Minimum Wages in Europe under Pressure

In a joint report [1] to the G20 Labour ministers meeting in June 2012 the IMF, OECD and World Bank together with the ILO managed to produce some remarkably ambiguous language concerning minimum wages.

First, there is a positive message: statutory minimum wages may raise labour participation, sustain demand and reduce poverty and all of this without destroying jobs. Given the IMF’s and the OECD’s reputation of busting all types of labour regulation, this statement in defense of minimum wages is quite revolutionary. Unfortunately, the report  goes on to say that if wage floors are set at a level that is significantly higher than appropriate, the positive effects on demand and inequalities risk more than being offset by lost job opportunities, especially for youth and low skilled workers. In other words, high minimum wages kill jobs.

Two months earlier in its ‘Employment Package’ Communication [2], the European Commission adopted an almost identical approach. In what now appears to be an implicit attempt to support the introduction of a minimum wage in Germany [3], the Commission backed the general principle of a wage floor while also attaching three conditions: minimum wages need to be set at an appropriate level, be ‘sufficiently adjustable’ to reflect overall economic developments (in a downwards direction?) and to be ‘differentiated’ in order to uphold labour demand.

While the Commission Communication refrains from defining exactly what an ‘appropriate’ minimum wage level would look like, the joint IMF/OECD/ILO report to the G20 Labour ministers did propose a precise range of a minimum wage between 30% and 40% of the median wage. Minimum wages below that range would increase inequality and undermine aggregate demand. On the other hand, minimum wages above 40% of the median wage destroy jobs, thereby worsening poverty and inequalities. Here, one cannot avoid the impression that a sort of football game is going on, with the ILO and the Commission’s employment and social policy directorate passing the ball to the IMF and OECD who then have kicked the ball into the goal. Events at the Commission’s recent Employment Conference in early September strengthen this impression, with keynote speaker and recent Nobel prize winner Christopher Pissarides openly pleading in favour of ‘low’ minimum wages and the  general secretary of the OECD Angel Gurria claiming that ‘there’s massive evidence that high minimum wages destroy jobs’.

All of this is a clear step backwards. Indeed, statutory minimum wages across Europe are systematically higher than the threshold defined by the G20 institutions. They start from 45%  of the median wage in Poland, going up to 60% in  France (see table). It’s only in the Czech Republic and Estonia that the minimum wage falls in this so-called appropriate range.

Source: OECD, ETUI

So in reality, this institutional discussion on the general desirability of minimum wages boils down to a vicious attack on existing minimum wage systems across the majority of Europe. This neatly fits in with the strategy of internal devaluation that finance ministers and central bankers are now in the process of implementing in the Euro Area, replacing the missing instrument of a currency devaluation with deflationary wage cuts. In such a strategy, decent wage floors are seen as an obstacle blocking the downwards adjustment of wages that member states need in order to restore competitiveness. By attacking the existing levels of minimum wages, even the lowest wages are transformed into a factor of competitive adjustment.

The joint G20 report does not provide any supporting evidence whatsoever for the claim that minimum wages higher than 40% of the median wage would destroy jobs. In fact, if we look at other studies published by the same institutions that co-signed the G20 report, we actually find evidence to the contrary. For example, the 2006 update of the OECD’s Jobs Study concluded that ‘a considerable number of studies have concluded that the adverse impact of minimum wages on employment is modest or non-existent’ (OECD Employment Outlook 2006, page 86).

Another study, undertaken by the ILO and referred to in a footnote in the G20 report [4] states that ‘empirical studies (…) have so far failed to find any significant correlation between the minimum wage and employment’ (page 26). Moreover, the ILO study examines experiences with minimum wages in 13 European countries and finds no adverse effects on employment in Ireland, the UK, Greece, Sweden, Bulgaria and the Baltics. For countries where policy achieved a (relative) fall in minimum wage rates (Netherlands) or systematically promoted low-wage jobs (Germany), the conclusion is that this did not improve overall employment but simply replaced jobs in the middle income range with low paid jobs. In other words, bad jobs drove out good jobs without creating new net jobs.

The only warning the ILO study provides is on the issue of timing. In a reference to the doubling of the minimum wage in Hungary in 2001-2002, the ILO insists on the condition that minimum wages are to be adjusted in a progressive and regular way. That, however, is quite different from the G20 recommendation to keep the level of minimum wages at a low and indecent level.

Finally, a fundamental remark is that this policy discussion on a ‘one size fits all’ threshold does not make much sense. From a static point of view, everything depends on the distribution of skills, education and training. If that distribution is more equal, minimum wages can be substantially high and even need to be so in order to avoid possible situations of exploitation. From a dynamic point of view, the adjustment mechanism that policy should be using is to upgrade skills and workplace practices, not the downgrading of wages that are already low. Here, robust minimum wages can actually function as an incentive for employers, pushing them to reorganize the workplace in a better and more efficient way. Here’s another quote from the ILO: ‘The Low Pay Commission in the UK has insisted on the role of the minimum wage in encouraging firms to compete on the basis of quality as well as price; helping to promote employee commitment, reduce staff turnover and encourage investment in training, thereby boosting productivity and aiding company competitiveness’ (page 29). In their obsessive drive to install ultra wage flexibility across Europe and the Euro Area, the international institutions are ignoring these dimensions and functions of minimum wage policy.