Paying attention to

Labour 2002/3 No. 128 Contents

Editorial V

Background and general information The ILO and the protection of wages, by Georges P. Politakis 1 The local ups and downs of a universal principle, by Louis Bredow 8 It pays to be union, US fi gures show, by Ian Graham 13

The crisis of arrears Wage debt: Africa’s other plague, by André Linard 17 Unpaid in Africa: An explosive issue, by Ibrahim Mayaki 21 Unpaid wages in Belarus: Adjusting to economic transition, by Kiryl Haiduk and Svetlana Parchevskaya 25 The challenge of wage arrears in China, by Gerard Greenfi eld and Tim Pringle 30

Income equality and collective bargaining Wage trends in Central and Eastern Europe, by Béla Galgóczi 39 Collective bargaining and equality in an integrating world, by Susan Hayter 45 A fi rst step towards fi xing Europe-wide wages?, by Jonathan Equeter 53 Pay equity at last in Quebec?, by Roland Côté 57 Social partners: Collective bargaining in Austria, by Martina Krichmayr 61

Fighting poverty: The How to get the maximum out of the minimum wage, by Catherine Saget 67 Wages, and prices, by Hansjörg Herr 74 Minimum wages and employment: The positive UK experience, by Damian Kyloh 80 Uganda: Minimum wages or minimizing wages?, by Martin Wandera and Mohammed Mwamadzingo 90 An underrated tool?, by Samuel Grumiau 94

III Editorial

ust a few years ago, the prompt and timely payment of wages was more Jor less taken for granted. Apart from isolated cases of enterprises fac- ing occasional liquidity problems, sectors hit by disputes or economic crises in one country or another, the situation seemed relatively stable. Wage-earners who were lucky enough to have a stood a good chance of being paid regularly, even if their wage rates sometimes left much to be desired. Indeed, a workers’ education manual published by the ILO in 1964 and reissued 20 years later scarcely mentions the question of wage arrears.1 By that time, moreover, some were arguing that the Protection of Wages Convention (No. 95), adopted in 1949, had outlived its useful- ness. Or, at least, that some of its provisions had. These claims turned out to be premature – a lesson worth recalling whenever we contemplate a revision of international labour standards. Thanks in part to that Convention, now ratifi ed by 95 countries, the regular payment of wages did become a welcome general achievement. But today, it is in serious jeopardy. Tens of millions of workers in vari- ous parts of the world are being deprived of the fruits of their labour for months on end, and sometimes for years. There have already been deaths. Wage debt is now a real scourge which destroys lives, families and com- munities. It leaves a wake of misery and despair. It threatens fragile de- mocracies and slows down development. The fi gures speak for themselves. According to data, Rus- sian wage debt stood at more than 38 billion roubles in April 2000. At that time, the Russian owed its teachers 628 million roubles. And in Ukraine, total arrears in 2001 accounted for more than 30 per cent of the country’s monthly wage mass. Five million Ukrainian workers no longer get paid regularly. In the Republic of Moldova, the delays can be as much as two years. In Bulgaria, wage debt grew sevenfold between 1991 and 1996, and then doubled again between 1997 and 1999. Unpaid wages in Belarus made up 7.5 per cent of the wage mass in 2001. Africa, too, has been affected. One article in this issue of Labour Edu- cation describes wage debt as another African epidemic, comparable to AIDS. Nor has Latin America been spared. According to the Brazilian gov- ernment, most breaches of wage laws concern late payment. More than 50 per cent of all cases dealt with! In China, arrears have reached millions of dollars. During the past fi ve years, most of the observations made by the ILO Committee of Experts on the Application of Conventions and Recom- mendations, concerning the Protection of Wages Convention, have been about wage arrears or about payment in kind – another topic covered in this issue.

V So the decision to make Convention 95 the subject of a general survey which will be discussed at the International Labour Conference in June 2003, is wholly apt. Wage debt is a complex problem. However, a number of factors emerge from analyses made by correspondents of the ILO Bureau for Workers’ Activities (ACTRAV), as well as from the articles published in this issue. To start with, there are the recommendations of the Committee of Ex- perts, which has had to look into many cases of arrears. First, it should be clear to everyone that delays in the payment of wages are a fl agrant viola- tion of the letter and the spirit of the Protection of Wages Convention. After all, Article 12(1) of this standard stipulates: “Wages shall be paid regu- larly. Except where other appropriate arrangements exist which ensure the payment of wages at regular intervals, the intervals for the payment of wages shall be prescribed by national laws or regulations or fi xed by collective agreement or arbitration award.” As the Committee has repeat- edly recalled, it is up to to ensure that the Convention is re- spected and that wages are paid promptly and punctually not only in the public services, where the State is the employer, but also in the parastatal and private sectors. Secondly, the Committee insists that the application of the Convention should be based on three elements: effective monitoring by labour inspectorates, strict application of the prescribed sanctions in cases of violation, and the payment not only of the sums owed to the workers but also of compensation for the prejudice caused by the delays. And, of course, legislation should be put into conformity with the Convention. State intervention comes at a price. But doing nothing could prove even more costly. All the available studies show that wage arrears lead to a deterioration in living conditions, a lowering of household consump- tion and a fall in life expectancy. Moreover, all the affected countries are experiencing the development of a parallel , a black market and corruption. Let there be no doubt about governments’ ability to tackle the wage debt crisis. In some countries, the sudden improvements just before presi- dential or parliamentary elections speak volumes. Such sunny intervals show just how important to this issue is good governance. Clearly, too, the international fi nancial institutions should be able to play a role in this. For instance, they could usefully advise governments to embark on a social dialogue about the thorny subject of unpaid wages. Unfortunately, this has not happened yet. In this issue of Labour Education, tales are told of the many failures of structural adjustment and economic transition, as advocated by the IMF and, to a lesser extent, the World . Also recounted is the way in which the arrears problems coincided with the launch of the fi rst adjustment programmes. In some countries, these institutions are said to have intervened directly in order to encourage the downward revision of wage protection, notably in the case of enter- prises’ fi ling for bankruptcy. The debt burden has complicated the situa- tion. Privatizations conducted at a forced pace, and often without trans- parency, are aggravating it. So the question of wage arrears cannot be treated in isolation from a context that combines a lack of social concern in economic adjustment and transition efforts, the fragility of democratic or newly democratizing systems, a weak tradition of dialogue and a distrustful, even hostile, at- titude to the independent organized labour movement.

VI These are the same factors that form the backcloth to the general ero- sion of purchasing power in the transitional or the countries undergoing structural adjustment. So this issue also looks at the ques- tion of the minimum wage. The role of the minimum wage in combating poverty is no longer in doubt (as long as it is set at a reasonable level and within a framework of social dialogue). This is also true in the industrial- ized countries. Thus, according to the British unions, the introduc- tion of a minimum wage in the United Kingdom in 1999 lifted millions of people out of poverty, without causing the rise in that its detractors had predicted. The success of a minimum wage will depend to a large extent on the quality of social concertation that accompanies its elaboration and implementation. That is why, in this issue, we have also touched upon wage bargaining and trade union approaches to ensuring a just distribution of income. This must, of course, include the eradica- tion of the pay discrimination that still affects women workers in most countries. This issue of Labour Education has the modest ambition of shedding some light on the efforts needed to improve the situation of millions of people who are deprived of regular pay, who are on starvation wages or who suffer discrimination. To do so, it draws on analyses by ILO special- ists and explores the courses of action mapped out by the trade union movement. One thing is sure. The ILO standards on wage protection, on the set- ting of the minimum wage and on equal pay are as relevant as ever. The urgent need now is to ensure that they are respected and applied. Worker delegates will have a chance to emphasize this when the general survey is discussed at the International Labour Conference in June 2003.

Manuel Simón Velasco Director ILO Bureau for Workers’ Activities

Note

1 ILO: Wages, a workers’ education manual, third edition, Geneva, 1984.

VII Background and general information

The ILO and the protection of wages

The Protection of Wages Convention, 1949 (No. 95) and Recom- mendation, 1949 (No. 85) are the first international labour instru- ments dealing in a comprehensive manner with all practical aspects of labour remuneration and seeking to accord the fullest possible protection to workers’ earnings. A close look at these instruments shows that they have not lost any of their relevance.

Georges P. Politakis International Labour Standards Department ILO

emuneration is, together with work- culated to ensure a just share of the fruits Ring time, the aspect of working condi- of progress to all and a minimum living tions that has the most direct and tangible wage to all employed and in need of such impact on the day-to-day lives of work- protection”. ers. Since its early days, the questions of decent wage levels and fair labour remu- neration practices have been at the centre Origins and objectives of the ILO’s action and the ILO has advo- of Convention No. 95 cated labour standards seeking to guaran- tee and protect workers’ rights in respect National laws relating to the protection of of wages. The original Constitution of the wages are among the oldest measures of ILO, which was established in 1919, re- social protection. The question of adopt- ferred to the “provision of an adequate ing standards with a view to regulating ” as one of the improvements the medium of wage payment as well as urgently required to promote universal other aspects such as wage deductions, the peace and combat social unrest, hardship attachment of wages and wage guarantees and privation affecting large numbers of in case of bankruptcy was fi rst placed on people. It listed among the methods and the agenda of the International Labour principles which were considered to be Conference in 1947. Until then, the Con- well fi tted to guide the policy of member ference had given only incidental consid- States “the payment to the employed of a eration to the problems of wage protection, wage adequate to maintain a reasonable adopting a number of resolutions and also standard of life as this is understood in some provisions in various Conventions their time and country”. and Recommendations. At its 19th Ses- The 1944 Declaration of Philadelphia sion in 1935, for instance, the Conference concerning the aims and purposes of the adopted a resolution inviting the Offi ce to Organization reaffi rmed that “poverty undertake an inquiry into the “truck sys- anywhere constitutes a danger to pros- tem” (the obligation to spend wages on perity everywhere” and stressed the need supplied by the employers) and re- for world programmes which will achieve lated practices, but the inquiry was later “policies in regard to wages and earnings, suspended because of the outbreak of the hours and other conditions of work cal- Second World War. At its 25th Session in

1 1939, the Conference included in the Con- … the general purpose of legal measures tracts of Employment (Indigenous Work- for the protection of wages is to guarantee ers) Convention, 1939 (No. 64), certain the worker against practices which would provisions relating to the question of the tend to make him unduly dependent on his protection of wages, in the form of a re- employer and to ensure that he receives quirement that contracts of employment promptly and in full the wages which he are to contain particulars concerning, inter has earned. To achieve these ends it is nec- alia, the rate of wages, the method of wage essary that he should normally receive his calculation, the manner and periodicity of wages in the form of money which he can wage payments, and advances of wages. spend as he wishes, that he should be paid Finally, the Social Policy (Non-Metropoli- regularly and at intervals short enough to tan Territories) Convention, 1947 (No. 82), allow him to live on a cash rather than a adopted at the 30th Session of the Confer- credit basis, that he should be protected ence in 1947, contains specifi c provisions against any unjustifi ed or arbitrary deduc- on workers’ remuneration and, in particu- tions from his nominal earnings and, in gen- lar, provisions on wage payment in legal eral, that he should be kept informed of his tender and at regular intervals, wage de- wage conditions of employment.2 ductions, record keeping and wage state- ments, payments in kind, the place of wage payment and advances on wages. These Scope and content principles had been for the most part set forth in the Social Security (Seafarers) Con- The Convention (Article 2) applies to all vention, 1946 (No. 70), adopted in 1944 by persons to whom wages are paid or pay- the 26th Session of the Conference, and in able, although the competent authority the Certifi cation of Able Seamen Conven- may, after consultation with employers’ tion, 1946 (No. 74), adopted in 1945 by the and workers’ organizations, exclude per- 27th Session of the Conference. sons who are not employed in manual la- The origins of Convention No. 95 are bour or are employed in domestic to be found in the report on the “Future or similar work and whose conditions of policy, programme and status of the Inter- employment are such that the application national Labour Organization”, prepared to them of all or any of the provisions of by the Offi ce for the 1944 Conference, in the Convention would be inappropriate. which it was pointed out that “wage poli cy To make use of exemption possibilities, lies at the core of the preoccupations of the a ratifying State has to specify in its fi rst International Labour Organization” and annual report submitted under article 22 further suggested that: of the Constitution any categories of per- sons which it proposes to exclude from … a Convention or Recommendation on the application of the Convention, addi- methods of wage payment dealing with the tional exclusions not being possible after periodicity of wage payments, deductions the date of its fi rst annual report, while in from wages, advances of wages, the prohi- subsequent reports it has to indicate any bition of truck, the adequacy of remunera- progress made with a view to the applica- tion in kind, the protection of wages in legal tion of the Convention to such categories proceedings and similar subjects would also of persons. The term “wages” (Article 1) is be of great in relation to many parts used in a generic sense to cover all earn- of the world, especially in regard to rural ings or remuneration, however designated workers.1 or calculated, capable of being expressed in terms of money and fi xed by mutual The preliminary report prepared by the agreement or by national laws or regula- Offi ce for the 31st Session of the Confer- tions, which are payable in virtue of a writ- ence in San Francisco introduced the sub- ten or unwritten contract of employment ject in these terms: by an employer to an employed person for

2 work done or to be done or for services form of allowances in kind is customary or rendered or to be rendered. desirable because of the nature of the in- dustry or occupation concerned, national Wage payment in legal tender. The Conven- laws or regulations, collective agreements tion (Article 3) guarantees that the remu- or arbitration awards may authorize such neration owed by the employer to the payment subject to the following condi- worker by virtue of a contract of employ- tions: (i) the payment of wages in the form ment must be paid in cash. This require- of liquor of high alcoholic content or of ment for legal tender may also take the form noxious drugs is not permitted in any cir- of a prohibition of payment in the form of cumstances; and (ii) when authorized, ad- promissory notes, vouchers, coupons or equate measures have to be taken to ensure other tokens taking the place of money. that such allowances are appropriate for the personal use and benefi t of the worker and Payment in kind. In the earlier stages of his family and also that the value attributed industrial development wages were paid to such allowances is fair and reasonable. in other media such as food, clothing and shelter. This method of payment, known as Freedom of workers to dispose of their the “truck system”, led to abuses and was wages. It is not enough that workers should thus generally prohibited. It has always receive the wages due to them in full and in been recognized, however, that in particu- a regular fashion. They must also be able to lar industries and occupations, such as ag- spend them as they choose. Any constraint riculture, mining, construction work in re- on the part of the employer on the use of the mote areas, merchant marine, hotels and wage should be forbidden. The Convention restaurants, hospitals and domestic service, (Articles 6 and 7) expressly prohibits em- allowances in kind offer certain advantages ployers from limiting in any manner the to the workers and are often equally benefi - workers’ freedom to dispose of their wages cial to their family members. In a number of and recognizes the workers’ right to make countries, therefore, labour laws and regu- use of a , where one exists, lations provide for exceptions to the prin- only if they so wish. It also provides that ciple of payment in cash, while seeking to the competent authority has to take appro- protect the wage earners by laying down priate measures to ensure that works stores concrete conditions which authorized pay- are not operated for the purpose of secur- ment in kind should meet. In some cases, ing profi t, but for the benefi t of the work- regulations specify that the goods sup- ers concerned, and that the goods are sold plied to workers should be of suitable at fair and reasonable prices, where access quality and suffi cient quantity, while in to other stores and services is not possible. other cases employers are required to sup- These provisions are supplemented by an- ply allowances at cost price, or at specially other clause included in the Recommenda- favourable rates. Strict regulation is all the tion (Paragraph 9) suggesting appropriate more necessary as, in many cases, the value measures to encourage arrangements for of the goods provided in lieu of wages can the association of representatives of the be deducted from the cash wages. By way workers concerned, and more particularly of safeguard, the labour legislation in cer- members of works communities or tain countries specifi es that deductions similar bodies, in the general administra- cannot be authorized except with the ex- tion of works stores or similar services es- press consent of the worker concerned, tablished in connection with an undertak- whereas in other countries regulations fi x ing for the sale of commodities or provision the maximum percentage of cash wages of services to the workers. which may be deducted. The Convention (Article 4) recognizes Wage deductions. The regulation of de- that in those industries or occupations ductions is necessary to protect workers where the partial payment of wages in the from arbitrary, unfair or excessive deduc-

3 tions which would amount to an unjust within which outstanding wage claims are decrease of their remuneration. The Con- to be accorded preferential treatment. The vention (Article 8) sets out the princi- principle of the preferential treatment of ple that deductions should be permitted wage claims in the event of the employ- only under prescribed conditions and that er’s insolvency was later substantially re- such conditions should be required to be inforced through the adoption of the Pro- brought to the notice of the workers in the tection of Workers’ Claims (Employer’s manner deemed most appropriate by the Insolvency) Convention (No. 173) and competent authority. Recommendation (No. 180), 1992.3

Attachment and assignment of wages. Periodicity, time and place of wage pay- The Convention (Article 10) provides that ments. The Convention (Article 12) lays the conditions under which and the limits down the obligation to pay wages at regu- within which wages may be attached or lar intervals, to be prescribed by national assigned should be prescribed by national laws or regulations or fi xed by collective laws or regulations. It also stipulates that agreement or arbitration award. The ra- wages should be protected against attach- tionale underlying this provision is to dis- ment or assignment to the extent deemed courage long wage payment intervals and necessary for the maintenance of the thus to minimize the likelihood of indebt- worker and his family. The rationale be- edness among workers. The Recommen- hind this provision is similar to that re- dation (Paragraphs 4 and 5) deals with the garding deductions, i.e. there must be a periodicity of wage payments in greater proportion of the worker’s wage which is detail and suggests that workers whose absolutely essential to the maintenance of wages are calculated by the hour, day or the worker and his family and which for week should be paid at least twice a month, that reason must be immune from attach- and not less than once a month for salaried ment or seizure. employees. It also recommends that work- ers whose wages are calculated on a piece- Wage guarantee in the event of bankruptcy. work or output basis should be paid, so far One of the oldest established measures of as possible, not less than twice a month, social protection consists of provisions to while in the case of workers employed by protect workers’ claims in the event of the the task, the completion of which requires insolvency of their employer, since wages more than a fortnight, payments should are recognized as being essential for the be made on account, not less than twice worker’s maintenance and often equally a month in proportion to the amount of vital for the subsistence of the worker’s work completed, and the fi nal settlement family. To avoid a situation where wage should be made within a fortnight of the earners are deprived of their livelihood completion of the task. upon the bankruptcy of their employer, provisions have to be made to guaran- Notifi cation of wage conditions and state- tee the immediate and full settlement of ment of earnings. The Convention (Arti- debts owed by the employer to workers. cle 14) calls for effective measures, where The Convention (Article 11) spells out the necessary, to ensure that the workers are almost universally recognized principle informed in an appropriate and easily un- according to which wage claims should derstandable manner of the general wage be treated as privileged debts in the event conditions to which they are subject before of the bankruptcy or judicial liquidation of they enter employment, as well as of the an undertaking. However, the Convention wage details concerning the calculation of allows each State to determine the relative their earnings in respect of each pay pe- priority of wages constituting a privileged riod. The provisions of the Convention are debt, as well as the overall limits, in terms supplemented by more detailed provisions of a maximum period of service or amount, in the Recommendation. With respect to

4 notifi cation of wage conditions, the Rec- worker concerned, the operation of works ommendation (Paragraph 6) specifi es that stores or the payment of wages on working the details of the wage conditions which days and at or near the workplace seem to should be brought to the knowledge of be generally complied with, others, such the workers should include: (i) the rates as those regarding the payment of wages of wages payable; (ii) the method of cal- in kind, the wage deduction limits, or the culation; (iii) the periodicity of wage pay- preferential treatment of wage claims in ments; (iv) the place of payment; and case of bankruptcy, have not elicited the (v) the conditions under which deductions same degree of legislative conformity on may be made. As regards wage statements the part of ratifying States. Yet, most im- and records, the Recommendation portantly, the provision respecting the (Paragraphs 7 and 8) provides that, in all regular payment of wages has recently appropriate cases, workers should be in- turned into an urgent issue for a grow- formed with each payment of wages of the ing number of countries, especially those following particulars relating to the pay of Central and Eastern Europe following period concerned, in so far as such particu- their transition to a market economy, and lars may be subject to change: (i) the gross also in Africa and Latin America.5 In the amount of wages earned; (ii) the amount of last fi ve years, practically all the observa- any deduction which may have been made tions formulated by the Committee of Ex- including the reasons therefor; and (iii) the perts in respect of Convention No. 95 have net amount of wages due. In addition, em- referred to problems of wage arrears and ployers should be required in appropriate the failure of the governments concerned cases to maintain records showing, in re- to ensure the regular payment of wages in spect of each worker employed, the above accordance with Article 12, paragraph 1, of particulars. the Convention. Similarly, in the past ten years, the Conference Committee on the Implementation through national laws. Application of Standards (CCACR) has The Convention (Article 15) requires that regularly considered individual cases re- the laws and regulations giving effect to ferring to persistent problems of wage ar- its provisions have to be made available rears. In addition, in the past decade, the for the information of persons concerned, Governing Body has dealt with seven rep- defi ne the persons or institutions respon- resentations made under article 24 of the sible for compliance, prescribe effective ILO Constitution alleging non-observance sanctions or other remedies to punish in- of Convention No. 95, mostly in respect of fringements, and fi nally provide for the delayed payment of wages. maintenance of adequate payroll records. In relation to wage arrears, the Com- mittee of Experts has consistently pointed out that delays in the payment of wages Role and impact clearly contravene the letter and the spirit of the supervisory bodies of the Convention and has stressed that the application of the Convention should The number and nature of the comments comprise three essential elements in this made by the Committee of Experts on the respect: (i) effi cient control; (ii) appropri- Application of Conventions and Recom- ate sanctions; and (iii) means to redress mendations (CEACR) in recent years the injury caused, including not only the concerning the practical application of full payment of the amounts due, but also the Convention in ratifying States attest fair compensation for the losses incurred to the continued relevance of most of its by the delayed payment.6 Another remark provisions.4 While certain requirements of frequently made by the Committee of Ex- the Convention, such as those relating to perts is that putting an end to the accumu- the notifi cation to workers of wage condi- lation of wage arrears calls for sustained tions, the payment of wages directly to the efforts, an open and continuous dialogue

