A European Minimum Wage Policy for a More Sustainable Wage-Led Growth Model

Compressing the wage structure from the lower end would lead to a more egalitarian distribution of income and stabilise the wage share. This can be achieved by a European minimum wage target according to which, in every country, the minimum wage – determined either by law or by collective agreement – should be at least 60% of the national or sectoral average wage.

In the wake of the current crisis there is much talk about re-regulation of financial markets. While this is clearly vital, the focus on the financial system is misleading since it does not tackle the more structural causes of the current crisis.

Apart from financial markets, probably the most important structural cause of the current crisis is the rapid increase in income inequality. Behind this development, which it has been possible to observe during the last two or three decades in almost all industrialised countries, lay a fundamental shift in wage policies, with two main dimensions: first, there was a clear trend towards declining wage shares in national income, which means that wage increases lagged constantly behind productivity developments, leading to a significant redistribution from labour to capital income. Secondly, there was a trend towards much higher wage dispersion which widened from both ends of the wage scale. At the top a relatively small group of wage-earners (including managers) saw an enormous increase in their salaries which were totally decoupled from average wage developments. At the bottom there was a rapid growth in workers with very low wages leading to the well-known phenomenon of ‘working poor’, with wage levels below national poverty lines or subsistence levels.

The rapid increase in income inequality is mainly the result of a major shift in the power relations between capital and labour which led to a significant weakening of trade unions’ bargaining power. Unions have three inter-linked sources of power: organisational, structural and institutional power. As regards their organisational basis, almost all trade unions faced a significant decline in union density. The structural power, which mainly depends on the overall economic framework conditions, was undermined by high unemployment and sluggish economic growth. Finally, their institutional power was systematically weakened by the de-regulation of labour market institutions.

The rapid increase in income inequality led to a situation where private demand from wage income lagged systematically behind the overall economic development and thereby dampened economic growth. This reflects the fact that higher income groups have a much higher saving rate, which was also one major source for the enormous growth of financial markets.

Against the background of an increasing lack of wage-driven private demand, two alternative economic development strategies emerged. The first was a credit-based growth model typified by the United States but also found in some European countries such as United Kingdom or Spain. In these countries growth was driven by private consumption but it was based on household borrowing rather than wage income. A second strategy was followed by countries such as Germany, Japan and China which developed an export-led growth model that sought to offset a lack of domestic demand by export surpluses. Both growth models were interdependent and have created huge global imbalances. The global crisis has now shown that neither growth model is sustainable.

The development of a new post-crisis growth model, which is more sustainable and globally balanced, has to shift the focus again to a more wage-led growth strategy and a much more equal development of incomes. While trade unions have to do their own job to regain their organisational power, policymakers could promote a more equal income distribution essentially through two channels, the first being a more progressive tax policy with an emphasis on higher taxes for top income earners and the second a re-regulation of labour market institutions in order to re-balance the power relations between capital and labour and to strengthen trade unions’ structural and institutional power. Considering the high degree of European economic integration, such a reinforcement of labour market institutions should be promoted and coordinated at EU level.

A European minimum wage policy
One concrete means of strengthening labour market institutions in Europe is the development of a European minimum-wage policy. Currently all European countries have some regulation to determine a minimum wage floor. In 20 out of 27 EU member states there exists a general statutory minimum wage, while in the remaining seven states minimum wages are determined by collective agreements. In the former group of countries the minimum wage has universal applicability, while in the latter it depends on the collective bargaining coverage.

There are large differences in the value of the minimum wages. In absolute terms, rates range from less than one euro per hour in Bulgaria and Romania to more than nine euros in Luxembourg. While this partly reflects the different costs of living in the various EU countries, there are also significant differences in the relative value of the minimum wage, that is the value of the national minimum wage in relation to the national wage structure. Minimum wages in Europe vary between 30% and 50% of the respective average wage.

The principle aim of a European minimum wage policy would be that every worker in Europe should receive a ‘fair’ or ‘decent’ wage. Obviously, such a policy would not be about the harmonisation of minimum wages towards a single European rate. Rather the task of such a policy would be to define common standards or norms for national minimum wages regarding their relative value. One possibility would be to determine a European minimum wage target at EU level according to which, in every country, the minimum wage – determined either by law or by collective agreement – should be at least 60% of the relevant (national or sectoral) average wage. The latter was also demanded by the European Parliament which has called on the EU Council to agree on a timetable for achieving the European minimum wage target in all member states.

A European minimum-wage policy could become incorporated within the so-called open method of coordination (OMC), according to which specific goals and deadlines are set at European level which then have to be implemented via the national institutions for minimum wage-fixing (e.g. statutory minimum wages, national collective agreements, extension of sectoral agreements or combinations of these procedures). The European level then has the task of overseeing the implementation at national level and of contributing, through a comprehensive monitoring of national minimum wage policies and wage outcomes, to the spread of ‘good national practices’. Furthermore, the EU has to provide contemporary and comparable data on wage developments in Europe, which allow an accurate evaluation of the relative value of national minimum wages.

For the European trade unions there are two ways of becoming part of a European minimum wage policy: first, both trade unions and employers’ organisation should become involved in the development of the concrete aims and procedures of a European minimum-wage policy through the established channels of tripartite social dialogue. Secondly, the unions could support such a policy by setting their own targets for their internal European coordination of collective bargaining and could organise transnational campaigns against low pay.

A significant increase in national minimum wages through a coordinated policy at EU level would have numerous positive social and economic effects:

• Compress the wage structure from below and lead to a more egalitarian distribution of income between different groups of workers (including the reduction of the gender pay gap);

• Contribute to strengthening overall wage developments in order to stabilise or even increase the wage share;

• Help to fight poverty and reduce the burden on the state of social welfare benefits;

• Help to stabilise or increase private demand, since workers with low income will spend the largest part of their additional income;

• Support the function of wages as a nominal anchor for the price level in order to prevent deflation.

To sum up, a European minimum wage policy could make a major contribution to the development of a new more sustainable, wage-led economic growth model. At the same time, it would give a concrete expression to the idea of Social Europe.

Further reading
Schulten, T. (2009), ‘Minimum wages in Europe: new debates against the background of economic crisis’, ETUI Policy Brief, No 2.
Schulten, T. (2008), ‘Towards a European minimum wage policy? Fair wages and social Europe’, European Journal of Industrial Relations, 14 (4), 421-439.
Schulten, T. and A. Watt (2007), ‘European minimum wage policy – a concrete project for a social Europe’, European Economic and Employment Policy Brief, No. 2, Brussels: ETUI.

This article is part of the book ‘After the crisis: towards a sustainable growth model‘, edited by Andrew Watt (ETUI) and Andreas Botsch (ETUI/ETUC) and published by the European Trade Union Institute (ETUI).