piece of the bigger picture.

Photo credits: FrankHH/Shutterstock

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