5 with the social partners and a wide range food and lodging, specifi c provision needs of measures, not only at the legislative to be made to ensure that allowances in level, but also in practice.7 kind are appropriate for the personal use Apart from the issue of timely pay- and benefi t of workers and their families. ment of wages and rapid settlement of The Committee has also repeatedly em- outstanding wage debts, the Committee phasized the need for a legislative provi- of Experts has made recurrent comments sion explicitly prohibiting the payment of on other aspects of the Convention, such wages in the form of alcoholic drinks or as the concept of the “wages” to be pro- narcotic substances.11 tected, the principle of wage payment in With respect to deductions, the Com- legal tender, the partial payment of wages mittee of Experts has on a number of occa- in the form of allowances in kind, wage sions drawn attention to the fact that pro- deductions and the attachment of wages. visions of national legislation authorizing Concerning the notion of the “wage” to be deductions by virtue of individual agree- protected under the Convention, the Com- ment or consent are not compatible with mittee has pointed out that while the wage the terms of the Convention. The Conven- nature of any sums paid by an employer tion is considered as fully applied by States to an employed person for work done whose national laws or regulations specify may vary according to national legisla- the types and fi x the overall limits of per- tion, all earnings, however termed or con- missible deductions, and also prohibit any sidered for the purpose of calculating the other deductions. In other instances, the base wage, benefi ts and other allowances, Committee has emphasized that there is have still to enjoy full wage protection in an obligation to keep workers informed accordance with the provisions of Articles of the legal provisions regulating wage 3 to 15 of the Convention.8 In relation to deductions. the payment of wages in legal tender, the Regarding the attachment or assign- Committee has stressed that the relevant ment of wages, the Committee of Ex- provision is suffi ciently clear and precise, perts has concentrated its comments on and therefore practices such as providing whether or not the ratifying States have convertible tokens of the in place in fact adopted national laws and regu- of cash, or paying wages in local govern- lations which set out the conditions and ment bonds, or converting wage arrears the limits within which wages may be into an internal debt are inconsistent with attached or assigned, and which protect the requirements of the Convention.9 wages against both of these procedures to With regard to payments in kind, the the extent deemed necessary for the main- Committee of Experts has principally fo- tenance of workers and their families. Con- cused its comments on the need for ad- cerning the requirement for a prompt fi nal equate guarantees that allowances in kind settlement of outstanding wage payments are indeed benefi cial to workers and their upon the termination of the employment families and they are valued reasonably.10 relationship, the ILO’s supervisory bodies In concrete terms, the Committee has un- have affi rmed that such an obligation ap- derlined three main points: fi rst, the mo- plies to all persons to whom wages are dalities of such payments are to be regu- paid or payable, irrespective of the char- lated by legislation, collective agreement acteristics of their contracts, formal or non- or arbitration award, and not left to indi- formal, whatever the cause of the termina- vidual agreement between the employer tion, and independently of the nationality and worker. Secondly, setting an upper of the workers concerned.12 limit on the amount of wages which may Finally, it should be noted that, at its be paid in kind does not resolve the prob- forthcoming annual session (Nov.-Dec. lem of how the valuation of these allow- 2002), the Committee of Experts will be ances is to be made. Thirdly, when pay- considering for adoption a general survey ment consists of allowances other than of national law and practice in regard to the

6 Protection of Wages Convention (No. 95) report of the Committee set up to examine the repre- and Recommendation (No. 85) on the basis sentation under article 24 of the Constitution alleg- of reports which have been supplied by ing non-observance by Congo of Convention No. 95, Mar. 1996, GB.265/12/6, paras. 21-24, pp. 6-7. member States under article 19 of the ILO 7 See, for instance, ILO, Report of the Commit- Constitution. tee of Experts, 2001, p. 354 (Congo); 1999, p. 319 (Ukraine); 1998, p. 216 (Ukraine). See also ILO, Record of proceedings, International Labour Conference, 86th Notes Session, 1998, p. 18/101, and International Labour Conference, 75th Session, 1988, p. 28/48. 1 See International Labour Conference, 26th Ses- 8 See, for instance, ILO, Report of the Commit- sion, 1944, Report I, p. 51. tee of Experts, 1998, p. 217 (). See also the 2 See International Labour Conference, 31st Ses- report of the Committee set up to examine the repre- sion, 1948, Report VI (c)(1), p. 3. For the Conference sentation under article 24 of the Constitution alleging discussions which led to the adoption of the Con- non-observance by Venezuela of Convention No. 95, vention and the Recommendation, see ILO, Record Mar. 1997, GB.268/14/9, paras. 17-23, pp. 5-8. of Proceedings, International Labour Conference, 31st 9 See, for instance, Report of the Committee of Session, 1948, pp. 459-469, and International Labour Experts, 2001, p. 355 (Costa Rica); 1997, p. 219 (Argen- Conference, 32nd Session, 1949, pp. 324-332, 499-524. tina). See also the report of the Committee set up to ex- To date, Convention No. 95 has been ratifi ed by 95 amine the representation under article 24 of the Consti- member States. tution alleging non-observance by Congo of Conven- 3 Convention No. 173 entered into force in 1995 tion No. 95, Mar. 1997, GB.268/14/6, para. 21, p. 5. and has so far been ratifi ed by 14 member States. 10 See, for instance, Report of the Committee of 4 It should be recalled that, following the recom- Experts, 1996, p. 179 (Greece); 1993, p. 245 (Egypt). mendations of the Working Party on Policy regarding 11 See, for instance, the report of the Committee the Revision of Standards which was set up in 1995 set up to examine the representation made under ar- for the purpose of assessing actual needs for the revi- ticle 24 of the Constitution alleging non-observance sion of standards, the Governing Body has decided to by the Republic of Moldova of Convention No. 95 include Convention No. 95 among the Conventions which reads in part: “the Committee does not need which are considered up to date and the ratifi cation to insist that Article 4 of the Convention may only be of which should be encouraged since they continue understood as laying down a comprehensive prohibi- to respond to current needs; see GB.283/LILS/WP/ tion against replacing salaries and other contractual PRS/1/2, para. 17. remuneration by harmful products such as alcoholic 5 See ILO, Report of the Committee of Experts, beverages, narcotic substances or tobacco. The Com- 1997, General Report, paras. 71-73, p. 21. In Ukraine, mittee recalls, in this respect, that the Committee of for instance, the non-payment of wages began in 1994 Experts on the Application of Conventions and Rec- and by 1998 wage arrears had grown to more than 5 ommendations has consistently read into the provi- billion hryvnya (nearly US$3 billion). This amount sion of Article 4, paragraph 1, of the Convention a is greater than a six-month wage bill for the entire clear proscription of wage payment in the form of country. In total, nearly 200,000 enterprises reported alcoholic beverages or noxious drugs of any sort and an inability to pay wages; see ILO, Ukraine: Country in any circumstances. Moreover, the Committee is of Employment Policy Review, 1999, p. 50. Similarly, in the the opinion that the exclusion of liquors and noxious Russian Federation, the number of workers affected drugs from permissible allowances in kind should be by arrears is huge. According to March 1996 data, only read in conjunction with the provision of Article 4, 60 per cent of workers received their last wage in full paragraph 2, of the Convention which limits pay- and on time. About a quarter of employees received a ment in kind to those allowances which are appro- wage on time but were not paid in full, whilst around priate and benefi cial to the worker and his family”; 11 per cent received their wage late and not in full; GB.278/5/1, para. 32, p. 7. see H. Lehmann, J. Wadsworth and A. Acquisti: Crime 12 See, for instance, Report of the Committee of and punishment: Job insecurity and wage arrears in the Experts, 2001, p. 356 (Côte d’Ivoire); 1997, p. 223 (Lib- Russian Federation, 1998, p. 6. See also OECD: Russian yan Arab Jamahiriya); 1992, p. 260 (Iraq). See also the Federation, Economic Surveys, 1997, pp. 36-37. report of the Committee set up to examine the repre- 6 See, for instance, ILO, Report of the Committee sentation made under article 24 of the Constitution of Experts, 2000, p. 215 (Russian Federation); 1998, alleging non-observance by Mauritania of Convention p. 212 (Russian Federation); 1997, p. 227 (Ukraine); No. 95, Offi cial Bulletin, Vol. 74, 1991, Series B, Sup- 1995, p. 233 (Turkey). See also the report of the Com- plement 1, paras. 68-69, 71 and 75, pp. 15-16, and the mittee set up to examine the representation under report of the Committee set up to examine the repre- article 24 of the Constitution alleging non-observance sentation made under article 24 of the Constitution al- by the Russian Federation of Convention No. 95, Nov. leging non-observance by Iraq of Convention No. 95, 1997, GB.270/15/5, paras. 30-40, pp. 7-10; and the May-June 1991, GB.250/15/25, paras. 23-24, pp. 4-5.

7 Background and general information

The local ups and downs of a universal principle

The universal principle that labour is not a commodity was inter- preted in highly specific ways in the during the first half of the twentieth century.

Louis Bredow Journalist

“ abour is not a commodity,” states Thus, in affi rming the principle that la- Lone of the ILO principles adopted in bour was not a commodity, many delega- 1944 by the International Labour Confer- tions to the ILO Conference were express- ence held in Philadelphia. Although the ing their determination to counter those principle was proclaimed unanimously, grim forecasts. Many employers, trade un- it probably had different connotations for ionists and progressive politicians agreed different members of the tripartite delega- on the need to remove labour from the tions from the 41 countries that attended infl uence of the market and to regulate the Conference. wages through long-term collective agree- Most of the delegates to the Conference ments endorsed by the state. Only in this – which was convened at the height of the way could and industrial Second World War – were aware of the peace be guaranteed. Faced with these ur- threats that could rapidly materialize as gent tasks, the Conference hastened to es- soon as the war was over. The social truce tablish the universal principles that would which trade unions had agreed to in order act as beacons for the welfare state and de- to support the war effort in their respective cent work for everyone. countries would come to an end, and many The desire to prevent the livelihood of demands put on hold by the war would human beings from being determined by once again be made. The winding up of the inhuman mechanisms of supply and the war industries was expected to result demand had already been voiced many in job losses, but no one had a clear idea years earlier. For example, the idea that of how to adapt the production system to labour should not be a commodity was at peacetime purposes. Furthermore, it was the very heart of Catholic social doctrine. feared that the return of large numbers of Pope Leo XIII had put forward this prin- troops to civilian life would further swell ciple in 1889, and 40 years later, in 1931, the great wave of mounting unemploy- Pius XI’s encyclical Quadragesimo Anno ment. All of these prospects made Marx’s restated the theological arguments under- analysis particularly relevant, since, start- pinning that principle. However, the argu- ing out from the premise that labour was a ments advanced in support of the principle commodity, Marx had predicted the emer- were not just ethical, but also economic, gence of serious social confl icts if market and a very wide range of social thinkers forces were allowed to push wages down. were persuaded that any Ironically (and cruelly), the end of the war which tolerated the exploitation of work- foreboded more violence. ers was doomed to violence and crises.

8 Thus, during the fi rst half of the twen- enforced with the help of state or federal tieth century, the idea that labour should troops, so trade union activity was dis- not be a commodity found support both rupted by the forces of law and order be- in Christian theology and in non-Marx- fore it could lead to negotiations with the ist economic and social theories. Not employers. surprisingly, therefore, a broad consen- The trade unions consistently argued sus legitimated the principle when it was that the Sherman Act had been adopted proclaimed in the 1944 Declaration of Phil- to regulate the commerce or exchange of adelphia. commodities, but labour could not be con- As part of that consensus, however, sidered a commodity. They therefore de- the importance American trade unionists nied that the draconian Sherman Act was attached to the principle is particularly relevant to labour issues. However, their noteworthy. “Labor is not a commodity” argument had no specifi c basis in case law, was a very popular slogan among workers and for many years the unions were de- in the United States and the principle that fenceless in the face of the Sherman Act, it encapsulated bore special signifi cance which became a major obstacle to the de- for them. Indeed, American trade union- velopment of trade union demands and ists proclaimed it with a view to removing the American labour movement. what for many years had been the greatest The unions had to endure the legalized obstacle to the development of the trade violence sanctioned by the Antitrust Act union movement in that country, namely for 24 years before the Clayton Act was fi - the stringent provisions of the law protect- nally passed in 1914 under pressure from ing against monopolies, or Sherman Anti- the labour movement. Through this law, trust Act. trade unionists succeeded in introducing The adoption of the principle by the the principle that “the labour of a human ILO was expected to strengthen the posi- being is not a commodity or article of com- tion of American trade unions in the legal merce” and that therefore trade union ac- battle they had been waging for years tivities did not fall within the scope of the against the employers. Sherman Act. So we can now understand In fact, since 1890, US employers had why the proclamation of the same princi- successfully been developing a legal strat- ple by the ILO Conference in Philadelphia egy that assimilated labour to a commod- had very special signifi cance for American ity. On several occasions the employers’ at- workers. torneys had succeeded in making the law The Clayton Act was a major success courts apply the Antitrust Act against the for the labour movement.1 By reducing unions. The Act outlawed “every contract, the number of injunctions which, on the combination in the form of trust or other- basis of the Sherman Act, prevented indus- wise, or conspiracy, in restraint of trade or trial action, it enabled workers to carry out commerce” and could be interpreted in strikes, boycotts and peaceful demonstra- such a way as to characterize trade union tions effectually. organizations as “conspiracies” and in- It is not surprising that the founding dustrial action or boycotts by the workers President of the American Federation of as limiting the trade in the commodity of Labor, Samuel Gompers, considered the “labour”. On the strength of such an inter- Clayton Act the “Magna Carta” of trade pretation of the Sherman Act, the employ- unionism in the United States. ers had secured injunctions from the law The Clayton Act served the purpose of courts to effectively put an end to a wide preventing the Sherman Act from being range of trade union activities. By means misused against organized workers. But, of injunctions, the employers could pre- though affording trade unions a certain vent workers from forming a union, or- degree of protection against the antitrust ganizing a strike or pressing their claims legislation, it also gave rise to considerable in any other way. The injunctions could be controversy.

9 A good example of this occurred in the ries in New York City experienced a major period following the Philadelphia Confer- boom in that period. The number of ence.2 multiplied, wages rose and working hours In mid-1945 the Supreme Court of the decreased. United States had to decide whether the These practices alarmed manufacturers actions of a particular union were unlaw- located outside the city boundaries. Not ful under the Sherman Act or whether, on only were they effectively being prevented the contrary, they were protected by the from marketing their products in the coun- Clayton Act. The case was brought before try’s largest conurbation, but now they the Supreme Court after several years of also found that their own markets were legal proceedings. being eroded by competitors who could The defendant was Local Union No. 3 sell products at cut-throat prices. Manufac- of the International Brotherhood of Elec- turers located outside the city feared that, trical Workers (IBEW), with jurisdiction as a result of these developments, they over New York City. The plaintiffs were would eventually lose their markets and several manufacturers of electrical equip- be taken over by the metropolitan compa- ment whose factories were located out- nies. They therefore sought the protection side the city. They argued that the union of the law courts, invoking the Sherman was preventing them from manufacturing Antitrust Act. and selling their goods in the New York In the opinion of the original-jurisdic- metropolitan area because of the closed- tion judge, it was fairly obvious that the shop agreements which the union had practices in question violated the provi- concluded with electrical installation con- sions of the Sherman Act. The judge is- tractors in the city. In fact, the latter were sued injunctions against the union, or- not allowed to hire personnel that were not dering it to put an end to some of its members of the union. practices. Summing up the facts, the Supreme In the event, however, the Court of Ap- Court recognized that the aim of the peals overturned the decision of the Court union was to increase its membership, re- of First Instance, arguing that the activ- duce working hours, and improve wages ities of the trade union could not be judged and employment opportunities for its under the Sherman Act since the Clayton members. In order to achieve better em- Act expressly prohibited doing so. The ployment opportunities, the union had ar- Court of Appeals quoted the relevant para- ranged for electrical equipment factories in graph of the Clayton Act.3 “The labor of a New York City to benefi t from a protected human being is not a commodity or arti- market in which to sell their products. cle of commerce. Nothing contained in the On the strength of the closed-shop agree- antitrust laws shall be construed to forbid ments in force in the electrical installation the existence and operation of labor, agri- companies, the union had instructed its cultural, or horticultural organizations, in- members to boycott the installation of any stituted for the purposes of mutual help, electrical implement manufactured by com- and not having capital or conducted panies located outside New York City. The for profi t, or to forbid or restrain individ- companies entrusted with installing electri- ual members of such organizations from cal equipment had therefore been forced to lawfully carrying out the legitimate ob- buy their supplies from factories in New jects thereof; nor shall such organizations, York that exclusively employed members of or the members thereof, be held or con- Local Union No. 3. Factories were also being strued to be illegal combinations or con- forced to sell their products exclusively to spiracies in restraint of trade, under the local installers who had concluded closed- antitrust laws.” shop agreements with the union. The controversy reached the Supreme As might be expected, in the absence Court, which found itself in the delicate of competition, electrical equipment facto- position of having to reconcile two laws

10 that apparently neutralized each other: ⅙ unions are forbidden to spend money the Sherman Act, designed to protect an or make contributions in connection economy based on free competition, and with federal elections, primaries and the Clayton Act, which sought to protect conventions; the right of unions to strive for better liv- ⅙ ing standards and working conditions for the National Labor Relations Board is their members. authorized to secure injunctions that re- The courts could not order manufac- strain labour unions from engaging in turers or installers of electrical equipment a set of predefi ned “unfair labor prac- to terminate their agreements since these tices”; had been negotiated collectively with the ⅙ are given the right to sue union. for damages from strikes or work stop- The Supreme Court delivered an exten- pages deemed unlawful under the Taft- sive ruling in which it expounded the dif- Hartley Act; fi culties it had encountered in reaching a ⅙ coherent decision, given that the two main employees are explicitly granted the legal instruments at its disposal contra- right not to join a union and not to dicted each other. participate in collective action (a right However, the Court stated that a con- that was never legally denied); spiracy did exist between the unions and ⅙ closed-shop (a workplace in which the employers, as was apparent from the only union members can be employed) fact that the employers had engaged in agreements are prohibited; price-fi xing. The Court decided that the union had forfeited the immunity it en- ⅙ limited union-shop agreements are al- joyed under the Clayton Act and that lowed only if a majority of the employ- therefore its actions fell within the scope ees agree in a secret-ballot election and of the Sherman Act. “Had the union acted only if permitted by state law; alone, in its own , and had this re- ⅙ employers are prohibited from contrib- sulted in a restraint of interstate trade, uting to union health and welfare funds the Sherman Act would not apply. But that are not under joint labour-manage- the union helped the manufacturers and ment administration; traders to violate that law, and therefore the union’s immunity is annulled.” ⅙ the federal government may stop a The Court’s ruling did not fail to elicit strike for a so-called “80-day cooling criticism. “What is legal when performed off period”. in isolation should not become illegal when performed with the help of others Nevertheless, in spite of the ups and for the same purpose. Otherwise collective downs it experienced, the principle that bargaining will come under the threat of labour is not a commodity remained fully illegality,” argued one of the judges, who in force and the Sherman Act could not be had a divergent opinion. invoked again to prevent workers from The ruling of the Supreme Court on forming trade unions or engaging in in- this matter became a precedent in case dustrial action. This “American adven- law, thus paving the way for the Sherman ture” could be regarded as an anecdote Act to be invoked once again in disputes of merely marginal interest if it did not between employers and unions. tellingly illustrate the questionable use to Even worse was that the contradic- which a universal principle can be put in tions between the two laws led the US certain specifi c contexts. Hence the need Congress to adopt the Taft-Hartley Act in to remain ever vigilant to ensure that prin- 1947 which limits trade union rights. Key ciples and standards retain the spirit and elements of the Taft-Hartley Act include serve the purposes for which they were the following: adopted.

11 Notes tracts”). The Wagner Act, regulating the organiza- tion of trade unions and collective bargaining, was adopted in 1935. 1 Other legal instruments extended trade union 2 rights. The Norris-Laguardia Act (1932), for exam- US Supreme Court, Allen Bradley Co. v. Local ple, prohibited contracts whereby an employee Union No. 3, 325 U.S. 797 (1945). undertook not to join a union (“yellow dog con- 3 Part 6 of Law 15 U.S.C.A. 17.

12 Background and general information

It pays to be union, US figures show

Unionized American workers earn much more than their non-union counterparts. Also, women and ethnic minorities face a smaller pay gap in union-organized workplaces. So why aren’t more Americans in a union?

