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Plea for a European Minimum Wage Policy

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Plea for a European Minimum Wage Policy Internationale Politikanalyse Internationale Politikanalyse International Policy Analysis Unit International Policy Analysis Unit X Politik Info Jana Zitzler * Plea for a European Minimum Wage Policy In Germany, the debate on the introduction of a statu- tions in individual EU states and be able to ensure po- tory minimum wage has been intensifying since 2004. litical feasibility. While critics worry about the danger of increasing un- employment or the threat to free collective bargaining, advocates hope that a minimum wage would close Minimum wage regulations in the wage policy gaps and reduce the number of working European Union poor. In the United Kingdom – contrary to the expecta- tions of many – the introduction of a statutory mini- Within the EU, employment and remuneration are the mum wage did not lead to massive job losses. Instead, competence of the member states and the social part- the minimum wage has had a positive effect on em- ners. However, the Commission makes recommenda- ployment and the quality of work (“Initiative Mindest- tions in so-called opinions in which the member states lohn 2006”). are asked to ensure the right of all workers to ade- quate remuneration, regardless of gender, handicap, Against the background of an increasingly inte- ethnic origin, race, religion or nationality. In addition, grated European economy and labour market deregu- the European Social Charter already contains a right to lation, the question of European coordination of na- adequate pay. tional minimum wage regulations is coming up more and more. A European minimum wage policy can be Minimum wage regulations are laid down in Europe regarded as an important instrument in preventing in- in two ways: through agreement-based and statutory creasing wage differentiation and dramatic expansion wage determination. In the case of agreement-based of the low wage sector in the European Union, and regulation minimum wages are laid down in wage positively influencing economic growth in Europe. An agreements or general contracts of employment. independent institution – on the model of the British However, due to their relatively low level of organisa- Low Pay Commission – should accompany the gradual tion, the trade unions do not have sufficient negotiat- alignment of minimum wages at a uniform level. Such ing strength in all sectors to enable them to impose an an institution could properly take into account condi- agreement-based minimum wage. Therefore agree- ment-based regulation is lacking in the traditional low- * Friedrich-Ebert-Stiftung Bonn April 2007 Jana Zitzler Plea for a European Minimum Wage Policy 2 wage branches (for example, private services). This is minimum wage, however, and this is higher than the where, in many European countries, the statutory equilibrium wage, demand for labour falls off. As a minimum wage comes in to supplement agreement- consequence, unemployment increases, which particu- based minimum wage regulations. Of the 25 EU mem- larly harms occupational groups in the lower wage ber states, 18 have a statutory minimum wage (those segment. 04/2007) without are Denmark, Germany, Finland, Italy, Austria, fo ( Sweden and Cyprus). The regulations are often insuffi- The assumption that minimum wages have a nega- n cient to ensure adequate social standards, however. In tive effect on employment (particularly for young peo- most countries the minimum wage is below 50 per ple) has been increasingly criticised, however, above all Politik I cent of average gross monthly earnings, with the ex- against the background of empirical studies. For ex- X ceptions of Luxembourg and Ireland (see Figure 1). ample, a US study by Card and Krueger (1995) for the first time reached the conclusion that an increase in the minimum wage has no negative effect on em- cáÖìêÉ= NW= jáåáãìã= ï~ÖÉ= ~ë= ~= éêçéçêíáçå= çÑ= Öêçëë= ployment. More recent studies in Europe unanimously ãçåíÜäó=É~êåáåÖë=áå=áåÇìëíêó=~åÇ=áå=íÜÉ=ëÉêîáÅÉ=ëÉÅíçê= stress that minimum wages do not lead to higher un- áå=ëÉäÉÅíÉÇ=br=ãÉãÄÉê=ëí~íÉëI=OMMQ= employment but often even to more employment. These empirical conclusions can be underpinned by various theoretical approaches. 60 50 On the basis of imperfect labour market conditions, 40 30 enterprises have so much market power that wages in % 20 can be set below the equilibrium wage. In cases where 10 there is only one employer (a so-called monopsonist) in 0 a given region, it has no interest in taking on addi- s a m lic lt tvia gal ary d urg tonia land pain tu g o s o S uania La r lan Ma eland tional employees because then it would have to pay all lovakia P ngdo lovenia Ir E i Po er S K Lith Repub Hun S emb d x Neth Lu employees a higher wage. There is only an incentive Unite Czech for the unemployed to take employment if the wage is above the level of state transfer payments. The em- Source: Eurostat ployment level is therefore lower than with perfect competition. Here the minimum wage steps