Minimum Wages and the European Union. Options for a common strategy

Table of Contents

1. Abstract

2. Introduction

3. Minimum Wages
3.1 A Short Macroeconomic Explanation
3.2 Prevailing Opinions on the Effects of Minimum Wages

4. Overview of Minimum Wages in the European Union
4.1 History
4.2 Forms
4.3 Levels and Coverage
4.4 Trends

5. Related EU Instruments and Institutions
5.1 Europe 2020 and the European Semester
5.2 Peer Reviews
5.3 Eurofound

6. Outlines of a European Minimum Wage
6.1 Requirements
6.2 Possible Implementations

7. Conclusions

References

1. Abstract

Especially in times of economic crisis in Europe, the issue of social justice is exceptionally relevant. Many EU citizens are facing in-work poverty and exploitation. More than 20 million employees are working in the low-pay sector, which means that they are earning less than two thirds of the national median (Schulten/ Watt, 2007). The European Union has made it its responsibility “to ensure that wages are set in a fair and adequate manner” (German EU presidency 2007). In order to maintain and support the idea of a social Europe, it is necessary to take action now.

As national minimum wages are becoming more and more popular in the member states, there has been an ongoing discussion on whether the EU should set up a European policy and how this could look like. In 2006, Jean- Claude Juncker, former prime minister of Luxembourg and nowadays President of the European Council, claimed “the creation of a European Minimum Wage” in a speech on the conference of German Catholics. 1993, the member states were requested to “take appropriate measures to ensure that the right to an equitable wage is protected” (European Trade Union, 1993) by the European Commission. Only because some countries neglected the mention of wages in the “Charter of Fundamental Rights in the European Union”, there is no direct engagement of the EU in national wage policies yet (Schulten/ Watt, 2007).

Although minimum wage levels and mechanisms are clearly a matter of the member states in EU law, the recent economic crisis has caused the European institutions to intervene directly in national budgets and also in wage policies for the first time. This development has opened the doors for a renewed discussion on common minimum wage rules (Eurofound 2014).

The EU countries are by far not equal when it comes to wage distribution. The types of minimum wages, their calculation and levels vary immensely. A percentage of the median national monthly wage of each member state would consider these differences. Moreover, all the stakeholders - governments, NGOs, trade unions and citizens - need to be involved in the implementation process.

2. Introduction

The central questions of this paper are the following:

- Would a European Minimum Wage be beneficial for the people?
- What is necessary for the implementation of a European Minimum Wage and how should it be set up?

To answer these questions, concrete possibilities for the enforcement of a European Minimum Wage will be elaborated. Therefore, prevailing minimum wage regulations and their outcomes need to be presented, as well as related EU mechanisms which would enable the development. First, general aspects of minimum wages will be discussed, followed by the status quo in the EU member countries concerning the degree of coverage, levels and trends. There are various EU institutions that could support and enhance the process of creating a European Minimum Wage: The most relevant ones will be introduced here. Furthermore, necessities that a European Minimum Wage should comply with are pointed out, as well as possible implementations with respect to those. In a conclusion, the most important outcomes will be emphasized.

3. Minimum Wages

3.1 A Short Macroeconomic Explanation

A minimum wage is the minimum amount of money an employee receives for work set on the basis of a governmental statute or a collective agreement. It generally aims at preventing in-work poverty and exploitation. Mainly women and young workers are affected by minimum wages, as they are prevalent in the low-pay sector.

The neo-classical model of a competitive labor market with a minimum wage (figure 3.1) assumes a minimum wage set at a higher level than the equilibrium wage. Therefore, supply of labor increases while at the same time demand decreases. The gap between new labor demand and new labor supply is defined as unemployment.

The monopsony model (figure 3.2) shows a different point of view. It presumes that employers have a considerably higher market power than the workers. These employers will set wages at the minimal level that attracts enough labor supply in order to reach a desired output with minimal costs. If a minimum wage is now set at a reasonable level, it can increase growth and employment because workers will have more money to spend. Also, the minimum wage will serve as an incentive for the least productive workers to improve their skills (Eurofound, 2014). Nevertheless, a certain degree of unemployment can never be excluded, due to seasonal, structural and frictional reasons.

illustration not visible in this excerpt

Figure 3.1 and 3.2 created by the author, source: Lectures by V. Carstensen

3.2 Prevailing Opinions on the Effects of Minimum Wages

For a long time, the neo-classical view of minimum wages was predominant. If minimum wages were set below the equilibrium level, they would be irrelevant for the labor market. If set above, the employment would be decreased by rising wages as employers would not be willing to pay more for the same labor (Eurofound, 2014). Wages should float freely and would ideally balance at the equilibrium price.

However, various empirical studies, above all by Card and Krueger in 1994, proved that the negative impacts on employment are insignificantly small or do even recognize positive effects on labor. They argue with the fact that higher wages can lead to more motivation (“efficiency wage”: Schmitt, 2013). Moreover, the overall purchasing power of low-paid workers will increase and cause a higher demand. The contradiction between theory and empirical studies can also be explained with the influence of so-called “adjustment channels” (Eurofound 2014): Due to the fact that employers will try to save working hours, wage floors can considerably improve the efficiency of a business. Additionally, employers will be able to save the money they spend more on wages at other areas of business; for instance less non-wage payments, wage compression or higher consumer prices are possibilities for this.

4. Overview of Minimum Wages in the European Union

4.1 History

The first minimum wages in Europe came into force in the United Kingdom in 1909. Winston Churchill, at that time president of the Board of Trade, established the so-called wage boards, which set different wage floors in low- pay industries (Manning, 2013). Later, the Wage Council extended their work to more sectors, occupations and regions. Only New Zealand and Australia had their minimum wages earlier, namely already in the end of the 19th century.

In the second half of the 20th century, many countries started to enforce minimum wages covering the whole work force. In the 1990’s, the UK’s previous regulations were abolished and only a few years later, a national minimum wage was reintroduced. Heavily criticized at first, this governmental decision initiated a success story which has served as a role model for other European countries. Today, 22 out 28 EU member states have applied a national minimum wage, the other six at least have some sectoral agreements.

4.2 Forms

Generally, minimum wages can be distinguished by their form of coordination and their level of coverage (European Commission Mutual Learning Program, 2014). They can be set in a governmental statute or through a collective agreement, which can be valid for only certain sectors or the whole working population. Collective agreements by trade unions can also be nationally binding, if there is an intersectoral agreement about that. At the moment, the number of collectively agreed and statutory minimum wages in the EU is almost equal. In countries were trade unions are weaker, it is more likely that a statutory regulation is applied and vice versa (European Commission Mutual Learning Program, 2014). However, there are only six countries left until now without a national agreement, which are Cyprus, Denmark, Finland, Italy, Sweden and Germany. The latter will leave this group as from 2015.

4.3 Levels and Coverage

The national minimum wages measured in monthly gross earnings are biannually published by Eurostat. They recently range between 174€ in Bulgaria and 1.921€ in Luxembourg; this is a ratio of 1 to 11. The member states can be divided into three groups concerning their minimum wage levels: the first group is the Western countries from 11.10€ per hour in Luxembourg to 7.78€ in the UK. The second group are mainly Southern and some Central European countries ranging from Slovenia (4.53€) to Poland (2.21€). The vast gap between the two groups clearly reveals that differences among EU countries are enormous.

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