Ian Graham Journalist

t pays to be union. That’s offi cial – at least organizable workers – has fallen dramati- Iin the United States. Once again, govern- cally over the past few decades. ment statistics show that unionized work- US union density peaked in 1945-46 ers have much higher earnings. and in 1954, when 35 per cent of work- Last year, American union members ers were union members. By 1983, this across all sectors earned on average about had declined to 20.1 per cent. After that, 25 per cent more than their non-union a steep drop brought it down to 13.5 per counterparts, the US federal Department cent in 2001 (fi gure 2). Moreover, the latest of Labor found.1 Union workers averaged fi gure is mitigated by a rise in organizing US$718 a week, while the unorganized had among government services, where union to make do with $575. density is currently 37 per cent. In private In almost all occupational groups, non-agricultural industry, the American union workers fared much better than oth- unions now organize less than 10 per cent ers, as shown in table 1. For workers in the of the workforce. protective services industry, the union ad- So why have the American unions’ or- vantage was a staggering 56 per cent. ganizing rates failed to match their very “A woman’s place is in her union,” in- clear achievements on the wages front? sists another old labour saw. Here too, the One reason often advanced by US trade facts are fi rmly on the American unions’ unionists themselves is that they did not side. Women union members earn 30 per place a high enough priority on new or- cent more than non-union women. In other ganizing during the 1970s and 1980s. words, the is narrower They changed that approach in the 1990s, when unions are present (see fi gure 1), al- when the “Union Yes” slogan heralded a though differences certainly remain. new emphasis by sectoral unions and the A similar effect can be seen for ethnic national labour federation, the AFL-CIO. minorities. African-American union mem- Big new funds went into organizing, and bers earn 30 per cent more than their non- many more organizers were recruited. But, union counterparts and for Latino work- of course, the impact of this would take ers, the union advantage reaches 45 per some time to be felt. cent (fi gure 1). In any case, there is another, much Americans generally like a bargain, so bigger obstacle to union membership in it might be expected that they would be America – anti-union employers, backed queuing up to join the unions. But that is by legislation that frustrates organizing at far from being the case. Union density – every turn (see also the article by Louis union membership as a proportion of the Bredow on page 8).

13 Table 1. US union and non-union earnings by occupation, 2001 Full-time wage and workers’ median weekly earnings

Occupation Union ($) Non-union ($) Difference (%)

Total 718 575 25.0 Executive, administrative, manager 869 865 –0.4 Professional 864 853 0.1 Technicians 731 662 11.0 Sales 559 575 –3.0 Administrative-clerical 597 472 26.0 Service, protective 809 518 56.0 Service, other 426 333 27.0 Precision, craft, repair 822 590 39.0 Machine operators 587 421 39.0 Transportation, moving 724 521 39.0 Handlers, labourers 530 369 44.0 Farm, forestry, fish 587 345 70.0

Source: US Department of Labor, Employment and Earnings, January 2002. Prepared by the AFL-CIO.

Figure 1. Median weekly earnings of full-time US wage and salary workers, 2001

Median weekly earnings ($) 800

765 Union 700 718 Non-union

647 643 600 603 575 578

500 494 463 400 398

300

200

100

0 Total Men Women African-American Latino

Source: US Department of Labor, Employment and Earnings, January 2002. Prepared by the AFL-CIO.

14 Figure 2. US union density, 1930-2001

% 40

35

30

25

20

15

10

5

0 1930 1940 1950 1960 1970 1980 1990 2000

Note: Bureau of Labor Statistics information before 1981 was compiled on a different basis from the present series and it is not necessarily comparable. Sources: Bureau of the Census, Historical Statistics of the United States, Colonial Times to 1970; Bureau of Labor Sta- tistics, Handbook of Labor Statistics Bulletin 2070, December 1980; and Bureau of Labor Statistics, Employment and Earnings, January, various years, 1983-2002. Prepared by the AFL-CIO.

According to a major national survey which went on to state that American law from September 2001, 68 per cent of work- is “unable to protect workers when the em- ing Americans believe that workplace ployer is determined to destroy or prevent rights need more protection and 65 per union representation. Weak laws and en- cent also felt that corporations have too forcement also inhibit the practice of col- much power and new laws are needed to lective bargaining.” hold companies responsible for the way In the ICFTU’s opinion, “a series of they treat employees. The poll was con- far-reaching measures needs to be taken ducted for the AFL-CIO by Peter D. Hart in order to establish genuine respect for Research Associates.2 It noted a 10 percent- core labour standards in the US, particu- age point increase over the past fi ve years larly with regard to trade union rights”. in workers’ view that management has But perhaps the highest-profi le denun- too much power and a 12-point increase ciation of US came two years in those saying new laws are needed. ago, from Human Rights Watch. In a special Certainly, America’s labour laws have report, it noted that thousands of American often come in for strong criticism. “The workers are fi red from their jobs each year right to organize and the right to strike or suffer other reprisals for trying to or- are not adequately protected under US ganize unions. Employers can resist union labour legislation,” commented the Inter- organizing by dragging out legal proceed- national Confederation of Free Trade Un- ings for years.4 The penalties for violating ions (ICFTU) in a detailed submission to labour laws are so slight that companies the ILO Governing Body in March 2002.3 often treat them as a routine cost of doing The AFL-CIO is an affi liate of the ICFTU, . In any case, as Human Rights

15 Watch pointed out, millions of workers – also, in many cases, robbed them of their including farmworkers, domestic house- savings. Not only had employer hold workers, low-level and contributions to schemes been in- “independent” contractors who are really vested in the company’s own stock, but dependent on a single employer – are delib- there had also been a growing tendency erately excluded from the coverage of laws to press workers to put their own retire- on organizing and bargaining rights. ment savings back into the company. Human Rights Watch called on the US Tough questions are now being asked Congress to ensure, amongst other things: about the wisdom and morality of plough- ⅙ rapid reinstatement and full back pay ing employees’ pension funds back into for workers who are fi red for organiz- their employers’ fi nances. One way of ing; “Enron-proofi ng” retirement provisions ⅙ is through defi ned-benefi t pension plans. faster election procedures for determin- These carry insurance and are thus some- ing union representation in a work- what better protected against employer place; bankruptcies. ⅙ expedited appeals to resolve unfair la- Signifi cantly, the 1999 fi gures showed bour practices more quickly; that 70 per cent of union members in ⅙ proper union access rights to work- American private industry had defi ned- places; benefi t retirement coverage, but only ⅙ stronger remedies against bad faith bar- 16 per cent of non-union workers… gaining by employers; Notes ⅙ US ratifi cation of ILO Conventions on freedom of association and collective 1 The fi gures on earnings and union member- bargaining. ship in this article, and the tables and graphics, are taken from The union difference, an online publication Such measures would undoubtedly of the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO). In turn, the boost American labour’s organizing rates. AFL-CIO drew its statistics from two main sources: Meanwhile, the unions continue to im- US Department of Labor, Employment and earnings, prove their members’ pay and conditions. January 2002, and Bureau of National Affairs, Union Of course, pay is about more than members and earnings data book, 2000. The union differ- ence is online in English at http://www.afl cio.org/ wages alone. are an important uniondifference/index.htm and in Spanish (as a part of any remuneration package. So is PDF) at http://www.afl cio.org/uniondifference/ health coverage, particularly in the US diferencia_sindical.pdf where there is no generalized health in- 2 AFL-CIO, Workers’ rights in America, Septem- surance scheme. ber 2001. Also downloadable as a PDF at http:// On these points, too, union members www.afl cio.org/rightsinamerica/report.pdf win. Government fi gures in 1999 showed 3 Freedom of association and effective recognition of that 73 per cent of unionized workers in the right to collective bargaining, document for the ILO Governing Body, 283rd Session, March 2002. This American private industry participated document reproduces information received and does in medical care benefi ts, as against just not represent the opinion of the ILO. The section on 51 per cent of non-union workers. Simi- the United States begins on page 179. A PDF version larly, 79 per cent of union workers were can be downloaded at http://www.ilo.org/public/ english/standards/relm/gb/docs/gb283/pdf/gb- covered by pension plans, compared with 3-2-coll.pdf 44 per cent of non-union workers.5 4 Human Rights Watch, Unfair advantage, August Retirement benefi ts are a sore point for 2000. Also available online in English, French and Span- American workers these days. The recent ish at http://www.hrw.org/reports/2000/uslabor big corporate collapses suddenly threw 5 Bureau of Labor Statistics, Employee benefi ts in long-serving employees on to the street but private industry, 1999.

16 The crisis of wage arrears

Wage debt: Africa’s other plague

Non-payment of wages has reached epidemic proportions in parts of Africa. It has serious, even fatal, consequences for the workers concerned. And it is undermining education, health, democracy and the rule of law.

André Linard Journalist With contributions from the Syfia International network

n 20 June 2002, workers from Senegal’s 1996.” (Germain Sylaï Gotto, Agence Syfi a, Osupplementary nutrition programme June 1997.) marched through Dakar demanding pay- In the Democratic Republic of the ment of four months’ wage arrears. Before Congo, the mining concern Gécamines that, and for the same reason, the workers was similarly hit. Its new boss, appointed of the Dakar public transport company in 1999, paid off part of the outstanding Sotrac and the textile workers had taken wages, but “the previous wage arrears, for to the streets several times. 1997 and 1998, could not be covered. On the These are just a few recent examples contrary, further wage debts accrued, up to among many. They illustrate a common 2001, so that today, some 18 months’ pay is practice on the continent of Africa – de- owing.” (Le Phare, Kinshasa, 3 May 2002.) layed payment of wages, sometimes so In Madagascar, there are at least three delayed that it amounts to non-payment. different types of delay – wages that are In September 2001, the staff of the Côte never paid, delayed payments and arbi- d’Ivoire newspaper Fraternité Matin were trary wage cuts. suddenly faced with the result of a pull-out Other variants exist, such as a Zimba- by the State. One Friday, they found just bwean case denounced by the ICFTU: in 5,000 francs CFA (less than US$7) in their October 2001, “about 200 cleaners at the pay packets. In February 2002, the staff of Harare Central Hospital were suspended Air Afrique were hit when the company pending .1 They had been on fi led for bankruptcy. It already owed two strike since September 24 in protest at months’ wages to its workers in Togo and being paid less than half the monthly sal- Benin, and six months’ pay to those in Côte ary they were contracted to have.” Another d’Ivoire. And so it goes on … problem is the non-payment of wages to If we look back a little farther in time, trade union representatives who have many more examples come to light. “The been suspended because of their activi- only thing that isn’t going up is offi cials’ ties, as in Malawi.2 salaries,” wrote a Central African journal- ist in mid-1997. “But in any case, none of them have seen any money since the begin- All sectors affected ning of the year. At the end of April, after threatening to go on strike, they did get one Different sectors are affected in different payment. It was their salary for December places, depending on the situation. In Sen-

17 egal, it is the private enterprises that fall be- development strategy has been put in place. hind. Many company bosses do not abide The last big repairs date back to 1992!” ex- by the legislation on wages. The worst-hit claims Rambelo Jacky, RNFCM’s chief ex- sectors are transport, textiles and food and ecutive. The result: since 1998, the staff have agriculture. “Over the past fi ve years, there received only half of their salary, which has has been a steep rise in the number of dis- never been revised. For the past six months, putes linked to wage payment problems, they have received nothing at all. and the courts have been swamped with Delays in wage payments may also be cases,” explains lawyer Ablaye Fall, a labour due to external causes, such as economic law specialist in Dakar. On the other hand, conditions. Thus, in Benin the fall in the public servants’ salaries are paid regularly. price of cotton on the world market (down But what goes for Senegal does not from US$1,300 a tonne in 2000 to US$660 necessarily hold true elsewhere. In Cam- in June 2000) deprived the cotton company eroon, for instance, many town halls have Sonapra of resources, and the producers faced labour disputes over the pay owed and transporters have not been paid. Simi- to council staff. “Our salaries were cut, like larly, some delays in paying state employ- those of all state employees, but in fact, ees (civil servants, teachers and so on) are we’re not employed by the state,” explains due both to administrative failings and to Mahzou, a town clerk in Douala. “Later, the strangulation caused by structural ad- the state employees’ salaries were raised justment plans. In developing economies, back up a bit, but not ours.” enterprises do not necessarily have the So they counted as state employees reserves or the easy access to credit that when it came to pay cuts, but not for pay would enable them to weather a cash- rises. Playing around with employment fl ow crisis. status is another way of avoiding full pay- ment of wages. In Madagascar, employees of public en- Near- terprises, or companies in which the State holds shares, are among the fi rst to suf- The consequences of delayed payments fer. Then the short-term staffers, in other can be many, varied and serious – for the words those state employees who never workers, the enterprise and as a make it into the great family of civil serv- whole. ants. Then the workers in small and me- The fi rst to suffer are, of course, those dium-scale enterprises, many of which are who have earned their pay but do not re- run by foreigners. ceive it. Sometimes, their situation is dra- matic. On Madagascar’s railways, during the fi rst six months, about 40 employees Bad management died from impoverishment. The families and world markets of some unpaid workers are now living in old rolling stock. As for the 24,000 workers Non-payment of wages is due to at least at Gécamines and their families, they have three causes – lethargic leadership, cor- been left without any social protection. “In ruption and bad management. In Mada- Kinshasa and Matadi, families are being gascar, for example, more than 150 public turned out of their homes; the children enterprises are scheduled for privatization, are being kicked out of school; hospitals, and some are being run down by execu- clinics and laboratories are slamming the tives who intend to buy them on the cheap door in their faces…” (Le Phare, Kinshasa, later. But a badly managed enterprise does 3 May 2002.) not have the resources to pay wages. A good In the fi ght for survival, these workers case in point is the National Malagasy Rail can sometimes fi nd themselves in situa- Network (RNCFM). Since 1996, this com- tions that are close to slavery. In Africa, pany has been shunted into a siding. “No one of the main causes of is

18 indebtedness.3 During the war in the Demo- Trade union action cratic Republic of the Congo, unpaid pub- lic servants contracted debts with usurers Certainly, there are solutions to this prob- and were forced to do agricultural work lem, but they are not simple. Often, the on the moneylenders’ farms. Some of the workers face a dilemma. Should they workers sold their children in order to protest, at the risk of losing their jobs, or repay their debt. should they accept delayed payments in To avoid ending up without any in- order to maintain at least some source of come, workers are also sometimes driven income? “This is a diffi cult battle which we to seek alternatives, and this can be to the often lose, because workers are much more detriment of the enterprise or other social concerned with holding on to their jobs,” groups. Many desert their posts and go off explains Iba Ndiaye Diadji. He heads the to work elsewhere, in order to make ends Confederation of Autonomous Trade Un- meet. Take the case of Mose, a short-term ions of Senegal (CSA). employee at the Ministry of Agriculture in In Madagascar, for instance, despite Madagascar. He gets into the offi ce at fi rst all the failings, few complaints are lodged light. An hour later, having put in an ap- with the labour inspectorate. Unpaid pearance, he is off to a little garage where wages account for only 10 per cent of the he can earn a crust by doing small repairs. complaints registered. At 4 pm, he goes back to the offi ce to clock Does the existence of trade unions help off. Then straight on to his other job, driv- to ensure regular payment for the workers? ing a taxi. Asked about his absences, Mose Yes, trade unionists generally reply. “The replies, “My boss understands. After all, existence of unions is extremely important, the family has to survive somehow. The because it makes the employer think,” an State can’t offer me anything better!” expert in Dakar emphasizes, “particularly Unpaid or underpaid workers do in- when the unions are cool-headed and non- deed sometimes have to take on a second confrontational and aren’t out to destroy job and may be tempted to absent them- the tools of the trade.” selves during working hours in the search First and foremost, the union presence for additional income. In Cameroon, the has a preventive role. If the Senegalese head teacher of a primary school in Douala public services pay their staff on time, this explains that “due to inadequate , is “linked to the prestige of the administra- some teachers can no longer afford to pay tion, but also to the fact that the most tur- for their transport to work. So they no bulent unions, such as those of the teach- longer come to the school, and you can ers, are in the public services”, Iba Ndiaye imagine the losses involved.” Diadji explains. Of the 67,000 state employ- Sometimes, the consequences are ees, 25,000 are teachers. worse, entailing corruption and extor- In Senegal, experience has shown that tion. Teachers deprived of their salaries it is more effective to promote negotiations frequently require “contributions” from between employers and workers. This parents, so certifi cates and lessons are lit- avoids long drawn out proceedings or dis- erally up for sale. And then there are the putes. However, lawyer Ablaye Fall notes, policemen who impose arbitrary fi nes and “agreements should never be reached pocket the proceeds. Unpaid journalists, against workers’ ”, because pay- meanwhile, resort to advertorials, spon- ment of wages is a right. But once a dispute sored features, “buff envelopes”, hacking. fl ares up, it becomes diffi cult to negotiate, Call it what you will. In all of these cases, because the labour inspector has to apply late payment or non-payment of salaries the law, which states that “the matter of has consequences that reach far beyond the wages is not negotiable”. workers concerned. The victims are the edu- When “prevention” is not enough, cation system, the rule of law, democracy trade unions proceed to other forms of ac- – in short, the whole of society. tion, and everything depends on the bal-

19 ance of strength that they can build up. In the lack of real independence for the judges Cameroon, in the course of a few years, and of resources for the plaintiffs. “It’s no salaries in the public service have been uni- use my going to the law. It would proba- laterally reduced. This amounts to a refusal bly be a waste of time. If I don’t have the to pay. For two years now, the Cameroo- means to ‘sweeten’ certain offi cials, I won’t nian teachers’ unions have staged a wave win my case,” reveals Basile, a Malagasy of strikes, demanding that their salaries be driver who has been unemployed since restored to their pre-1993 levels and call- April 2002. In 1997, Senegal introduced the ing for a stable employment status for their concept of a “référé social”, a plea of social members. They obtained this, a teacher’s urgency that may lead to an interim court union leader explains, and this means in order. But “there has to be an immediate particular that they are now entitled to danger and an absence of serious contesta- bonuses, but their tion”, lawyer Ablaye Fall points out. “omits to specify the amount. It says that Certain heads of small and medium- the amount of the bonuses will be deter- scale enterprises take advantage of the cre- mined by an implementation document, dulity of some employees and refuse to pay but we’re still waiting for that.” In the same their wages. “Certain new foreign investors country, town hall staff have conducted don’t give a damn about the labour laws several disputes, demanding payment of here, and fi nd pretexts for not paying their salaries that have been arbitrarily reduced. employees what they owe them,” a Mala- The result has been that payments are now gasy labour inspector maintains. This is be- at least being made regularly, even if they cause many workers do not know anything are occasionally delayed for two weeks. about their rights or the labour laws. In this situation, late payments are common. So the main way forward is to edu- challenge cate workers about their rights. This is a basic trade union activity. “Most work- When trade union organizations repre- ers don’t know what they’re entitled to. sent a signifi cant number of workers, and A lot still needs to be done to teach them are independent, their members become a about the labour laws,” explains the head force that the defaulters must reckon with. of the Fisemare trade union in Antanan- But these two conditions for effective trade arivo. Germany’s Friedrich Ebert Founda- unionism (representativity and independ- tion, in particular, has organized training ence) are not always fulfi lled. In Madagas- courses for workers, so that they know car, one reason why few workers turn to their way around the labour legislation the union is its political past. “I don’t fi nd and can defend their rights. After all, laws it necessary to join. The existing unions are there to protect the vulnerable against are so dependent on the political parties. the strong… So their concerns often don’t match those of ordinary wage-earners,” admits Rajo, a worker in a free trade zone. Whether this Notes is true, or whether it is due to a wrongful 1 International Confederation of Free Trade Un- perception of trade unions, is neither here ions (ICFTU), Annual Survey of Violations of Trade Un- nor there. Workers who are not organized ions Rights 2002. weaken their own defensive capacity, but 2 ibid. also that of their unionized colleagues. Rely- 3 See World Confederation of Labour (WCL), An- ing on the courts is often a gamble, given nual Report on Workers’ Rights 2001.

20 The crisis of wage arrears

Unpaid salaries in Africa: An explosive issue

There is a link between wage arrears in Africa and structural adjust- ment programmes promoted there by international financial institu- tions. But government policies are also partly to be blamed for the problem.