in and simply compensates for this imbalance. A minimum In the remaining EU states the minimum wage is regu- wage also has a positive effect on employment by con- lated exclusively by the trade unions and management tributing to the stabilisation of demand. Since employ- (the so-called ‘q~êáÑé~êíåÉê’). Particularly in Germany, ees in low-wage sectors tend towards a particularly however, there are massive gaps in agreement-based high consumption rate, a large proportion of increas- minimum wage regulation. Due to the advent of low- ing incomes due to the minimum wage flows directly wage branches of private services from the mid-1990s, into consumption. In addition, minimum wages in- agreement-based coverage rates have markedly re- crease the productivity of employees and reduce em- ceded. ployee turnover, which in turn positively influences the long-term growth and employment prospects of the national economy (Swiss Trade Union Confederation, The effect of minimum wages on 2002). employment and income distribution A further major benefit of minimum wages consists There are opposing positions in the individual debate in the fact that they have an extremely positive effect on the connection between minimum wages and em- on income distribution. Many studies have come to the ployment. The classical argument starts from the as- conclusion that minimum wages have prevented or sumption that political regulation of wages has a nega- even reduced a potential extension of wage differen- tive effect on employment. According to this ap- tiation. The minimum wage protects particularly those proach, there is perfect competition on the labour employees who work in low-wage sectors. Women, market, as on other markets. On that basis, supply and young men and ethnic minorities are disproportion- demand can establish an equilibrium wage. If the state ately employed in those sectors. The minimum wage interferes in the functioning of the market by setting a can be seen as an effective instrument for, if not re- Internationale Politikanalyse International Policy Analysis Unit moving, at least reducing income discrimination impracticable by critics because of the significant dif- among these groups (Funk/Lesch, 2006). ferences between national economic circumstances. Other approaches regard the European minimum wage rather as an EU guideline. It would define a cer- A minimum wage for Europe? tain national minimum wage level in relation to na- tional economic performance, to which the different In the face of increasing liberalisation of the European EU member states should orientate themselves. A economy and labour market, particularly in the service group of German, Swiss and French academics have sector, as well as mass unemployment in many Euro- proposed Europe-wide coordination of national mini- pean countries, wages are coming under pressure. mum wage policies. All EU states would be obliged to There is therefore a risk that the trade unions will lose gradually increase minimum wages to a level corre- negotiating power and wage policy will no longer con- sponding to at least 50 per cent – and prospectively 60 stitute an adequate instrument to safeguard the mini- per cent – of national average income (Schulten et al. mum wage. The pros and cons of introducing a statu- 2005). The open method of coordination has been tory minimum wage are therefore increasingly being proposed for implementing this policy. Concrete tar- discussed in some countries without legal regulation. gets and implementation periods would be established But also in those EU states where a statutory minimum at European level, which ultimately would be imple- wage exists, real wage development is characterised by mented at national level with the customary institu- two fundamental trends. On the one hand, wages tions and procedures. Therefore, statutory minimum have lagged behind productivity growth, which has wages, generally binding wage agreements or combi- contributed to a weakening of private consumption nations of the two forms of regulation could be ap- and has led to low economic and employment devel- plied. The European level would in turn have the task opment in many EU countries. On the other hand, in of supervising implementation at national level. For the most EU states an increase in wage differentiation can purpose of implementation the European trade unions be detected. This can be explained mainly by the fact have been asked to develop a common concept for a that the low wage sector has massively expanded. But European minimum wage policy (Schulten/Bispinck/ eastern enlargement has also increased pay differen- Schäfer 2006; Burmeister 2006). tials within the EU, as well as pressure on the regions close to the border (Schulten/Bispinck/Schäfer, 2006). Enforceability of a European minimum Given these developments, it can be established wage policy that current national minimum wage regulations – statutory or agreement-based – are no longer ade- At present, the EU is a long way from a common quate in order to respond appropriately to increasing minimum wage policy.
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