Ibrahim Mayaki Regional Specialist in Workers’ Education ILO Office Abidjan

n August 2002, when employees of the ailing fi nances. At that time, thousands of IBangui local council decided to hold an Malian civil servants were laid off. And not eight-day all-out strike, their discontent- only were there redundancies, but also de- ment peaked – and with good reason, for layed payments for those who remained most of the 400 council employees in the in work. Unpaid wages and “rationaliza- Central African Republic’s capital have not tion” were no doubt familiar ploys to a been paid for the last 42 months. Aware trade union movement that was the lead- of the administration’s fi nancial situation, ing pro-democracy force and that, in 1991, they are prepared to accept seven months brought General Moussa Traoré’s regime of back pay. Anything would be a help, as to an end. the situation is now desperate. “For the In the 1990s the “wage arrears club” last four years, nothing has been done to gained new members in the Central Af- ease the staff’s suffering. Many of my col- rican Republic, Chad and Niger. Benin, leagues have died in poverty, while oth- Côte d’Ivoire, Guinea Bissau, Madagas- ers, because they had no money, have seen car and Togo were also quick to jump on their wives or husbands and children die this shameful bandwagon, extending the before their very eyes,” one trade union delays in payment to 42 months. In Niger, offi cial lamented. another country in the throes of structural The case of the local government em- adjustment, the number of strikes in pro- ployees in Bangui is no isolated case in test at wage arrears grew virtually through- French-speaking Africa (see also the arti- out the decade. To wipe the slate clean, the cle by André Linard on page 17). For nearly Government went as far as issuing bonds two decades now, the non-payment of sala- to civil servants. But the whole operation ries has become a widespread problem was a failure, leaving sharks and throughout Africa, particularly in public speculators the main winners. It was not and semi-public administrations. until 1999 that social dialogue produced an Is this mere coincidence? In the early agreement that fi nally offered a way out. 1980s, Mali started the trend of late pay- From strikes to “ghost towns” and ment of African civil servants’ salaries from demonstrations to stormy negotia- when it embarked on a structural adjust- tions, the thorny question of the non-pay- ment course designed to cure the country’s ment of salaries in many French-speaking

21 African countries has remained a source of reached the point where the advice issued social instability. Here and there, protests by these institutions seems more like or- have already cut short the terms of several ders. What other interpretation is there for governments which have turned a deaf ear the remarks made last May by Burundi’s to the calls for talks. Minister for National Education when he Today though, calm would appear to threatened to discipline teachers striking have been restored. Various draft agree- for a pay increase by reiterating that “Bu- ments are being fi nalized, and in some rundi is hardly likely to increase salaries countries social pacts between employers at a time when the IMF is calling on our and trade unions have been concluded. country to slash its budget by 3.5 billion However, unless steps are taken to con- Burundi francs (US$4 million)”. solidate such social consultation, unless It is also important to point out the the commitments that have been made are fact that since the 1980s workers have not actually respected, and unless measures lia- only suffered the delayed payment of their ble to boost economic economy are imple- wages, but also a signifi cant decrease in mented, this slight improvement could be their purchasing power. For instance, a short-lived – all the more so since the phe- secondary-school teacher in Burundi with nomenon of wage arrears is now also hit- a university degree earns less than US$50 ting private-sector workers, who had pre- a month, “an amount which is just enough viously remained unaffected. to pay the rent, and even then only for a Now is surely the right time to attack home in a run-down area of the capital”, the roots of the problem. Admittedly, gov- one trade unionist explained. ernments are not entirely wrong to point In Côte d’Ivoire, salary levels for pub- out the poor economic situation, as Car- lic servants have been frozen since 1980, los Pinto Pereira, Guinea Bissau’s Minis- and the devaluation of the CFA franc in ter of Public Administration and Labour, 1994 did nothing to improve the situation did last April. Last May, the Guinea Bis- in the region. With regard to Cameroon, a sau Government began paying the arrears report by the French Senate noted that in it owed its teachers and medical staff by the wake of devaluation “Cameroon did giving them two of the four months they pull off the required changes, but only at had demanded. “The fact that other arrears the expense of budget cuts in the civil ser- have not been paid is not a sign of the gov- vice, a classic result of IMF intervention”. ernment’s lack of goodwill, but is due to The Senate report, which talks of “the in- a very diffi cult fi nancial situation,” said coherent policy of the International Mon- Pinto Pereira. And while the adjustment etary Fund, fortunately tempered by the programmes implemented in Guinea Bis- World Bank”, also notes that “far from sau would appear to have curbed infl ation, decreasing in scope, inequalities have ac- the current government debt is estimated tually grown”. In Cameroon, pay rises in- at 743.1 billion CFA francs (more than troduced in 2000 for civil servants were at US$1 billion), which is equivalent to fi ve best a “symbolic” gesture. times the country’s gross domestic prod- In Niger, the country’s four trade union uct (GDP). Meanwhile, a country like Cam- organizations joined together during the eroon is 5.8 billion in debt. In total, 1 May 2002 holiday to denounce the “ill- West Africa “owes” international lenders conceived” privatization of public utilities. almost US$70 billion, or nine-tenths the re- They called for a social plan to tackle “gal- gion’s average GDP. loping” infl ation, a “decline” in purchas- It seems that no wage negotiations at ing power and “rocketing” prices for bare all can take place without governments necessities. The same demands and unity deeming it necessary to consult the Bret- of purpose are evident in relation to struc- ton Woods institutions, namely the Inter- tural adjustment programmes in Burkina national Monetary Fund (IMF) and the Faso. Last May, all the trade union organi- World Bank. Indeed, things have now zations – right across the board – called for

22 strike action. Their banners read: “Power the problems that young democracies have to the social plan. The Government must inherited against their will (in the form of withdraw from the welfare sectors. Pov- colossal debts accumulated by former dic- erty has spread and will continue to do so, tatorial regimes, pressure from their fi nan- affecting more than half of Burkina Faso’s cial backers and adjustment plans that lack population. In the space of just one dec- an accompanying social element). But the ade, life expectancy has dropped from 52 fact remains that local trade union organiza- to 46 years!” tions are increasingly being led to denounce In July 2002, the minimum wage in not only the priority given to repayments Burkina Faso was 25,000 CFA francs and servicing their debts, but also the poor (roughly US$38 per month). More than management of fi nances and public prop- 45 per cent of the country’s 11 million in- erty which is also a drain on the respective habitants live below the poverty line (on countries’ meagre fi nancial resources. less than US$109 per year). In August 2002, Last year at a meeting in Nyanga, offi cials at the national telecommunica- Zimbabwe, representatives of the NGO tions agency even refused to carry out Transparency International from 11 Af- the instructions issued by the responsible rican countries reiterated that over sev- minister by not implementing the price in- eral decades almost US$40 billion had creases planned for certain types of com- been corruptly and illegally appropriated munication. In Togo, a senior manager can from the poorest countries on the planet, earn up to 230,000 CFA francs per month, most of them in Africa, and stashed away or barely US$12 a day, which is classed as a abroad by politicians, military personnel, “very high salary”. Yet as one non-govern- businessmen and other leading members mental organization (NGO) pointed out, of society. The repatriation of these funds for most workers in French-speaking Af- would certainly provide the region with rica, a pair of glasses costs several months’ just the shot in the arm it needs. wages. The African Civil Services Observ- But more should also be done to change atory (OFPA) based in Cotonou, Benin, bad habits, particularly among certain recently confi rmed that morale was ex- political leaders who still confuse pub- tremely low. According to the OFPA, an lic funds with the resources of their own economic upturn is impossible without a political groups. “Corruption is an evil, healthy administration, yet African civil a hindrance to the development of Côte servants will remain unmotivated unless d’Ivoire,” said senior civil servant, Gnam- they have decent working conditions. ien Konan, the managing director of the However, a word of caution: however country’s customs administration, speak- dramatic a situation, it can hide another ing recently in Abidjan. “Corruption has even more distressing one. One recent permeated the whole of society, spread study on four French-speaking African throughout the administration and struck countries (Burkina Faso, Guinea, Mali and at the heart of the forces of law and order Togo) published by the International Con- which are supposed to be setting an ex- federation of Free Trade Unions (ICFTU) ample,” he said in a furious attack on his concludes that there is “extensive evidence country’s politicians. In September 2001, of discrimination against women in these most managers of public companies in the countries”. According to the ICFTU, the Democratic Republic of the Congo were differences that continue to exist between dismissed for having shamelessly dipped men and women in the areas of employ- into their companies’ funds. ment and wage levels “indicate that the At the beginning of 2002, nine magis- elimination of discrimination will require trates were arrested in Benin, accused of governments to implement much more accepting bribes totalling 1 billion CFA pro-active, positive action programmes”. francs (US$1.4 million). In all, 29 magis- No one denies either the diffi cult eco- trates in Benin were charged with embez- nomic situation facing African countries or zlement between 1996 and 2000.

23 In Cameroon, a census of civil serv- it clear that an enormous task lies ahead of ants carried out in September 2000 re- them,” stressed Mr Eigen. vealed the presence (or rather absence!) Perhaps it would have been more re- of 15,000 “phantom” civil servants out of assuring if NEPAD’s concept had also in- the registered total of 135,000. Their sala- cluded civil society and trade union organi- ries were no doubt paid to those respon- zations. Concerns about this omission were sible for the scam. raised by African trade unions meeting in Apart from Botswana (6.4 out of 10), no Durban at the end of July under the aus- African country included in Transparency pices of the ICFTU and the Organization International’s Corruption Perceptions of African Trade Union Unity (OATUU). Index (CPI) published in August 2002 Meeting in Turin, representatives in Africa scored more than fi ve points out of a pos- of the ILO Bureau for Workers’ Activities sible ten. Two countries, Cameroon and also brought up this trade union issue. The Madagascar, even bring up the rear of the recent proposal by South African President group of “less transparent” countries. Thabo Mbeki to include tripartite consul- Looking at the situation objectively, tations in NEPAD and to create an institu- Africa is not alone: according to Transpar- tional mechanism for consultation with so- ency International, of the 102 countries sur- cial partners is likely to ease the legitimate veyed, almost 80 failed the integrity test. fears of trade unions and, above all, should In this respect, NEPAD, the New Part- make the NEPAD process more effective nership for Africa’s Development, could than it would otherwise have been in tack- be good news. “NEPAD has set out some ling major economic and social issues. bold aims, which I applaud,” said Trans- In the meantime, trade union organiza- parency International’s chairperson, Peter tions should become more involved and Eigen, at the beginning of September 2002 do more to fi nd solutions to the problems at the World Summit on Sustainable Devel- facing millions of underpaid or unpaid Af- opment in Johannesburg. “Just as interna- rican workers. Governments and employ- tional institutions and donor bodies must ers will have to seize the opportunities pre- now insist on transparency and good gov- sented to them by social dialogue to deal ernance, politicians need to rise to the chal- with an issue which is not just burning but lenge at national level. The new CPI makes also explosive.

24 The crisis of wage arrears

Unpaid wages in Belarus: Adjusting to economic transition

More and more Belarusian wage earners are receiving their money late – or not at all. Barter and payment in kind are threatening work- ers’ living standards. How can employers, government and the unions promote a better economic transition?

Kiryl Haiduk Svetlana Parchevskaya Labour Economists Minsk

he labour market of Belarus is riddled ties between former Soviet republics, thus Twith antagonisms, paradoxes and ri- resulting in the loss of traditional destina- gidities. tions for Belarusian exports. In a way, labour market developments It was in the aftermath of the Soviet in Belarus are path-dependent and there Union’s disintegration that employees is a vast array of adjustment measures fi rst experienced wage debts. At the time, in place, devised by the economic actors. these debts were a temporary phenome- But these adjustment mechanisms have non which vanished quite quickly. Belarus emerged due to a specifi c macroeconomic has not (yet?) repeated the situation in Rus- regime which the state has imposed on sia, where non-payments became a chronic society. disease of a demonetized economy, exten- This regime is essentially a transitional sively reliant upon barter transactions. In one, since the country is in the process of Russia, non-payments are so widespread dismantling the old state-socialist eco- that they have become socially acceptable nomic institutions, albeit at a very slow and even customary both for employers pace, and introducing elements of the mar- and employees (Kapeliushnikov, 2001). ket economy. In Belarus, such a regime is Just recently, there has been some evi- marked by the existence of soft-budget con- dence of a similar trend in Belarus. This straints, aimed at keeping state-owned en- article assesses the scope of the problem, terprise afl oat, and thus securing employ- why it has happened, and the reaction of ment within large industrial units. economic actors, such as workers, em- This policy of soft-budget constraints ployers, government and trade unions. has a relatively long history in post-social- Finally, some policy recommendations ist Belarus. Over the past few years, the are offered for resolving the problem of Belarusian Government has continued non-payments. to provide loss-making enterprises with credit resources and implemented cross- subsidization policies – all necessary in The scope of the problem order to avoid painful restructuring. This is partly due to the fact that the collapse of Non-payments on a signifi cant scale are state socialism has disrupted the economic a very recent phenomenon in Belarus.

25 Before 2001, non-payment of wages had nominal wages doubled (IMF, 2002, p. 28). been infrequent and concerned just a few As a result, infl ation remained high, while enterprises, mainly in agriculture. But they the fi xed exchange rate made Belarusian managed to pay off these wage debts. Over exports uncompetitive on the Russian the past year, however, the problem of non- and West European markets. Due to slug- payments has become accentuated, largely gish domestic and international demand due to the worsening of the economic situ- for their goods, Belarusian producers re- ation and the State’s direct intervention in sorted to barter deals. The stockpiling of the regulation of the labour market. goods has reached 40 per cent since the The issue also gained a higher politi- beginning of 2002 (Natsionalnaya Ekonom- cal profi le, due to the 2001 presidential icheskaya Gazeta, 4 June 2002). elections. This resulted in rigorous gov- The spread of barter transactions through- ernment action, such as credit rationing, out the economy can thus be mentioned as subsidies and giving wages fi rst priority the third cause of non-payments. Overall, for payment, but these measures proved the barter economy has accounted for more to be very short-lived. Through 2000 and than 40 per cent of the Belarusian economy 2001, wage debts ranged between 2 and as a whole, while for some sectors barter 4 per cent of the country’s gross wage bill, operations make up 60 per cent of all trans- and went down almost to zero around the actions (IMF, 2002). Wage payments have time of the presidential election. But by the therefore been delayed until cash fi nds its end of September 2001, they had jumped to way back up the barter chains. 7.5 per cent of the gross wage bill. Throughout last year, enterprises also Nowadays, the situation is much worse. retained access to banking credits in Non-payment is a burgeoning problem order to pay wages, and so accumulated throughout the Belarusian economy. Still, outstanding debts with the , but it agriculture remains the most problematic is very unlikely that this situation could sector, since non-payments there have be- be reproduced again. On the other hand, come a chronic disease. credits had an adverse effect on the enter- prises, since they included debt servicing in their costs. This further increased their Macroeconomic perspective prices. Moreover, the banks are simply no on non-payments longer able to provide that have lit- tle prospect of being paid off. There are several major factors behind Finally, there is a rather technical reason non-payments in Belarus. First of all, wage for not paying wages on time. The Central policy last year was driven largely by the Bank ruled that the payment of electricity President’s pledge to raise monthly wages and bills had priority over wage pay- to US$100 throughout the economy. Even ments. This means that companies cannot loss-making enterprises were obliged to withdraw money from their accounts to pay this wage for their employees, and pay wages until these other priority pay- the same holds true for the major “budg- ments have been made. The only sum that etary sector” (teachers, medical workers companies with energy or tax debts are and people employed in the arts and re- allowed to withdraw from the bank and search). Most state-owned enterprises pay to their employees is the government- were granted tax deferrals, thus increas- established minimum wage. ing the state budget defi cit. Accordingly, All these features, taken together, have the budgetary sector of the economy did allowed non-payments to grow, so there not receive the resources that it needed in is not a single cause behind this phenom- order to pay its employees. enon. Secondly, nominal wages have been grow- ing faster than productivity. In 2001, produc- tivity increased by 7 or 8 per cent, while

26 Microeconomic and institutional and this is even more costly than having perspective on non-payments wage debts. How do workers react if they are not At the microeconomic level, key agents paid on time? It might be assumed that involved are enterprise managers and growing dissatisfaction would eventually workers. force people to leave their workplaces and Enterprise managers are trying to seek out more remunerative jobs. So far, resolve the problem of non-payments empirical evidence has not confi rmed this through various measures. These may be assumption. classifi ed into active and passive meas- First of all, the labour market does not offer ures. Active measures include those new, decent workplaces. Private-sector devel- aimed at increasing productivity and ef- opment remains very slow, because of the fi ciency by offering new product ranges government controls on private economic to capture additional market share and activity. The lack of opportunities in the reduce the proportion of barter transac- formal sector means that the black and sub- tions. Passive measures could also be la- sistence economies are growing. Revenues belled as inert policies of adjustment to from non-declared business and other ac- the present economic situation, shaped tivities (such as the subsistence economy) by the transitional economic regime in make up about one-third of the people’s Belarus. income (IMF, 2002, p. 86). Hence, wages at The most prevalent measure is pay- the major place of work do not determine ment in kind. In other words, employees disposable income, since people rely upon receive the goods produced by their en- survival strategies, related to private horti- terprises, instead of being paid a money culture, casual jobs and informal trading. wage. Often, the market value of the goods At the same time, employees prefer distributed to the workers is higher than to stay at their workplaces (at least for- their money wages would have been. At mally) since the welfare system in Belarus fi rst sight, this might look like a good deal is enterprise-based. This implies that access for the workers, but they then have to put to welfare provisions is guaranteed in case in extra working hours as retailers on the of employment. Furthermore, expectations secondary market in order to convert the play an important role. Employees usually goods into cash. Ultimately, payment in expect that their enterprise may improve kind has further contributed to the de- its performance in future, so delayed wage monetization of the Belarusian economy. payments are perceived as a temporary oc- The second inert measure of passive currence. These expectations are rooted in adjustment is to reduce working hours and/ the earlier experience of non-payments, or to oblige people to go on unpaid leave which previously had been successfully – so-called “administrative holidays”. In eliminated. January-April 2002, about 4.6 per cent of In addition, some senior workers have the active labour force worked reduced a psychological problem about leaving their hours and about 4 per cent were obliged to job, since they feel strongly attached to the accept unpaid leave (Ekspress-informatsiya enterprises where they have been working Soveta Federatsii Profsoiuzov Belorusskoi, for more than a decade. For them, unem- 1 July 2002). Further, enterprises are cut- ployment, albeit temporary, is a threat to ting wages and are not paying the bonuses their social status. and fringe benefi ts provided for in the col- Nevertheless, as soon as non-payments lective agreements. became more widespread in the Belarusian The fi nal instrument available to enter- economy, strikes emerged as a spontane- prise managers is dismissal of redundant ous reaction by workers to delayed wage workers. But this is problematic because payments. For instance, in June 2002, the Belarusian obliges en- workers of the Gomel-based starting en- terprises to provide decent severance pay, gines plant came out in support of their

27 demand to eliminate wage debts accu- debts with both the management and the mulated since February. In Lepel, ma- workers. If the negotiations are unsuc- chine-operators of the “Lepelskii” state cessful, trade union representatives may farm (sovkhoz) stopped work for several even go to court to protect workers’ rights. hours. The demand was the same, namely However, such cases are still rare. the payment of wages not received since The second approach may be termed March (www.praca.by). These two exam- a “passive compromise strategy”. Here, ples, along with empirical data on non- trade unions act in cooperation with en- payments, demonstrate growing tension terprise managers to insert changes into in the workers’ collectives. This may set a collective agreements. These amendments precedent for broader social unrest. relate to shifting the terms of wage pay- The Government is aware of the hard- ments, supporting wage cuts and reduc- ship caused by non-payments, so it has in- ing welfare provisions. In contrast to their tervened to reduce wage debts. First, by Western counterparts, Belarusian trade un- special resolution, enterprises are permit- ions do not consider strikes as a form of re- ted to reserve a proportion of the total wage sistance to existing economic pressures. mass, equal to the government-established minimum living wage (in contrast to the minimum consumption wage), in order Policy recommendations to pay wages in “hard times”. Secondly, coercive mechanisms, such as penalties and Recently, non-payment of wages has be- fi nes, have been imposed on enterprise come a more urgent issue in the Belaru- managements when wage payments are sian economy. The low competitiveness of delayed. Belarusian enterprises, the spread of the These are very much short-term poli- barter economy and infl ationary wage in- cies, aimed simply at stifl ing confl ict creases at a level higher than productivity through direct and coercive intervention. are among the key explanatory variables. The outcome of such a short-term out- The Government seems to be aware of the look is the emergence of specifi c passive problems, but so far no viable long-term adjustment measures at the enterprise solution has been implemented. Instead, level, aimed at hiding the scale of non- the Government acts in a coercive manner payments. This leads us to assume that by devising policies aimed at controlling non-payments are even more widespread and penalizing those enterprises which do than is recorded in offi cial statistics. Short- not pay wages on time. Such a strong-arm term policies may seem to be less costly policy can succeed only if non-payments for the Government in both political and are rather small, but in a situation of mas- economic terms, but they cannot deal with sive wage indebtedness these measures are the structural defi ciencies of the Belarusian impossible to implement, as enterprises economy, stemming from persistent infl a- can always fi nd a way to adjust. tion, low competitiveness and barter. It appears that measures aimed at a sub- Like the Government, Belarusian trade stantial decrease in barter transactions are unions are deeply concerned with wage the only way to combat the dysfunctional debts. There are two basic strategies ad- character of a demonetized economy. In- vocated by trade union leaders. The fi rst deed, a move from a barter-dominated model is a so-called “active negotiating towards a money-based system is an im- strategy”, mainly pursued by trade un- portant step in bringing the necessary sta- ions from the petrochemical, machine- bility into the transitional macroeconomic building and radio electronics industries. regime. In essence, trade unions monitor the im- Tackling the non-payments issue con- plementation of collective agreements at tributes to labour market restructuring, the enterprise and sectoral level and then but this has to be complemented by ne- negotiate possible ways of reducing wage gotiating mechanisms. These will work if

28 there are strong unions and powerful em- References ployers’ associations in place. To become Ekspress-informatsiya Soveta Federatsii Profsoiuzov Be- strong, Belarusian trade unions should lorusskoi, 1 July 2002. have a clear understanding of the existing International Monetary Fund. 2002. Republic of Be- pathologies within the macroeconomic re- larus: Selected Issues, IMF Staff Country Report, gime of Belarus. Only then could an “active No. 02/22, Washington, DC, IMF. negotiating strategy” succeed, and labour Kapeliushnikov, R. 2001. Rossiiski Rynok Truda: Adap- interests could be organized and properly tatsiya bez Restrukturiyatsii, Moscow, GUVSE. represented during the whole transitional Natsionalnaya Ekonomicheskaya Gazeta, 4 June 2002. period. www.praca.by

29 The crisis of wage arrears

The challenge of wage arrears in China

Unpaid wages are common throughout China – in state-owned en- terprises, but also in foreign-backed companies. Meanwhile, many state firms face bankruptcy, and legal changes prompted by the World Bank will soon end wage earners’ right of first call on available funds. Protests are spreading, but the lack of trade union freedom is hamper- ing the Chinese workers’ campaign.

Gerard Greenfield* Research Officer Hong Kong Confederation of Trade Unions Tim Pringle Labour Research Consultant based in Asia

peaking to the National People’s Con- million) in wages owing from the previ- Sgress (NPC) in Beijing on 17 March ous year. Outlining a series of measures for 2002, Chinese Minister of Finance Xiang county-level governments to take over wage Huaicheng called for more rapid economic payments for local cadres (especially teach- reform, while promising – yet again – na- ers) in townships, the Finance Minister ex- tional prosperity and progress. Yet the na- posed an underlying sense of urgency. This tional political leadership was compelled urgency was based not on the needs and in- to recognize a number of growing social terests of government workers, but instead crises, not least the prospect of rapidly ris- refl ected the Party leadership’s overriding ing unemployment, increased inequality concern with social stability. Xiang Huai- and growing poverty. Also casting a long cheng was quick to assure NPC delegates shadow across this vision of national pros- that: “Funding for social security benefi ts perity was the problem of unpaid wages; a and wages and salaries will be guaranteed problem that has led to a wave of industrial to maintain social stability.” 2 unrest across the country and brought tens A similar sense of urgency concerning of thousands of protesting workers out on the growing wage arrears crisis was con- the streets.1 veyed in Premier Zhu Rongji’s report to In his report to the NPC, Xiang Huai- the NPC on the previous day: “We need to cheng announced that in 2001, “extra rev- ensure that wages and salaries are paid on enue in local budgets was mainly used to time and in full even if for that, new con- pay the overdue wages and salaries of em- struction projects have to be cancelled and ployees in government departments and things that are not urgent have to be given institutions …”. Yet the problem (as under- up or reduced in scale.” stated as it is in offi cial statistics) remained Signifi cantly, Zhu Rongji also alluded unresolved, with RMB 6.5 billion (US$793 to “extravagance and waste” as an expla- * Gerard Greenfi eld is the ICFTU/GUF/ nation for the shortage of state funds. Cor- HKCTU/HKTUC Hong Kong Liaison Offi cer ruption was identifi ed as a factor, though (IHLO). not explicitly: “Offi cials use public funds

30 for wining and dining, extravagant enter- City over wage arrears. At that time, 2,000 tainment and private travel abroad. This workers still working at the Ferro-Alloy Fac- misconduct invariably consumes large tory had not been paid for 16 months, while sums of money, so we must resolutely 2,000 xiagang (“off-duty”) workers and 1,000 stop this tendency.” 3 retired workers had not received their liv- This link between unpaid wages and ing allowances and pensions for three to six corruption is signifi cant precisely because months. Then, as now, 900 armed riot po- at the very moment that Zhu Rongji was lice were deployed to up the protest addressing the NPC, tens of thousands of and three workers’ representatives were workers in the north-eastern provinces of detained. In response workers marched Heilongjiang and Liaoning staged mass through the streets with banners that read demonstrations calling for the “Being owed wages is not a crime!”. of corrupt offi cials and demanding imme- diate payment of overdue wages. An es- timated 50,000 oilfi eld workers held pro- The scale of the problem tests in Daqing City in Heilongjiang Prov- ince, and 30,000 workers from more than The Finance Minister’s reference to RMB 20 state-owned enterprises (SOEs) rallied 6.5 billion (US$793 million) in government- in Liaoyang City in Liaoning Province. The sector wage arrears refl ects an attempt to workers were demanding unpaid wages, contain the problem by recognizing it, then pensions and compensation, as well as pro- seriously understating its size. testing against the corruption and injustice Though incomplete, existing nation- of local offi cials and enterprise managers. wide data give us a useful insight into the However, only hours before Xiang Huai- true scale of the problem. According to an cheng informed the NPC in Beijing that the oft-cited report released in December 2001, problem of wage arrears would be resolved the total wage arrears across the country through fi nancial measures, a more deci- amounted to RMB 36.7 billion (US$4.4 sive political step was taken. On the morn- billion) in 2000.4 This is marginally higher ing of 17 March, Yao Fuxin, a retired steel than the fi gures published by another of- rolling mill worker and representative of fi cial source, the All China Federation of the protesting workers from the local Ferro- Trade Unions (ACFTU). The ACFTU data Alloy Factory, was detained by police in show that 13.9 million workers in 79,000 Liaoyang City. Three days later, armed po- work units were owed RMB 31.9 billion lice were deployed to break up the protests (US$3.9 billion) in wages in 2000. against Yao’s detention. Three more work- These data are revealing in that there is ers were detained, and later all four were a strong correlation between the number formally charged with “illegal assembly”. of workers owed wages (and the amount They remain in detention and face fi ve owing) and the sites of recent mass protests. years’ imprisonment if convicted. The largest number of workers facing wage In its attacks on the workers’ protests, arrears is concentrated in Liaoning Prov- the Party leadership clearly demonstrated ince, with Hunan in second place, followed its narrow view of the wage arrears prob- by Heilongjiang and Henan provinces. lem as a threat to “social stability”. Also However, these fi gures must be revised clear is the divide between rhetoric and upward to take into account the increase in reality. Ultimately, the Party leadership’s wage arrears over the last two years, espe- recognition of the problem is ritualized in cially with increased bankruptcies and clo- Beijing, while workers’ collective action to sures of SOEs. Also, unpaid wages should resolve the problem is criminalized. be more broadly defi ned to include all Like the wage arrears problem itself, forms of remuneration owed to workers. workers’ action to demand unpaid wages Off-duty SOE workers themselves refer to and end corruption is not new. In May 2000, their monthly living stipend as their “off- over 5,000 workers protested in Liaoyang duty wage”. Thus, they consider that they

31 have just as much right to these wages as sized the need to speed up privatization, does any worker still employed in the involving the forced bankruptcy and clo- workplace. Furthermore, unfair wage de- sure of SOEs, despite the central role that ductions, unpaid insurance and pension corruption and unpaid wages play in this premiums that were deducted from work- process. Over the next fi ve years, the Gov- ers’ wages, but not paid into appropriate ernment will use RMB 290 billion (US$35 funds, are key issues in workers’ protests billion) to write off the debts of 2,900 SOEs and strikes. before declaring them bankrupt. Last year It is diffi cult to estimate the scale of alone, RMB 50 billion (US$6 billion) was wage arrears owed to retired SOE work- used to write off the bad debts of SOEs, ers. In June 2000, Zhang Zuoji, the Minister and this year it will be increased to RMB for Labour and Social Security, stated that 80 billion.7 arrears in pensions during the period from However, the Government faces a di- January to May 2000 alone totaled RMB 1.4 lemma. While it is allocating billions for billion (US$174.6 million) in 19 provinces SOE liquidation in order to bail out the and autonomous regions. Similarly, data banks, the existing bankruptcy law re- on the late payment or non-payment of quires that workers’ wages take priority off-duty SOE workers’ living allowances in the liquidation process. In response, the are incomplete. However, localized sur- Government is revising the bankruptcy veys may reveal the heavy concentration law to give priority to the rights and in- of “off-duty” SOE workers owed wages terests of creditors, especially banks. This within certain cities. For example, ac- is a revision the World Bank and Asian cording to a survey of off-duty workers Development Bank have long insisted be in ten cities by the China Economic Re- made. The result will be that under fu- search Centre, released in March 2002, ture SOE bankruptcies, workers’ wage ar- 57 per cent of workers were owed wages rears claims will be considered only after averaging RMB 3,634 (US$443) each.5 The the banks and other creditors have taken task of estimating the amount of wage ar- their share. As such, they will not only rears for migrant workers is even more lose their jobs and wages, but their legal diffi cult, given the lack of wage records right to claim unpaid wages, including off- and the prevalence of informal employ- duty wages and pensions, will be seriously ment, though one lawyer involved in de- undermined. fending the rights of migrant workers put The signifi cance of these rights for their total wage arrears at RMB 36.69 bil- workers cannot be overstated. Many off- lion (US$4.47 billion) in 2000.6 duty SOE workers have refused to take Regardless of what these fi gures do or on new jobs because breaking formal ties do not say, it is clear that the non-payment with their work unit renders it impossible of pensions and living allowances and of to pursue wage arrears claims. Workers migrant workers’ wages is an integral part also suspect that corruption – and not of the wage arrears crisis – not least be- merely ineffi ciency and unprofi tability – cause of the role of these workers in esca- underpins SOE bankruptcies. In Liaoyang lating protest actions, strikes and labour City, over 30,000 workers from 20 SOEs disputes. joined the “Bankrupt and Unemployed Workers” in linking the loss of wages, allowances and pensions, forced factory SOE bankruptcies and wage arrears closures and redundancies to corruption among management and local offi cials. In many ways, the references by Zhu That is why demands for unpaid wages Rongji and Xiang Huaicheng to the ur- were tied to calls for the resignation of key gency of wage arrears were directed not local offi cials and demands that the cen- at the current problem, but at a far greater tral Government intervene to investigate problem in the near future. Both empha- local corruption.8

32 Unpaid “off-duty” wages offi cial of 55, some even as and pensions young as 35.9 The issue of social security benefi ts and In addition to intensifi ed SOE bankrupt- pensions is also tied to former employers’ cies, the end of the xiagang (off-duty) sys- compliance with the retrenchment agree- tem will exacerbate the problem of wage ments that workers signed – or were com- arrears. Off-duty status will be abolished pelled to accept – when they were laid off by 2003, ending the payment of monthly from SOEs. For example, the failure of living allowances to workers after they the Petroleum Administration Bureau in are “stood down” from SOEs. The cur- Daqing to comply with its retrenchment rent system allows workers to maintain agreements led to protests by 50,000 work- their existing ties to their work unit for up ers in March and April 2002 – an action to three years or until they fi nd new em- which saw the formation of an independ- ployment. During that time they receive a ent union to pursue workers’ demands. monthly stipend, of which a third is paid Similar mass protest actions also re- by the work unit, a third by the unemploy- sulted when workers received retrench- ment insurance fund and a third by local ment packages, but were still owed several government. When the off-duty system is months’ wages. Again, the “break” with the abolished, SOEs will instead pay a one-off work unit weakens their ability to lay claim “economic compensation fee” calculated to unpaid wages and often leads to militant on the basis of a month’s salary for every action. Mine workers in Liaoning Province year of employment. clashed with police and soldiers when the Although SOE workers, retired work- miners were given severance packages, but ers and off-duty workers are treated as dis- were still owed 18 months’ wages. tinct categories governed by very different Another phenomenon worth noting is regulations and laws, for workers them- the illegal attempts by SOE managers to selves the distinctions are often blurred. pay wage arrears in kind. In May 2001, over This is especially so when workers are 200 workers from the Dengkou County drawn to protest over unpaid wages. Pro- Chemical Fertilizer Factory blocked the tests by retired and off-duty workers ex- Baotou-Lanzhou railway line for over an pose SOE workers to the prospect of hard- hour. An offi cial from the Dengkou County ship ahead, prompting them to question complaints offi ce reported that the Govern- whether ongoing wage deductions are re- ment decided to distribute chemical ferti- ally going into pension and social security lizer for the workers to sell in lieu of wages. funds. Similarly, protests by SOE workers They also ordered local police to fi nd out over unpaid wages place a question mark who had organized the demonstration. In over the viability of the enterprise and a conducted by China highlight the risk that late pensions and Labour Bulletin, a worker from the factory living stipends may never be paid. In fact, said he received fi ve tons of fertilizer in lieu protests over social security or labour in- of three months’ wages. The report notes surance funds are widespread and in prac- that: “He was pessimistic over the chances tice are often inseparable from the problem of receiving anything for the remaining of wage arrears. fi ve months’ wages owed to him.”10 Mismanagement and even embezzle- ment of labour insurance funds by com- pany managers have been widespread, Failure to pay local causing great anger among workers. Some government workers enterprises’ unwillingness or inability to pay labour insurance premiums has led In March 2002, the Chinese People’s Po- to protests by laid-off and retired workers litical Consultative Conference (CPPCC) – many of the latter have been forced into General Offi ce released the results of a early retirement and are far short of the nine-month research project showing that

33 local government employees in 26 out of to widespread rural unrest. Thus the wage the country’s 31 provinces and autono- arrears of local government workers be- mous regions are owed wages. come highly politicized in local-central Despite this, the central Government government relations. continues to order salary increases for Among those affected by this prob- government employees in an attempt to lem are rural teachers. In January 2000, maintain social stability, stimulate con- over 1,000 teachers from 38 schools in sumer spending and reduce the level of Huangkou Township, Anhui Province, corruption. However, as Yang Rudai, vice- went on strike to protest against the non- chairperson of the National Committee of payment of wages for the previous eight the CPPCC pointed out: “If the problem months. One of the teachers explained: of these overdue salaries cannot be solved, “The government has repeatedly prom- encouraging a policy of ‘rational salary ised that they would issue the pay. How- preventing corruption’ can hardly be im- ever, eight months passed like that and plemented.” we still haven’t received anything. It was The central Government, however, inevitable that the teachers would erupt claims that enough funds are transferred to like this and organize a collective action. provincial and county governments to al- They have also yet to give us the raises leviate the problem. At the NPC session in promised back in 1997.” The teacher also March, Finance Minister Xiang Huaicheng criticized the offi cial trade union for fail- reported that the central Government ing to protect their rights: “We went to the transferred RMB 89.2 billion (US$10.9 bil- provincial union offi ce and they said they lion) to local governments in 2001 to pay off couldn’t do anything, so we decided to act wage arrears and RMB 98.2 billion (US$12 on our own.”13 billion) for social security programmes, including basic living allowances for off- duty SOE workers. This was then used Wage arrears as a “local custom” to justify another pay rise for govern- ment workers in the coming year.11 Only On 8 January 2002, seven migrant work- a month later Xiang Huaicheng acknowl- ers from Sichuan climbed a 40-metre-high edged massive debt levels in county gov- crane at a construction site in Shenzhen, ernments. The fi nancial daily, Shichang Bao Guangdong Province, and threatened to (Market Daily), estimated this debt to be as jump if they were not paid back wages. high as RMB 3 trillion (US$366 billion).12 Over 100 workers employed at the state- The central Government puts the fi gure at owned construction company – also mi- RMB 10 billion (US$1.22 billion) in hidden grant workers from Sichuan – protested government debt at the county level, most below while police tried to talk the workers of which is owed to state-owned banks. into coming down. A similar incident oc- An important part of this tension be- curred on 30 August 2001, when the lead- tween central and local governments over ers of a team of carpenters from Chengdu the handling of wage arrears concerns scaled a 30-metre-high crane, demanding the local tax revenue base. Local offi cials payment of several months’ wages owed argue that the overdue wages of govern- to them. While the workers swung from ment employees are linked to a drop in the crane 30 metres overhead, dozens of tax revenue caused by unpaid and workers held protest actions below.14 declining farmers’ incomes. This is the re- Protest actions like these exemplify sult of falling agricultural prices since 1997 the extreme measures workers are forced – a problem exacerbated by China’s acces- to take in their fi ght for unpaid wages. In sion to the WTO. The diminished tax base Shenzhen such cases are proliferating, as of local governments has led to the imposi- wage arrears become an integral part of tion of additional taxes and levies on farm- work and life in the Special Economic ers, worsening their situation and leading Zone. In December 2001 alone there were

34 19 major labour disputes concerning un- Legal cases are long drawn out, making it paid wages. According to Xie Zhiwei, at impossible for migrant workers in particu- least half of the private companies in Shen- lar to sustain their livelihood while waiting zhen, including foreign-invested compa- for an outcome. nies, owe wages to their employees.15 The Violence against workers seeking wage problem is so rampant that the Govern- payments is also common. Ties to state of- ment established the Shenzhen Labour fi cials and the police strengthen the abil- Dispute Mediation Department in Janu- ity of employers to threaten and intimi- ary 2002, and in Shenzhen’s Baoan Dis- date workers. trict a campaign called “Get Your Money Another common practice that exploits Back!” was launched. the vulnerability of migrant workers and A sample survey of 220 collective ac- institutionalizes wage arrears is the de- tions dealt with by Labour Inspectorates in liberate retention of wages in foreign-in- Guangzhou revealed that 90 per cent were vested enterprises as a means of imposing wage arrears cases. An economist special- labour discipline. As one specialist on la- izing in foreign investment in southern bour issues in southern China commented: China argues that: “Keeping wages in arrears for three to six months in an attempt to halt high staff According to informed offi cials and factory is common at the low end [of managers, the illegal retention of workers’ the manufacturing industry]. By leav- wages for between one and three months ex- ing a factory without the required man- ists in 80 per cent of foreign-fi nanced fi rms. agement permission, workers risk losing This phenomenon exists despite the fact that owed wages as well as personal fi les and the fi rm is liable to pay 1 per cent interest on the security deposit that most migrants are the overdue wages from the sixth day of the required to pay.”18 following month onwards as compensation So prolifi c are wage arrears problems for workers. Article 14 of the Guangdong Regu- in Guangdong Province that an article in lations on Workers Rights 1994 also stipulates Gongren Ribao (Workers’ Daily) describes it that workers can claim RMB 5,000-50,000 in as a “local custom”. As Xie Zhiwei points compensation if their wages are overdue by out, wage arrears are often the result of more than three consecutive months.16 “deliberate negligence”, where loopholes in the law are exploited.19 There are additional regulations stipu- lating compensation for wage arrears in the Special Economic Zones. Article 40 of The proposed “Wage Law” Labour Regulations Governing the SEZs in Guangdong states that: “An employer unit As labour disputes over wage arrears pro- shall issue wages at least once a month. A liferate, and workers are compelled to take date shall be fi xed and the issue of wages more desperate measures in the struggle to on that date shall be strictly implemented. obtain their wages, there are growing calls If payment is not made by the stipulated among journalists, researchers, academics, date, the employee shall be rewarded com- policy-makers, trade union offi cials and pensation equivalent to 1 per cent of the others for the introduction of more effec- wage owed for each day after the sixth day tive laws to stop the deliberate retention of in arrears.”17 wages by employers. Of course, such calls Local regulations such as these deter- are not new, especially among workers. mine actual penalties and compensation There now appears to be some progress rates within the general provisions for in this direction. One of the reasons for this wage arrears in the national Labour Law. is that the wage arrears crisis has reached In practice these regulations, at both na- such a scale that it threatens to become tional and local levels, fail to protect work- unmanageable. While the details of a pro- ers in their struggle to claim unpaid wages. posed national Wage Law remain undis-

35 closed, a number of local regulations on The offi cial trade unions do not only wage arrears are under investigation as undermine workers’ demands for unpaid possible models for the new law. Among wages through inaction. In many cases, these are the Zhongshan City Regulations on they actively intervene to prevent work- Wage Payment by Enterprises introduced in ers from fi ghting against wage arrears. In Zhongshan, Guangdong Province, on 1 March 2002, Nanfang Gong Bao (South- January 2002. According to Xie Zhiwei, the ern Workers’ Daily) described a case in Zhongshan regulations have proved suc- which 131 workers dismissed from Heng cessful – though no evidence is provided Bao Industrial Company in Guangzhou to support this claim.20 It is most likely that fought a legal battle for unpaid wages of at this early the measure of “success” RMB 840,000 (US$102,440). Although the is simply the fact that tough regulations local Labour Disputes Arbitration Com- governing the payment of wages have mittee (LDAC) ordered the payment of been legislated. wage arrears and compensation to the Although the proposed Wage Law rep- workers, the enterprise management ap- resents a positive move towards alleviating pealed the ruling. The deputy chairperson the wage arrears crisis, its effectiveness will of the enterprise trade union represented be severely limited by existing legal-insti- the management in the LDAC and cross- tutional and political arrangements. Part of examined the workers. The newspaper this concerns workers’ access to legal rep- article reporting this case carried the fol- resentation in a form that permits them to lowing sub-heading: Workers Take Wage pursue their genuine rights and interests. In Arrears Claim to Arbitration – Deputy Chair the absence of freedom of association, work- of their Trade Union Defends the Company ers are subordinated to the trade union mo- Against Workers! Accompanying the arti- nopoly of the All-China Federation of Trade cle was a cartoon showing a trade union Unions (ACFTU) and its branches. While offi cial sitting on the lap of the boss in local trade union offi cials express concern the employers’ chair, leaving the workers’ over the wage arrears problems faced by chair empty.21 workers – an issue regularly reported in The offi cial trade unions’ role in the trade union publications – the fact remains “deliberate negligence” that underpins that the trade unions are embedded in the wage arrears should not be attributed to political structures of the Party and State, incompetence, lack of resources or a lack of and as such are entrusted with containing understanding of the role of trade unions in labour unrest, not articulating it. a market economy. It is not simply a mat- There is a general tendency for wage ar- ter of inaction, but their active role in pur- rears to build up for several months before suing the Party’s and the State’s political workers lodge formal complaints with la- agenda.22 As Article 4 of the revised Trade bour departments. This is often explained Union Law (27 October 2001) clearly states, in press reports in terms of workers’ lack trade unions must “… take economic con- of knowledge of the law. While this may be struction as the core, uphold the socialist true, it is equally true that workers – par- road, uphold the people’s democratic dic- ticularly workers in SOEs – often suffer de- tatorship, uphold the leadership of the Chi- lays as they wait for trade union offi cials to nese Communist Party, uphold Marxist- act on their behalf. Only after it is clear that Leninist-Maoist-Deng Xiaoping Thought, the union is failing to act in their interests uphold reform and opening up …”.23 do workers lodge complaints themselves or take industrial action. That is why pro- test actions by SOE workers often involve Conclusion: “Free our workers’ criticism of the offi cial unions. In the case of representatives!” the oilfi eld workers’ protest in Daqing, the local trade union offi ce was among those In the absence of freedom of association, buildings attacked by angry workers. workers who organize independently to

36 fi ght for unpaid wages face political per- 2 Xiang Huaicheng, Minister of Finance. 2002. secution. The likelihood of political repres- Report on the Implementation of the Central and Local sion is heightened by the fact that self- Budgets for 2001 and on the Draft Central and Local Budgets for 2002, Fifth Session of the Ninth National organized workers rarely limit themselves People’s Congress (NPC), Beijing, 17 March. to unpaid wage claims, often extending 3 Zhu Rongji, Premier of the State Council. 2002. their struggles to attacking corruption Report on the Work of the Government, Fifth Session of and the abuse of power. the Ninth National People’s Congress (NPC), Beijing, Numerous cases involving the politi- 16 March. cal persecution and detention of work- 4 Beijing Wanbao (Beijing Evening News), 17 De- ers have prompted strong criticism of the cember 2001. Chinese government by the ILO Commit- 5 Zhongguo Jingji Shibao (China Economic Times), tee on Freedom of Association. Just re- 14 March 2002. 6 cently, the International Confederation of The lawyer, Guan Huai, was interviewed in the Guangzhou-based Nanfang Zhoumo (Southern Week- Free Trade Unions (ICFTU) lodged a new end). China Daily, 6 February 2002. ILO complaint against the Government 7 Zhongguo Jingying Bao (China Business), 1 March of the People’s Republic of China con- 2002. cerning violations of freedom of associa- 8 See Is social security the “solution” to labour pro- tion. This specifi cally deals with the sup- tests in north-eastern China?, a report prepared by pression of workers’ protests in Liaoyang Gerard Greenfi eld for the ICFTU/GUF/HKCTU/ and Daqing. Submitted on 27 March 2002, HKTUC Hong Kong Liaison Offi ce, Hong Kong, Case No. 2189 focuses on the arrest and April, 2002. The report is available online at: http: // www.ihlo.org detention of Yao Fuxin, Pang Qingxiang, 9 Tim Pringle, op. cit. Xiao Yunliang and Wang Zhaoming for 10 organizing “illegal demonstrations” – a China Labour Bulletin, 11 July 2001. 11 charge that carries a prison sentence of Shenzhen Ribao (Shenzhen Daily), 11 March 2002. fi ve years. 12 The continuance of such political re- Shichang Bao (Market Daily), 4 June 2002. 13 pression today shows that the legal and Zhongguo Funu Bao (China Women’s News), 6 February 2001. administrative measures take by the Gov- 14 ernment to alleviate the wage arrears crisis “Zhui tao gong qian – yuan he lu niang beiju (Reasons for the unfolding tragedies behind pursuit will remain ineffective as long as workers of wage arrears)”, Zhongguo Laodong Bao (China are denied the right to genuine, self-organ- Workers’ Daily), 11 November 2001. On 1 November, ized representation. The Government’s three migrant workers climbed to the top of a crane response to the recent workers’ protests on a building site in the western suburbs of Xian. On 20 May 2002, Xinkuai Bao (News Express) reported in Liaoyang City is a sobering reminder another case of a worker who climbed a 120-metre- of this fact. It also recalls an earlier pro- high crane to demand unpaid wages. test by workers in Liaoyang, when they 15 Xie Zhiwei, “Zhili qianxin huhuan ‘gongzi fa’ marched with banners that read “Being (Appeal for a ‘Wage Law’ to deal with wage arrears)”, owed wages is not a crime!” and “Free our Gongren Ribao (Workers’ Daily), 9 February 2002. workers’ representatives!”. These two slo- 16 Godfrey Yeung. 2001. Foreign investment and gans, and the issues they represent, must socio-economic development in China: The case of Dong- be treated as inviolable and inseparable guan. Basingstoke, Palgrave, p. 171. 17 when facing the challenge of wage arrears Labour Regulations Governing the SEZs in in China today. Guangdong. 18 Interview with the Asia Monitor Resource Cen- ter’s Research Coordinator, Stephen Frost, in Gwyn- eth Roberts, “Legal vacuum keeps factory fl oors vola- Notes tile”, South China Morning Post, 7 July 2002. 19 1 Xie Zhiwei, op. cit. For a more detailed discussion, see Tim Pringle, 20 “Industrial Unrest in China: A labour movement in Xie Zhiwei, op. cit. the making?” in Asian Labour Update, Issue 40, July- 21 “Trade Union Offi cial Represents Bosses at Sep. 2001, pp. 5-8. This article is available online at: Guangzhou Labour Tribunal“, Nanfang Gong Bao http://www.amrc.org.hk (Southern Workers’ Daily), 4 March 2002.

37 22 For a more detailed discussion of the role of 23 See IHLO, The revised trade union law in main- the ACFTU, see Tim Pringle, “The Chinese working land China: Progress or regression for worker and trade class: Fiction and reality”, China Rights Forum, No. 1, union rights? Hong Kong, November 2001. The report 2002, pp. 12-21. is available online at: http://www.ihlo.org

38 Income equality and collective bargaining

Wage trends in Central and Eastern Europe

Has pay kept up with productivity in Central and Eastern Europe? How big is the wage gap between the present EU Member States and the candidate countries? Do unions in the new market economies need to change tack?

Béla Galgóczi Social Researcher Hungary

hen discussing wages in Central and the functions that would be normal in de- WEastern Europe, the specifi cs of the veloped market economies. Eastern European transition must be borne Thus, it must be emphasized that cost in mind. It is well known that wages had structures in Central and Eastern Europe a different function in state socialism than (CEE) are still quite different from Western they have in market economies. At that ones. Many of these differences can be at- time, wages were not intended to cover tributed to the low cost levels of services the whole cost of the reproduction of la- that appear in the calculations of purchas- bour. They were seen as one form of com- ing power parities. Some of the cost advan- pensation for work, alongside several oth- tages of CEE employees do not appear in ers. The State and also the companies bore these calculations, however. It is certainly certain of the employees’ living costs. Be- true that housing costs for most CEE citi- sides free health care and education, hous- zens are still much lower than those for ing was virtually free and a wide range their Western counterparts, as the previ- of consumer price subsidies compensated ously obtained cheap housing facilities for low wage levels. Various social serv- constitute a rather light fi nancial burden. ices were supplied by the employer (kin- The majority of CEE employees would not dergartens, housing subsidies, free holiday be able to fi nance market-based housing, resorts, etc.). which is normal in the West. With the transition to a market econ- As a consequence of this, even purchas- omy, the overwhelming majority of these ing power parity wage calculations result non-wage subsidies were discontinued in lower wage estimates than would be the and the role of the State was extensively case for the equivalent of Eastern wages cut back. However, wages did not rise suf- in a Western environment. It should also fi ciently to compensate for the loss of these be noted that wages in CEE account for a subsidies. Rather, the real value of wages lower proportion of total incomes than in began to decline during the fi rst period the West. of transition. This resulted in a massive Two other phenomena should be men- drop in living standards. Even after wages tioned when discussing wages in Eastern caught up substantially in the second half Europe. There are some countries, even of the decade (in the more fortunate coun- among those in line to join the EU, where tries of the region), pay did not take on all the problem of wage arrears still plays

39 a role. As a consequence of delayed and taking purchasing power differences into distorted structural change and the lack account. When comparing subsistence lev- of proper legal control, hundreds of thou- els, purchasing power parity fi gures will sands of people are the victims of non-pay- be examined. These relative fi gures can ex- ment of wages due to bankruptcy crimes or press differences in living standards and other fraudulent business manoeuvres. This can be of use in estimating potential migra- is still a massive problem in Bulgaria and tory pressures. On the other hand, nomi- Romania, and to a lesser extent in Latvia. nal wage levels are also signifi cant, since Fortunately, in other EU candidate coun- these determine competitiveness and also tries, the same situation does not apply. investment decisions. However, a common anomaly through- But if we focus our interest on the im- out the region is a form of tax evasion manent development features of transition under which only the minimum wage is countries, then the comparison of wages declared on the payroll, while the rest is with other economic indicators, such as the paid directly or indirectly to the employee. (GDP) and produc- Not only does this violate the principle of tivity, becomes decisive. The development sharing public burdens proportionately, it of wages relative to other indicators of eco- also leaves a great number of employees nomic performance can help us to estimate without labour protection. how employees participate in the economic Bearing in mind all these specifi c fea- produced in the country. tures, we turn to a more detailed analysis Figure 1 shows the levels of average of “regular” wage developments in Central gross industrial wages in CEE countries, and Eastern Europe in the last decade. calculated in euros at offi cial exchange rates. For a better comparison, wages are also shown at purchasing power parities, Wage levels in CEE countries also expressed in euros. Monthly average gross nominal wages When examining wage developments throughout the transition countries in CEE countries in the past decade, we (light grey columns in the graph) range should be aware of several diffi culties. As from 123 euros in Bulgaria and Romania price and cost structures in transitional through 480 euros in Poland to 925 euros economies still show substantial differ- in Slovenia, resulting in an average of ences to those in developed market econ- 345 euros. Monthly average gross wages omies, direct comparison of wage levels in throughout the European Union range nominal terms expressed in euros can be from 606 euros in Portugal to 2,997 euros misleading. It is also true that unequal and in Denmark (1998 data), resulting in an av- disproportionate transformational devel- erage of 1,928 euros, which is indicated in opments in individual countries can lead the graph for reference value. to substantial shifts in certain economic in- These fi gures seem rather shocking, al- dicators year by year. The impact of infl a- though wage levels at purchasing power tion and changing currency regimes, such parity (PPP) show a somewhat less dra- as stabilization measures, can produce matic view (dark grey columns in the sudden changes from one year to another. graph). It is important to examine wage develop- The average of the industrial wages ments for the whole period, as data from at PPP of the ten Eastern European coun- one particular year are not necessarily tries is 634 euros, which compared to the characteristic. 1,928 euros for the ten EU countries gives a In attempting to analyse wage devel- more balanced distribution. This indicates opments in ten Eastern European coun- that the gap in living standards is not as tries, two basic approaches will be ap- big as the nominal data imply. Thus, the plied. Comparison with EU countries will danger of social dumping is not as great be made both in nominal terms and also by as it might seem at fi rst sight.

40 Figure 1. Wage levels, current euros vs. PPP

€

2000 1 928

1800

1600

1400 PPP Euros 1200 1 136

1000

824 800 677 679 691 600 570 505 471 402 400 351

200

0 Bulgaria Lithuania Estonia Poland Czech Republic EU10 Romania Latvia Slovakia Hungary Slovenia

Source: WIIW database, own calculations.

Wage characteristics of CEE countries the Czech Republic (39 per cent). Along compared to their economic with Poland, Latvia has a rather high wage performance ratio, at 49 per cent. Employment ratios are not signifi - Also important, however, is the way in cantly different among the various tran- which wages in transition countries relate sition countries. The ratio of the total of to their economic performance. Below, an employed persons to the population as attempt is made to show how employ- a whole ranges from 38 per cent in Hun- ees participate in the wealth produced in gary to 43 per cent in Estonia, and only their countries and how this is distributed. Latvia and the Czech Republic show sig- These fi ndings are then examined in rela- nifi cantly higher values, at 47 per cent. As tion to the corresponding fi gures for EU these fi gures comprise both demographic Member States. characteristics and economic activity ra- tios, each factor alone may show higher discrepancies when examined separately. Wages and GDP It is certainly true that demographic and employment characteristics have their part The share of wages in the GDP of the to play in explaining why wage shares in ten Central and Eastern European coun- CEE are lower than in developed market tries is 40.5 per cent on average, while the economies. These fi gures also show, how- same value for the 15 EU Member States is ever, that the importance of wages in tran- 59 per cent. The lowest level is shown by sition economies is smaller than in Western Hungary at 31 per cent, and the highest by economies. Moreover, this is also an indi- Poland at 52 per cent. Low wage content cation that wages in CEE are depressed, of GDP is also characteristic of Bulgaria even when compared to their economic (33 per cent), Slovakia (34 per cent) and performance.

41 Development of wages, In Hungary, however, wages were most productivity and GDP depressed in comparison with economic performance. There, the level of productiv- A worthwhile exercise is to track the pro- ity is almost 2.5 times higher than that of ductivity development of transition coun- wages, if 1992 is taken as the base. Wages tries and then to compare it with the de- are also roughly 20 per cent behind GDP velopment of real wages. growth. As regards the relation between real However, the situation in Romania and wages and labour productivity develop- Bulgaria gives the greatest cause for con- ments in industry, data for most countries cern. Not only is the relative position of are available from 1992. A full overview wages very low, but pay is also very low will therefore be given for this period. in absolute terms. The most important lesson of the data Not to put too fi ne a point on it, it may in table 1 is that the development of real be said that: wages in the period between 1992 and 2000 ⅙ strong productivity gains in Hungary lagged substantially behind labour produc- were not rewarded by wage increases tivity developments, and in most countries at all; also behind GDP growth. Exceptions are ⅙ Lithuania, Latvia and Estonia, where wages in Romania and Bulgaria, productivity increased almost as much as productivity increases were punished; and much more than GDP over the eight- ⅙ in Poland, strong productivity gains year period. In these latter countries, wage were rewarded quite ungenerously; increases in this period seem to have been ⅙ beyond economic performance. Lithuania in the Czech Republic, Slovenia and is the only CEE country where wage in- Slovakia, weaker productivity in- creases substantially outstripped both pro- creases were rewarded generously; ductivity and GDP growth. The trends in all ⅙ in the Baltic states, minor gains in three Baltic countries show that wages grew productivity were rewarded over- faster than productivity in the fi rst half of generously. the period and the tendency was reversed only in the last couple of years. In the Czech Republic, Slovenia, Slo- Shortcomings of vakia and Poland wage increases follow industrial relations productivity developments to some extent in CEE countries and correspond to or even surpass GDP growth. In the Czech Republic, produc- As we saw above, wages are depressed tivity in the eight-year period grew 10 per and their uneven development is not in cent faster than wages. Apart from the Bal- line with economic performance in most tic states, the Czech Republic is the only CEE countries. This is a clear critique of CEE country where wages grew substan- the functioning of industrial relations and tially more than GDP. interest representation strategies. It is quite In Slovenia and Poland, wages and obvious that present-day industrial rela- economic performance seem to have been tions in CEE are quite far removed from the more or less evenly matched. patterns in the EU countries. In CEE, trade The same can by no means be said for union activity is overpoliticized and tripar- Romania, Bulgaria and especially Hun- tite structures are given too much weight, gary. In these countries, wages lagged far while industrial relations at the sectoral behind economic performance. In Roma- level are still underdeveloped. Industrial nia, the relative level of productivity was relations are less organic in CEE, as they twice as high as that of wages in the pe- are not rooted in the socio-economic de- riod 1992-2000. Wage dynamics have also velopment of the particular countries. It lagged behind GDP developments. should be remembered that the prevail-

42 Table 1. Development of labour productivity, real wages and real GDP in CEE countries (cumulative index. level of 1992 = 100.0)

1993 1994 1995 1996 1997 1998 1999 2000 Bulgaria Productivity 99.8 115.9 124.4 133.1 129.3 124.3 125.2 145.7 Wages 91.3 72.6 68.6 53.9 45.0 54.3 58.1 62.3 GDP 98.5 100.3 103.2 92.7 86.4 89.4 91.5 96.8 Czech Productivity 98.8 103.8 114.8 124.7 136.2 142.6 145.7 157.4 Republic Wages 103.7 110.4 119.9 130.4 132.8 131.2 139.1 142.7 GDP 100.6 103.8 110.4 114.7 115.9 112.8 112.3 115.6 Estonia Productivity 95.2 96.7 91.6 98.9 120.7 127.9 130.6 n.a.6 Wages 102.3 101.9 108.3 110.6 118.9 126.9 132.3 139.7 GDP 91.0 89.2 93.0 96.7 107.7 112.1 111.3 118.9 Hungary Productivity 113.4 131.2 144.6 158.2 179.8 201.2 222.4 259.5 Wages 99.5 104.5 95.2 92.7 95.8 99.2 102.8 106.3 GDP 99.4 102.3 103.8 105.2 109.8 115.5 120.4 126.6 Latvia Productivity 92.9 97.6 99.3 110.4 121.5 136.2 135.2 n.a.6 Wages 105.0 117.6 117.1 109.8 123.2 130.7 135.1 139.7 GDP 85.1 85.6 85.1 87.9 95.5 98.9 99.9 106.5 Lithuania Productivity 87.0 83.2 87.6 96.4 99.5 104.9 110.9 n.a.6 Wages 75.0 85.6 88.3 91.9 103.4 116.7 123.0 124.3 GDP 83.8 75.6 78.1 81.7 86.7 90.5 87.0 89.9 Poland Productivity 109.7 123.9 131.7 143.7 159.8 167.4 189.2 212.2 Wages 99.6 100.6 103.6 109.3 116.0 120.0 154.0 158.0 GDP 103.8 109.1 116.8 123.9 132.4 138.7 144.4 150.2 Romania Productivity 109.0 125.0 142.1 152.7 150.0 138.9 148.8 170.6 Wages 86.5 85.6 100.2 109.6 85.4 86.1 85.1 85.8 GDP 101.5 105.4 112.9 117.3 109.2 105.5 102.1 103.7 Slovakia Productivity 101.8 109.1 113.5 116.3 121.9 133.0 132.0 148.7 Wages 96.1 100.6 104.6 112.0 119.4 121.4 117.7 111.9 GDP 96.2 100.9 107.8 115.0 122.4 127.8 130.2 133.1 Slovenia Productivity 105.8 119.7 127.3 139.0 145.1 152.9 157.7 170.9 Wages 111.2 116.4 121.4 127.3 131.3 133.4 137.8 140.0 GDP 102.8 108.2 112.6 116.6 122.0 126.8 133.4 139.6 n.a. = not available. Source: WIIW 2001. Eurostat 2001. European Training Foundation 1999. own calculations.

43 ing pattern of industrial relations was es- The most characteristic union attitude tablished by laws imposed from above at in CEE has been self-restraint, union qui- the beginning of the 1990s, and to a great escence and a supportive approach to the extent it was matched to the economic painful but necessary reforms. This be- structure of that time (with a dominant haviour was justifi able during the most role for the State). diffi cult period of the transition. In fact, it Fundamental changes are needed at the could be seen as a necessary element in a core of industrial relations in CEE coun- successful transition and the preservation tries. On the one hand, this relates to the of social peace. But now the situation has basis of interest representation, namely to changed. The bulk of the economic tran- the workplace union strategies. If they are sition is over in the most advanced CEE to genuinely represent employee interests, countries, and their economies are devel- trade unions need solid roots in the work- oping dynamically. place. These are missing nowadays. It is For employees to benefi t from the re- most important that unions develop strat- sults of the transition, trade unions need egies for increasing their workplace pres- to become much more dynamic and to ence, adapted to the new structure of the take the initiative. Unions must be much economy. If present trends continue, effec- bolder in exploiting the opportunities aris- tive employee representation may soon be ing from the economic growth in order to restricted to the public sector. further workers’ interests. This is also vital There is a second, closely related, from the point of view of social inclusion. sphere in which trade union strategies Otherwise, only a thin layer of society will need to be reformulated – namely national- profi t from the achievements of economic level policies. transition.

44 Income equality and collective bargaining

Collective bargaining and income equality in an integrating world

Countries with strong collective bargaining institutions, including trade unions and employers’ organizations, also have better income distribution. They enjoy more equitable and socially sustainable inte- gration. Attempts to erode and weaken these institutions have been short-sighted and may even delay adjustment processes.

Susan Hayter Integration Department ILO

uch of the recent debate on globali- formally recognized or de facto the norm, Mzation has focused on the distribu- these institutions shape the way in which tional consequences. Critiques of globali- workers participate in the labour market zation argue that the benefi ts are unevenly and in the production process. They may distributed. There has been renewed em- promote productivity, growth and more phasis recently on the role that institutions equitable patterns of participation and play in promoting successful integration distribution, or reinforce patterns of ex- into the global economy and more equit- clusion and inequality. able patterns of development. Analysis of The approach to these institutions and the potential benefi ts to be gained by glo- labour market policy in general during the balization needs to include analysis of the 1980s and 1990s was one of deregulation institutions underlying growth and dis- and decentralization. Labour institutions, tribution. Labour institutions are among in particular trade unions, labour laws and the many institutions that are important wage-setting institutions, were blamed for for growth and distribution.1 The way in creating rigidities and distortions in the which labour participates in the produc- labour market, ultimately slowing adjust- tion process, and the way in which the la- ment and putting a break on employment bour market is organized to determine the creation and economic growth. wage for that participation affects, amongst Policy formulation was dominated by other things, distributional patterns. a strong neoliberal agenda that stressed The term labour institutions refers to the allocative function of labour markets those institutions that underpin labour (matching supply and demand) – a some- markets and production. These include what narrow view of the way in which trade unions, employers’ associations, labour markets function. There was little collective bargaining practices, human re- consideration of the role that labour insti- source practices, statutory regulations such tutions play in promoting dynamic effi ciency as protection against unfair dismissal and (increasing the quality of labour and their labour market policies on training, mini- participation in the production process) or mum wages, etc. They vary in the degree in ensuring social justice through, for exam- to which they are formalized within law ple, facilitating the equitable distribution and policy. But whether their existence is of income.2

45 This article focuses on the role that col- egy which includes benefi ts for labour in lective bargaining institutions (both collec- terms of employment creation, skills up- tive bargaining systems and trade unions) grading, social security, economic stabil- play in promoting more income equality in ity, and with growth, rising incomes. For an integrating world.3 example, in Ireland a series of national- level agreements have linked agreement on wage increases to agreement on eco- What is so important about nomic and social policy. collective bargaining? Centralized bargaining systems (with centralized trade union and employer con- Much of the debate in the 1980s and early federations) can be important coordinating 1990s focused on the performance of differ- institutions, in that they have greater in- ent levels of collective bargaining: central- fl uence over the level of wage settlements ized, decentralized or intermediate indus- in the economy as a whole. But as noted try-level bargaining. Centralized or decen- above, multi-tiered, industry or decentral- tralized levels of bargaining were held to ized plant-level bargaining systems may be superior to industry-level bargaining, in also function as coordinating institutions terms of employment, economic perform- (internalizing the externalities of their set- ance and equality.4 One of the weaknesses tlements). in the research was the specifi cation of the The actual coordinating mechanism in variables used to measure the relationship each system may differ. It may be formal between collective bargaining institutions or informal. Wages may be negotiated at and other variables.5 What emerged was an intermediate sectoral level, but with that decentralized systems of collective suffi cient linkages across the economy bargaining could also be highly coordinated (perhaps through a peak trade union or and thus also internalize the externalities employers’ organization) to coordinate of their actions – a key characteristic asso- the level of wage settlements. Alterna- ciated with centralized systems. tively, one industry may be so dominant It is important here to clarify what is in an economy that it acts as a “lead bar- meant by coordination, and which “exter- gainer” and signal for economy-wide nalities” are taken into account in collec- settlements. tive wage setting. The coordination of collec- In decentralized bargaining systems, tive bargaining refers to the degree to which employers’ organizations, such as those in trade unions and employers’ associations Switzerland or Japan, that operate through coordinate wage agreements across the dense networks can be important institu- economy so that wages are non-infl ation- tions of coordination. Thus, the key vari- ary, the wage bargain accommodates the able to consider is not the level at which macroeconomic implications of the wage collective bargaining takes place, but the settlement – such as infl ation, unemploy- degree of coordination in any system. Of ment and national competitiveness – and course, centralized systems also tend to wages and profi ts are in line with com- be highly coordinated – but this is only petitiveness. one institutional manifestation of a highly Thus, a key issue for the relationship coordinated system. between collective bargaining institu- tions, economic performance and income distribution is this institutional capac- Promoting income equality ity to organize or coordinate collective bar- gaining. The most institutionalized exam- An important characteristic of collective ples of bargaining coordination are “so- bargaining institutions is that they can cial pacts”, where there is commitment to promote equitable patterns of income non-infl ationary wage settlements in the distribution. Countries with strong col- context of a specifi c macroeconomic strat- lective bargaining institutions, including

46 trade unions and employers’ organiza- effi ciency.7 Indeed, there is a large body of tions, are also those countries with bet- evidence to show that participation at the ter income distribution (measured by the workplace enhances company perform- Gini ratio). Preliminary research using a ance and that fi rms with higher degrees sample of 41 countries for which data are of worker participation outperform other available shows that the following catego- fi rms.8 Participation at the workplace also ries of country all have better income dis- reduces monitoring costs, with benefi ts in tribution: terms of effi ciency. The potential to en- ⅙ countries where collective agreements hance effi ciency and productivity raises cover more than 60 per cent of the pop- other possibilities for distribution in the ulation (see fi gure 1); context of external pressures that place ⅙ constraints on the wage bargain. countries where there is a high degree Some, however, argue that trade un- of collective bargaining coordination ions and collective bargaining institutions (see fi gure 2); have a negative impact on income equal- ⅙ countries with higher trade union den- ity. According to this view, by negotiat- sity (see fi gure 3, sample size expanded ing a wage mark-up (the difference be- to 69). tween union and non-union wages) trade unions increase income inequality. But in The relationships are also statistically a more integrated world, the openness of signifi cant (for collective bargaining cov- economies and the intensifi cation of prod- erage and trade union density) at the 5 per uct market competition have signifi cantly cent level. This is consistent with the lit- reduced the possibility for fi rms simply erature that fi nds that highly coordinated to pass increases in labour costs (caused centralized systems of collective bargain- by unions’ negotiating a wage mark-up) ing are associated with less wage disper- on to consumers by raising prices. How- sion.6 For example, an OECD (1997) study ever, there is also a need to address in- found the relationship between cross- centives in product and labour markets. country differences in earnings inequal- This is considered in more detail in the ity and bargaining structures to be robust next section. and signifi cant. That is, more centralized/ coordinated economies have less earnings inequality than uncoordinated ones. Implications for Globalization and economic integra- the design of policy tion do present external constraints to distributive policies in that increased com- In some countries, trade unions have petition makes it more diffi cult to either been strong in activities enjoying signifi - change prices or raise taxes. But this does cant rents, such as protected manufactur- not preclude redistributive strategies that ing sectors and the public sector. Product rely on increasing productivity gains or re- and labour market distortions have given distributing income more equitably. Col- rise to what economists call “rent-seeking” lective bargaining institutions can facilitate behaviour by trade unions. Firms or the more equitable pay bargains, but they also public sector readily passed these increases can be productivity-enhancing, expanding in wages on to consumers. the product available for distribution. In considering reforms in labour and These labour institutions provide fi rms product markets, it would be important to with the capacity to encourage participa- look at the institutional environment and tion in the workplace. The literature on the incentives in product and labour markets. value of participation has examined ben- Policy measures may be required, aimed at efi ts related to the ability to secure trust changing incentives in product and labour and commitment in employment rela- markets so as to align the different institu- tions and thus improve productivity and tions with a country’s development priori-

47 Figure 1. Gini ratio in relation to collective bargaining coverage 50 45 40 35 30 25 20 15 10 5 0 13 countries 17 countries 11 countries with a high percentage with a middle percentage with a low percentage of bargaining coverage of bargaining coverage of bargaining coverage (>60%) (20-60%) (<60%)

Figure 2. Gini ratio in relation to bargaining coordination 50 45 40 35 30 25 20 15 10 5 0 11 countries 13 countries 17 countries with a high degree with a moderate degree with a low degree of coordination of coordination of coordination

Figure 3. Gini ratio in relation to trade union density 50 45 40 35 30 25 20 15 10 5 0 High density Medium density Low density (>50% – 13 countries) (20-50% – 30 countries) (0-20% – 27 countries)

Note: The Gini ratio (or index of income concentration) is a statistical measure of income equality ranging from 0 to 100. A measure of 100 indicates perfect inequality; i.e. one person has all the income and the rest have none. A measure of 0 indicates perfect equality; i.e. all people having equal shares of income. The lower the Gini ratio the higher the equality in income.

48 ties, and to facilitate smoother adjustment cial dialogue can play an important role and more equitable development.9 in building trust and consensus around Encouraging greater competition in reform. This will ultimately lead to policy product markets and removing anti-com- choices that promote equity and ensure so- petitive product market regulation can cially sustainable integration. Institutions diminish the ability of some unions (and of social dialogue and of dispute resolution enterprises) to pass wage increases on are important complements to policies that to consumers. Rather, it may encourage promote greater openness. a stance and productivity- In the reform and design of policy, de- enhancing strategies for increasing pay.10 regulation, which has been the leitmotif This highlights the central role that incen- of the last two decades, is not the answer. tives play in determining the potential ef- Rather, it is important to ensure greater de- fects of trade unions.11 grees of economic democracy by involving The implied policy response is there- trade unions and others in the design of fore to promote pro-equity developments policy reforms and promoting pro-equity in the institutional environment in which and pro-effi ciency incentives in the insti- trade unions and employers operate rather tutional environment (of product and la- than to take the fatalistic view that trade bour markets). unionism is automatically harmful for In other countries where organiza- equity. tions of labour and employers are absent, Changing the incentives by reforming the challenge is one of providing an envi- public-sector employment and liberalizing ronment that fosters the development of product markets would provide a more ef- these institutions, together with comple- fective route to improving labour market mentary institutions such as those that performance than seeking to weaken these provide dispute resolution services (me- institutions: diation and arbitration) and sources that can provide labour market and price in- Labour market reforms should be ap- formation. As labour institutions under- proached with great humility. […] restruc- pin the way in which labour participates turing the public sector and changing incen- in production and the distribution of the tives faced by union [in this case to extract returns, their absence leads to growing so- rents] may yield higher payoffs than chang- cial exclusion, from production and from ing the labour code. (Rama, 1995) the (formal) economy. Strong organiza- tions of workers and employers are a pre- In some developing countries where condition for effective collective bargain- strong labour institutions have spear- ing institutions, and promote social inclu- headed political change, the approach to sion and cohesion. date has been to see strong trade unions as obstacles to development. This has led to attempts to erode and weaken these insti- Conclusion tutions. The result has all too often been de- layed and diffi cult adjustment processes, Preliminary fi ndings reveal that there ap- as social instability and confl ict between pears to be a favourable conjuncture in various interests begin to escalate. many countries between the presence of To ensure that economic reform has the collective bargaining institutions, more greatest potential for success, it is impor- equal distribution and smoother adjust- tant to ensure greater degrees of economic ment as countries integrate into the glo- democracy by involving trade unions and bal economy. Efforts to undertake liber- others in the design of policy reforms.12 alization and adjustment by focusing on This is an important part of the process allocative effi ciency in markets and de- of making economic change and adjust- regulating and weakening collective bar- ment more acceptable. Tripartite and so- gaining institutions may not have been the

49 best strategy. In certain countries, this has Hoeven, van der, R. 2000. Labour markets and income no doubt undermined the role that these inequality. What are the new insights after the Wash- labour institutions are able to play in fa- ington Consensus? UN/WIDER Working Papers 209. United Nations University, World Institute cilitating more equitable development and for Development Economics Research (UN/ more successful integration. WIDER). The assumption that labour institu- ILO, 2000. Organization, bargaining and dialogue for de- tions automatically impede economic de- velopment in a globalizing world, Paper presented to velopment and cause rigidities and barri- the Governing Body Working Party on the Social ers to adjustment is fl awed. Labour insti- Dimensions of Globalization, November 2000. tutions appear to play an important role Kruse, D. and Blasé, J. 1995. “Employee ownership, employee attitudes and fi rm performance”, in in facilitating more equitable and socially NBER Working Paper Series, No. 5277, Sep. 1995. sustainable integration. The outcome de- Layard, R.; Nickell, S. and Jackman R. 1991. Unem- pends on the broader confi guration of in- ployment: Macroeconomic performance and the labour stitutions and incentives in product and market, Oxford University Press, Oxford. labour markets. Decision-makers need to Layard, R. and Nickell, S. 1998. “Labour market in- take these factors into account when de- stitutions and economic performance”, in CEP signing policy. Discussion Paper, No. 407, Sep. 1998, Centre for Performance, London, London School of Eco- nomics. Levine, D. 1995. Reinventing the workplace, Washing- References ton, DC, The Brookings Institution. Metcalf, D. 1987. “Labour market fl exibility and jobs: Aidt, T. and Tzannatos, S. 2002. Unions and collective A survey of the evidence from OECD countries bargaining: Economic effects in a global environment, with special reference to Europe”, in Layard, R. Washington, DC, World Bank. and Calmfors, L. (eds.): The fi ght against unem- ployment: Macroeconomic papers from the Centre Blinder, A. (ed.). 1990. Paying for productivity, Wash- for European Studies, Cambridge, Massachusetts, ington, DC, The Brookings Institution. MIT Press. Bruno, M. and Sachs, J. 1985. The economics of world- North, D. 1997. “The contribution of the new in- wide stagfl ation, Basil Blackwell, Oxford. stitutional economics to an understanding of Calmfors, L. and Driffi l, J. 1988. “Centralization of the transition problem”, UNU/WIDER an- wage bargaining”, in Economic Policy, Apr., 13-61. nual lecture delivered on 7 Mar. 1997. http:// Flanagan, R. 1999. “Macroeconomic performance www.wider.unu.edu/northpl.html. and collective bargaining: An international Rama, M. 1995. “Do labour market policies and in- perspective”, in Journal of Economic Literature, stitutions matter? The adjustment experience in Vol. XXXVII (Sep. 1999) pp. 1150-1175. Latin America and the Caribbean”, in Labour, Forteza, A. and Rama, M. 2001. “Labour market Special Issue, pp. S243-S268. ‘rigidity’ and the success of economic reforms Rodgers, G. 1994. Workers, institutions and economic across more than one hundred countries”, World growth in Asia, International Labour Organiza- Bank Paper No. 2521, Jan. 2001. tion, International Institute for Labour Studies, Freeman, R. and Medoff, J. 1984. What do unions do? Geneva. New York, Basic Books. Rodrik, D. 1999. The new global economy and developing Freeman, R. 1995. “War of the models: Which labour countries: Making openness work, Baltimore, Johns market institutions for the twenty-fi rst century?”, Hopkins University Press. in Labour Economics, 5, 1-24. Soskice, D. 1990. “Wage determination: The chang- Hayter, S. 2002. Institutions and labour policy in an in- ing role of institutions in advanced industrial- tegrating world, Paper presented to the 5th An- ized countries”, in Oxford Review of Economic nual Conference, Globalization, Growth and Policy, 6(4): 36-61. (In)Equality, Centre for the Study of Globaliza- Stiglitz, J. 2000. “Democratic development as the fruits tion and Regionalization, University of Warwick, of labour”, keynote address to the Industrial Rela- 15-17 March 2002. http://www.warwick.ac.uk/ tions Research Association, Boston, Jan. 2000. fac/soc/CSGR/Hayter.pdf Tyson, L. and Levine, D. 1990, in Blinder, A. (ed.). Pay- Hirshman, A. 1970. Exit, voice, and loyalty, Cambridge, ing for productivity, Washington, DC, The Brook- Massachusetts, Harvard University Press. ings Institution, pp. 183-237.

50 Annex 1: Samples of countries used

Figures 1 and 2 Figure 3 Figures 1 and 2 Figure 3 Collective Trade union Collective Trade union bargaining density and bargaining density and and inequality inequality and inequality inequality

ן Luxembourgןן Australia ןן Malaysiaןן Austria ן Mexico ן Azerbaijan ן Moroccoןן Belarus ןן Netherlandsןן Belgium ןן New Zealandןן Bolivia ןן Nicaragua ן Brazil ןן Nigeria ן Bulgaria ןן Norwayןן Canada ן Pakistanןן Chile ןן Panamaןן China ן Paraguay ן Colombia ן Peru ן Costa Rica ןן Philippinesןן Czech Republic ן Polandןן Denmark ן Portugal ן .Dominican Rep ן Romania ן Ecuador ן .Russian Fed ן Egypt ן Senegalןן El Salvador ן Slovakia ן Estonia ןן South Africaןן Finland ןן Spainןן France ןן Swazilandןן Germany ןן Swedenןן Ghana ןן Switzerlandןן Greece ןן Thailandןן Guyana ן Tunisiaןן Honduras ן Turkeyןן Hungary ןן United Kingdomןן India ןן United States ן Indonesia ןן Uruguayןן Ireland ן Venezuela ן Israel ןן Zimbabwe ן Italy ןן Japan Total sample 69 41 ןן Kenya of countries ן Korea, Rep. of

51 Notes critique of this fi nding, see Layard, Nickell, and Jack- man, 1991; and Soskice, 1990. 1 See Rodgers, G. 1994. 5 See Flanagan, J., 1999. 2 In considering new insights on labour markets 6 See Flanagan, J. 1999; Freeman, R. 1995; and and income inequality in a post-Washington Con- Aidt, T. and Tzannatos, S., 2002 for a review of the sensus era, Hoeven, van der, R., 2000 emphasizes at literature. least three functions of labour institutions and labour 7 In particular the classic works of Hirshman, A., policy: improving allocative effi ciency (matching sup- 1970; and Freeman, R. and Medoff, J., 1984. ply and demand in the labour market); improving 8 dynamic effi ciency (increasing the quality of labour See Blinder, A., 1990; Kruse, D., and Blasé, J., and their participation in the production process); 1995; Levine, D., 1995; and Tyson, L. and Levine, D., and improving or maintaining equity and social justice 1990, who survey 43 empirical studies, and fi nd that (a distributional function that also promotes social co- the effect of worker participation on productivity is hesion). He concludes that by focusing on the alloca- usually positive but almost never negative. tive aspects, the Washington Consensus overlooked 9 See ILO, 2000. institutional options for dynamic innovation, social 10 See, for example, Layard, R. and Nickell, S., cohesion and equity – all important components of 1998. growth and redistribution policies. 11 The fi eld of institutional economics is instruc- 3 For arguments concerning the role of collective tive here. It highlights the role that incentives play in bargaining institutions in promoting greater macro- shaping the behaviour of organizations. If the pay- economic stability and reducing the potential for a offs (incentives) are highest from rent-seeking activi- trade-off between employment and infl ation, see ties, then we can expect organizations to maximize Hayter, S., 2002. those margins. On the other hand, if the pay-offs are 4 In the early 1980s, analysts argued that corpora- from productivity-enhancing activities, then we can tist labour-management relations (centralized system expect economic growth. The broader institutional of collective bargaining) produced a better infl ation- environment (including laws, rights, etc.) unemployment trade-off, see Bruno, M. and Sachs, J., together with other economic constraints affect eco- 1984, and Metcalf, D., 1987. In the late 1980s, analysts nomic outcomes by affecting incentives. See, for ex- argued that either centralized or decentralized bar- ample, North, D., 1997. gaining was superior to industry-level bargaining, 12 See Stiglitz, J., 2000; Rodrik, D. 1999; and see Calmfors, L. and Driffi l, J., 1988. There was some Forteza, A., and Rama, M., 2001.

52 Income equality and collective bargaining

A first step towards fixing Europe-wide wages?

Belgian legislation is forcing social partners to take a look at what is going on in the country’s three main neighbours before taking a deci- sion on raising wages. This has not gone down well with workers, who are trying to build up alliances with the unions in those countries…

Jonathan Equeter Journalist

n 1996, the Law on Employment Promo- goes without saying that Germany has the Ition and the Preventive Safeguarding of greatest weighting within the average. The Competitiveness was adopted, opening up technical report by the Central Economic a completely new aspect of the social situ- Council is published annually in late Sep- ation in Belgium. Preparations for joining tember. Every other year, it is followed up EMU were in full swing (in 2000, 12 - by negotiations between unions and em- pean Union countries adopted the euro as ployers to try and draw up an intersecto- their single currency) and the Belgian Gov- ral agreement on a variety of issues, in par- ernment, saddled with signifi cant public ticular the maximum margins for increas- debt, wanted to signal to its European part- ing wage costs during the next two years. ners in no uncertain terms that its economy During the two-year period between any was in good shape. One defi ning factor in two negotiations, the technical report by the context of the Belgian economy is its the Central Economic Council will be able trade with neighbouring countries and to determine the actual wage increase in some feel that it cannot afford to increase Belgium as compared with the three other wages dramatically in comparison with its reference countries. If wages rise or fall too main neighbours and competitors. So, the quickly, the report will infl uence negotia- new law decreed that every two years – tions the following year and the standard when the social partners sit down together rate may then be lowered. to negotiate the maximum possible wage rise for the next two years – they must take into account the forecast rise in wages in If there is no agreement, Belgium’s three main trade partners – Ger- then the decision is taken many, France and the Netherlands.1 by the Government The result is a technical report by the Central Economic Council (CCE-CRB), a The authors of the 1996 law set out a very joint, national body bringing together un- strict timetable for negotiations. Where ions, employers and experts, all of whom the social partners reach an agreement be- predict potential wage rises in the three fore 31 October, the standard-wage fi gure countries based primarily on forecasts by is agreed and is taken as a reference value the OECD. It then averages out the pre- for all subsequent wage negotiations both dicted wage rises in each, weighted ac- in professional sectors and in companies. cording to their respective GDPs (gross do- On the other hand, if no agreement has mestic product). In view of its high GDP, it been reached by 31 October, the Belgian

53 Government intervenes and mediates Belgian-style compromise with a view to reconciling the standpoints of employers and unions. If this step is suc- So Belgian unions are calling for the stand- cessful, the standard is fi xed in an agree- ard fi xing of a maximum wage increase to ment. If not, the Government may impose be scrapped but employers hit back with by Royal Decree and before 31 December a the response that if that were to happen, maximum wage increase for the next two automatic index-linking of wages would years. Indeed, this was the case in 1996 also have to go since Belgium, along with when the Government imposed a 6.1 per Luxembourg, is the only country in Europe cent maximum standard after the social to operate such a system. “What Mia De partners failed to reach an agreement. Vits forgot to mention when she said that However, the Belgian Government does no country in Europe had a wage stand- not have a completely free rein to fi x the ard, was that neither did any country have wage standard: regardless of the forecast a system of index-linking wages,” points wage increase in neighbouring countries, out Tony Vandeputte, CEO of the Federa- the 1996 law stipulates that the maximum tion of Enterprises in Belgium (FEB-VBO) margin for increasing wage costs must at in the Belgian economics daily L’Echo on least refl ect increases linked to automatic 2 July 2002.5 “As far as we are concerned, index-linking of wages2 and incremental the two are inextricably linked.” wage increases. 3 Although unable to scrap the standard For the unions, the adoption of this law altogether, Belgian unions have managed was a bitter pill to swallow. “We feel that to negotiate modifi cations making it some- the 1996 law makes us look incompetent what more fl exible. “The union militants and irresponsible because we are looking don’t accept the fact that at a time when at what’s going on in other countries before the share of wages in the national revenue deciding what to do in our own,” says Luc is becoming smaller, this kind of standard Voets, head of research at the Belgian Gen- is imposed, whereas no provisions are im- eral Federation of Labour FGTB-ABVV, posed on, say, profi ts,” says unionist Luc one of Belgium’s leading trade unions.4 Voets. “When negotiating an intersectoral agreement, we try to broaden the discus- The FGTB-ABVV realises that in the con- sion to include a wage standard and make text of monetary union it is important to be employers aware of their responsibilities. aware of what our competitors are doing, They ask us to fi x wages at a sensible level, but that should be just one of many ele- but in return we want them to promise to ments to be borne in mind when conduct- hire more workers and provide training ing wage negotiations. We also have to fac- opportunities at the same rate as in the tor in predictions as to the situation of Bel- three reference countries.” gium’s domestic economy and take account The lack of vocational training is also of things like the level of unemployment, a strong argument for making employ- rise in prices and productivity. That way we ers face up to their responsibilities when would be less dependent on developments there is a shortage of workers in certain in our three neighbouring countries and in Belgium, as was recently the forecasts that never fully correspond to the case with long-distance lorry-drivers. “A actual situation since OECD forecasts, how- wage standard won’t help solve this kind ever reliable they might be, cannot predict of shortage,” says Luc Voets. “We need to precisely what the terms of wage negotia- develop training programmes that will tions in the three reference countries will help avoid this situation and that in time be one or two years down the line. What’s will attract workers to sectors where there more, we are no longer at a point where we is a labour shortage.” Other factors can are getting ready to enter monetary union also come into play when negotiating inter- which, after all, was the backdrop against sectoral agreements: for example, unions which the 1996 law was introduced. are trying to negotiate extra days of leave

54 or an increase in the minimum wage while fi gure was 6.4 per cent, for example, we employers are more inclined to make con- were able to secure an additional one-off cessions when the Government has taken (and so basically for a limited period) wage some favourable step like cutting employ- increase of 0.4 per cent in sectors where the ers’ charges. economic situation was good. We also won Broadening the scope of wage negotia- an agreement that the cost of measures in- tions to include other issues enables Bel- cluded in the intersectoral agreement (such gian unions to “limit the damage” as it as an increase in the number of days’ leave), were, in spite of the 1996 law, even if after which accounted for 0.2 per cent of overall the event it has turned out that the wage wage bill, would not be factored into the increase in Belgium was greater than the negotiable margin in these sectors and as a recommended norm (a situation that can result some sectors experienced an increase easily occur given how diffi cult it is to of 7 per cent.” monitor whether the maximum standard Belgian unions are well aware that is being observed). As such, the standard there are other groups in civil society who agreed by the social partners for the pe- oppose the 1996 law for reasons that have riod 1999-2000 was a 5.9 per cent increase, nothing to do with workers’ well-being. but in 2000, the increase ultimately reached Some are calling for the standard to be 7.2 per cent in Belgium as compared with scrapped since they would like to see in- 4.4 per cent in the three reference coun- creases in the highest wages or those in tries. A close analysis has revealed that specifi c sectors only: this sort of campaign this reassessment was due mainly to indi- for wage inequality is not at all what the vidual wage increases and increases in two unions advocate. And in the specifi c con- quite mixed sectors with poorly structured text of a federal state such as Belgium, wage negotiations (real estate and business maintaining a wage standard throughout services on the one hand and transport and the country is a hindrance to those who are communications on the other). Other fac- demanding less solidarity between the dif- tors unrelated to wage negotiations also ferent communities by means of holding played a part in the increase, such as the regional wage negotiations. So unions are conversion of temporary contracts into very careful not to create any counterpro- open-ended ones, which often provide ductive alliances for workers. higher remuneration.

The “Doorn group” Positive growth pacifies employers In the face of the 1996 law, the Belgian un- Negotiations are clearly much easier for ions FGTB-ABVV and CSC-ACV 6 decided unions during periods of positive eco- to bring together the German, French, nomic growth. In 2000, when the social Dutch and Luxembourg unions to speak partners met to set the maximum wage- with one voice at negotiations held in each standard increase, workers cited Bel- country. They are known as the “Doorn gium’s 4 per cent growth and the rise in group” after the Dutch town in which one fuel prices (an issue that is not included of their fi rst meetings was held. “We have in the health index upon which calcula- tried to fi nd a way of working towards the tions for index-linking wages are based) same goal without making wild demands to win concessions from employers. “The in terms of wages,” says Luc Voets. “We fi gure published in the technical report by ask that during negotiations between so- the Central Economic Council is not neces- cial partners, each union does everything sarily the fi gure agreed after negotiations,” in its power to gain wage increases that at points out Luc Voets. “The last intersectoral the very least are in line with both evolu- agreement was drawn up during a period tion of prices (infl ation) and an increase of major growth. Although the CCE-CRB in labour productivity.” This commitment

55 by the members of the Doorn group does the European Central Bank’s primary not mean that they will succeed in inte- concern is price stability and a balanced grating these two elements but rather con- budget in each of the Member States, while stitutes a guarantee that no one acting on on the other there is still no European gov- the workers’ behalf will play the wage re- ernment that is able, if necessary, to stim- straint card in order to gain market share ulate growth and employment. So wages in a rival country. Every year when the are the variable upon which the different Doorn group meets, the unions compare countries gamble in order to boost their what concessions they have gained in ne- economies, which gave rise to the 1996 gotiations, and explain to the others why law in Belgium and wage-restraint pacts they have or have not been able to achieve signed in other Member States of the Euro- one of the two objectives of the “Doorn pean Union. In my opinion, to avoid com- approach”. petition between European wage earners The Doorn group is not seeking to we now need to develop cooperation be- compete with the ETUC (European Trade tween European unions in terms of wage Union Confederation), far from it. In- policy. That is where the value of an initia- stead it sees itself as a sort of laboratory, tive such as the Doorn group lies.” a small-scale environment in which theo- ries are put to the test which could per- haps ultimately be extended to other Eu- Notes ropean countries. The ETUC’s Executive 1 Under Belgian law, the increase in the wage Committee has also adopted a guideline bill represents an increase, in nominal terms, of the for collective bargaining incorporating average wage bill per worker in the private sector the two elements of the group’s principle. expressed as a full-time equivalent. “If this Principle of ‘wage increase in line 2 In Belgium, all wages and social benefi ts are with both infl ation and increase in labour automatically adjusted according to the rise in re- tail prices calculated on the basis of a health index productivity’ were one day extended to which takes into account the rise in prices of a range all wage negotiations throughout Europe, of basic goods. Alcohol, tobacco and a number of en- then wages would no doubt rise more rap- ergy products are excluded from the index. idly in southern European countries than 3 Under Belgian law, “incremental wage in- in those in the north since the increase in creases” is taken to refer to wage increases granted productivity in the south should be much according to seniority, age or any promotions or changes in individual status provided for by a col- greater over the coming years,” says Luc lective agreement. Voets who, on behalf of the FGTB-ABVV, 4 FGTB-ABVV is the Belgian General Federa- is now calling for dialogue between Eu- tion of Labour, which currently has almost 1.2 mil- ropean unions in a bid to avoid a wage- lion members. restraint course between European Union 5 Mia De Vits is President of the FGTB-ABVV. Member States: “It is important that we 6 Confederation of Christian Trade Unions, work together because on the one hand which has some 1.5 million members.

56 Income equality and collective bargaining

Pay equity at last in Quebec?

A recent law in Quebec aims to end wage discrimination against women (and men) who work in predominantly female job groups. Unions are playing a vital role in getting the new rules applied.

Roland Côté Coordinator, Faculty of Human Sciences University of Quebec (Canada) in Montreal

t is more than 50 years now since the more and more women are entering the la- IGeneral Conference of the International bour market, and not only in traditional fe- Labour Organization adopted the Conven- male occupations. On the other hand, more tion on equal remuneration.1 This drew on and more men are to be found in tradition- various proposals concerning the principle ally female jobs. that male and female labour should receive In Quebec, human rights have devel- equal pay for work of equal value. It was oped along the same lines as for the world followed a few years later by the Discrim- in general. During the 1970s, the Quebec ination (Employment and Occupation) Provincial Government adopted a Charter Convention,2 which promotes respect for of individual rights and liberties. The right the rights set out in the Universal Declara- to work, and hence to a fair wage, is often tion of Human Rights. So what is the situ- unequally applied to men and to women. ation today, half a century on? Moreover, for several decades now, the pay gap between men and women has not really narrowed, and women as well as the The issues trade union movement have called for the State to intervene in order to end discrimi- Discrimination against women is noth- nation. For equivalent work, women cur- ing new. All human beings, regardless rently earn about 70 per cent of what men of race, beliefs or sex, ought to have the do. This state of affairs is unjust – women right to pursue material progress and spir- have the (basic) right to a fair wage. itual development in freedom and dignity, with economic security and equal oppor- tunities. But for women the reality is often The pay equity principle very different, particularly as concerns re- muneration. Invoking, amongst other things, the princi- For a long time, it never even occurred ple of respect for basic rights, women have to men that lower pay for women should demanded – both within society at large be questioned. It was seen as “normal”. and within the trade union movement – And yet women, and not only in the west- the right to be paid the same as men for ern developed countries, have enormous doing the same job. Not everyone has family responsibilities. taken the point. Prejudices against women Women often raise children on their die hard, even in the unions. Similar preju- own. Fathers as sole providers seem to be dices come to light when pay rates for pre- an endangered species. At the same time, dominantly female occupations are com-

57 pared with those for predominantly male lematic. In Quebec, we were told that you ones. Lo and behold, so-called women’s can’t compare apples and oranges. But if jobs often pay less than so-called men’s you are looking at calories or vitamin con- jobs. This is what has to change. tent, these two fruits may certainly be com- Trade unions must commit themselves pared. So what has to be found is a basis of to this struggle to get a basic right re- comparison between jobs, in other words, spected. In Quebec, the unions have done factors that are common to all jobs. Four so and have hammered home the princi- factors appear to be universally valid here. ple of “equal pay for work of equal value”. They are the qualifi cations required, the re- The Quebec Workers’ Federation (FTQ – sponsibilities, the (physical and mental) ef- Fédération des travailleurs et travailleuses fort demanded and the conditions under du Québec) was particularly involved in a which the work is performed. long lobbying effort that led to the adop- Qualifi cations are the education lev- tion of a law on pay equity. els, diplomas and permits or skills cer- The FTQ is Quebec’s biggest trade tifi cates required in order to hold a par- union centre. It has almost 500,000 mem- ticular job. Responsibilities can be varied bers, a third of whom are women. [Its – responsibility for supervising other staff, French name includes the feminine word for responsibility for other people’s health and “workers”, as well as the masculine one – safety, responsibility for budgets, etc. Cri- translator.] In 1989, the FTQ held a major teria of physical and mental effort make it forum entitled “Pay equity – no more, no possible to compare job requirements in less! A question of solidarity”. This forum terms of physical capacities (the capacity enabled the federation to develop common to lift weights or adopt postures) or men- viewpoints, leading on to a policy decla- tal capacities (concentration capacity or the ration by one of its congresses. Since then, ability to perform tasks simultaneously). pay equity has been a big topic at every Finally, the conditions in which the work is FTQ congress. carried out should be considered (ambient Like other trade union centres, the temperature, noise levels, dust, etc.) FTQ also carried this debate into the po- By the way, application of the pay litical sphere by demanding that the Gov- equi ty principle does not lead to a devalu- ernment adopt proactive legislation on ation of men’s work. On the contrary, men pay equity. “Pay equity is a matter of so- who perform jobs where women are in the cial justice and plain common sense. It is majority will also see an improvement in about women workers’ right to a fair and their wage rates. Equality is for everyone. just wage for their labour. But prejudices The point of pay equity is not to compare die hard and the ‘innate characteristics’ of women with men but to compare pre- women’s work (for instance, caring for dominantly female occupations with people, manual dexterity, simultaneous predominantly male ones. Jobs found to service to several people, etc.) are not al- be equivalent deserve equal pay. ways accorded their true worth. This non- recognition helps to keep their pay low and has an impact on the wage gap between Economic justification men and women.”3 If we want the pay for a job usually and As well as the trade union arguments in fa- predominantly performed by women to be vour of pay equity, there are various other equal to the pay for a job usually and pre- ones. Beyond basic rights and the search dominantly performed by men, these two for social justice, economic justifi cations jobs have to be compared. How are we to may also be invoked. Here, we consider judge if the two jobs are of equal value? three of these. Naturally, good criteria for comparison First, the main result of implement- have to be established. At fi rst sight, com- ing equal pay is undeniably that many paring different jobs might seem prob- women are able to break out of poverty.

58 The growing number of one-parent fami- and maintain pay equity within their en- lies (i.e. where just one parent, generally terprises. This is not a universal system, the mother, is present) has led to a rise of course. The law is not intended to bring in poverty. In some districts of Quebec’s about uniform wage rates. Equal pay is to metropolis, Montreal, almost 40 per cent be achieved and maintained on an enter- of families are one-parent. The majority prise-by-enterprise basis, and the obli- of these families currently live below the gations vary somewhat according to the poverty line. Many survive on state social numbers on the payroll. The State did not assistance or other social programmes (un- wish to impose the same requirements on employment benefi ts, retirement pensions, a small-scale enterprise (less than 50 em- etc.). The pay rates and the types of work ployees) as on a big one (more than 100). on offer to women (part-time, seasonal The law includes a precise timetable, but or otherwise precarious jobs) encourage does give employers some leeway about them to rely on social assistance rather compliance dates. than seeking paid employment. Often, it Not everyone is happy with this law, is not worth working for a wage, because of course. The employers have not exactly the net take-home pay will be scarcely any welcomed it with open arms, and all the higher than the state welfare benefi ts. An trade union centres have gone to court over upward revision of these women workers’ some parts of it. But an imperfect law is pay will have a direct impact on an impor- better than an injustice to women. tant section of the population, thus radi- “Although far from perfect, this law cally reducing social costs. Moreover, once nonetheless constitutes an important they reach retirement age, many women trade union gain and incorporates the basic fi nd themselves reduced to poverty. If they principles that we have always demanded had been earning a fair wage, they would – including recognition of trade union par- have been able to pay more into public or ticipation in the pay equity process, a recog- private retirement schemes. This consid- nition that we dragged out of the Govern- eration alone amply justifi es a drive for ment before the law was adopted. It is now progress on this issue. up to us to get it applied in our workplaces Secondly, given women’s growing par- and to improve it through trade union ac- ticipation in economic life, the appropri- tion, as we did for other laws (on occu- ate wage adjustments will serve to stimu- pational health and safety, the minimum late demand for goods and services – in wage, standards, etc.).”4 Without going into short, they will “keep the economy mov- the details of the law, it should be noted that ing”. Thus, one of the fi rst effects will be it aims to correct wage gaps that are due to to improve the living standards of women systemic discrimination against people in workers and their families. There may well predominantly female jobs. also be a positive impact on productivity, The procedures for achieving pay at least in the short term. Employers will equi ty at the workplace level, as required have nothing against that. by the law, include trade union participa- Finally, the State also stands to gain, tion. This recognition of the union role is because an increase in the wage mass will important, because it enables us to high- bring in more taxes. So the increased rev- light our experiences and achievements as enues will improve the fi nancial resources practitioners. After all, we trade unionists of the State. have considerable expertise when it comes to negotiating wages, social benefi ts, job assessment schemes and so on. Quebec’s pay equity law Under the law, all enterprises with 50 or more employees must draw up a pay After women mobilized and the unions equity programme. This must consist of lobbied, the Quebec Government brought four stages. Initially, the predominantly fe- in a law that obliges employers to achieve male and predominantly male job catego-

59 ries within the enterprise have to be iden- have always fought for justice for all, be tifi ed. Secondly, the method and tools for they men or women. assessment (of the job categories) have to be described. The third stage is to assess the job categories, compare them, estimate Notes the wage gaps and calculate the necessary 1 International Labour Organization, Equal Re- pay adjustments. Finally, the last stage is muneration Convention, 1951 (No. 100). to determine how the wage adjustments 2 International Labour Organization, Discrimi- are to be paid. nation (Employment and Occupation) Convention, Quebec’s experience with this law is 1958 (No. 111). too short to be able to draw any hard-and- 3 Fédération des travailleurs et travailleuses du fast conclusions yet. The process is moving Québec (FTQ), Mémoire sur le projet de loi sur l’équité along and, depending on the courts’ deci- salariale, submission to the Quebec Parliamentary sions, could end systemic discrimination Commission on Social Affairs, Montreal, 19 August based on sex. We are, however, convinced 1996. 4 that our aim is just, from a social and a Service de la condition féminine de la FTQ (Women’s service of the FTQ), L’équité salariale: Main- trade union point of view. Equal opportu- tenant à nous de jouer, Montreal, November 1998. This nities must be more than just a pious wish. awareness-raising and action-building document has They must become a reality. Trade unions greatly infl uenced the present author.

60 Income equality and collective bargaining

Social partners: Collective bargaining in Austria

A big advantage of Austria’s institutionalized collective bargaining system is its calculability. Most pay settlements are within a few per cent of the average wage. But could current government policies pose a threat to the consensus?

Martina Krichmayr Bureau for Workers’ Activities ILO

ustria is well known for its system level, but not at company level. The major- Aof social partnership, which has se- ity of the roughly 500 collective agreements cured continued political and social sta- concluded apply to the whole federal ter- bility since 1945 and has remained largely ritory, about 150 are regional in scope and intact even in recent years. By international about 50 are valid at the company level. standards, Austria can be regarded as one Additionally, there are some homeworking of the countries in which institutionalized agreements, minimum pay scales or regu- structures are most highly developed. lations for wage compensation. Collective bargaining represents one of This summary emphasizes sectoral col- the key areas of institutionalized industrial lective agreements. These prevail through- relations in Austria. It can still be charac- out the country, thus giving rise to some terized as a highly elaborated, stable and characteristics of collective bargaining in centralized system of fi xing the working Austria: conditions of the vast majority of the work- ⅙ Wage policy is primarily decided by force in the private sector. This is mainly trade unions and not by works coun- due to the centralized and inclusive na- cils. ture of the main actors, the Austrian Trade Union Confederation (ÖGB) and the Aus- ⅙ The ability to make collective legal ar- trian Federal Economic Chamber (WKÖ). rangements between employers and They act independently without any gov- works councils at the company level is ernment intervention – except where the subordinated to the regulation of collec- Government is the employer, as in the tive agreements at inter-company level. public-service sector. ⅙ In particular sectors, standardized Since the early 1960s, collective agree- guidelines are the rule in setting the ments have become the most important most important working conditions. trade union instrument for the develop- ment of labour relations in Austria. Since Due to the specifi c Austrian structure that time, the ÖGB has traditionally oper- of professional self-administration and the ated a productivity-oriented wages and in- highly institutionalized system, another comes policy with the objective of general peculiarity has to be mentioned: wage and income development. Collective agreements can be negoti- ⅙ Almost all collective agreements are ated at the federal, provincial or sectoral concluded on behalf of employers by

61 their legal representative, the Austrian casting Corporation, the Federal Cham- Federal Economic Chamber and its sec- ber of Labour or the Federal Employ- toral substructures, and on behalf of ment Service are, by special laws, given employees by their voluntary profes- formal competence for collective bargain- sional association, the Austrian Trade ing solely as concerns those actually em- Union Confederation. ployed by them. ⅙ An existing independent trade union organization for white-collar workers Workers’ right to conclude is responsible for concluding separate collective agreements collective agreements on behalf of blue- and white-collar workers. Formally, the authority to conclude a col- lective agreement negotiated by a trade Capacity to conclude union is vested in the ÖGB. Since Septem- collective agreements ber 1947, the ÖGB has the exclusive enti- tlement to conclude collective agreements In Austria, the capacity to conclude collec- for employees and workers. Although for- tive agreements is based on legal or admin- mally the ÖGB has the entitlement, the 13 istrative recognition by the Federal Concil- trade unions take the responsibility for iation Board in the Ministry for Economy setting up collective agreements. As em- and Labour. powered organs of the ÖGB, they can also By law, the following are permitted to conduct negotiations with the competent conclude collective agreements: sectoral subdivisions of the employers. Therefore, collective bargaining policy ⅙ legal bodies representing the interests is implemented both by the 13 trade un- of employers and workers (the cham- ions and their branches and professional bers of business and of labour, as pub- committees, but the legal responsibility is lic corporations by virtue of special borne by the umbrella organization (ÖGB). laws); By recognizing the autonomous wage and ⅙ legal personalities, under public law, income policy of the trade unions, the ÖGB unless they are within another collec- rejects central wages and incomes guide- tive bargaining entity. lines. The Chamber of Labour, the legal rep- Upon request, the following are enti- resentative of workers’ interests, trans- tled to conclude collective agreements by ferred the right to collective bargaining virtue of their recognition by the Federal to the trade unions and does not exercise Conciliation Board: this right in any of the areas where work- ers are organized in unions.1 Nevertheless, ⅙ voluntary trade associations of workers the Chamber of Labour has considerable and employers, on condition that they signifi cance in the formulation of laws, as fulfi l certain criteria such as appropri- it provides technical expertise during the ate statutes and suitability as a body bargaining process. representing professional interests (as is the case for the ÖGB, with its 13 trade unions, on the employee side); Employers’ right to conclude ⅙ associations, on condition that they ful- collective agreements fi l the stated criteria but are not part of any collective bargaining entity. In contrast to the situation for employees, voluntary associations of the employers, There is no provision for company- like the Federation of Austrian Industry, level agreements in Austria. Individual do not have general responsibility for col- legal entities such as the Austrian Broad- lective bargaining. This task was assigned

62 to the Federal Economic Chamber (WKÖ), The standard provisions laid down in through their legally enshrined role as a the agreement are minimum rights. Col- professional representative of interests. lective agreements concluded by the ÖGB Since all independent companies in Aus- apply not only to trade union members but tria are legally obliged to be members of to all workers (the so-called “non-member the WKÖ, and its legal obligations include effect”). A collective agreement, once con- collective bargaining, labour relations are cluded, is therefore valid for all employees more or less comprehensively regulated by of an economic sector or industry. collective agreements. The standards set by a collective agree- ment are minimum rights, which must not be undercut even with the employee’s con- Scope of collective agreements sent. Any waiver of these minimum rights is null and void. Normally, collective agreements apply At the company level, works councils for 12 months. After that, they are gener- can conclude workplace agreements relat- ally not fully renewed or replaced, but are ing to wage structures and wage scales. amended by supplementary agreements. These are valid only if they contain bet- They remain legally applicable until a new ter wage provisions or conditions for the agreement comes into force. The tradi- employee than do the collective agree- tional standard scope of these agreements ments, or if they relate to matters not cov- includes the setting of minimum wages, ered by collective agreements. In no case as well as pay scales, special payments may the terms of a collective agreement (annual entitlements roughly equivalent be undercut. to two extra months’ pay – the “13th and Which collective agreement applies to 14th month”), additional payments and which employees will be determined by bonuses, expense allowances, working the sectoral subdivision of the WKÖ to hours and piece-work, , terms which their employer is assigned. of notice and termination dates. The scope of collective agreements was substantially increased by the Labour Con- Practical experience stitution Act in 1973. They may now also determine the following: collectively In Austria, collective bargaining is limited agreed pension and retirement benefi ts, to the private sector. In the public sector, consultation and co-determination rights there is no formal bargaining, but nego- of the workforce concerning the imple- tiations take place between public-sector mentation of works agreements about re- trade unions and government representa- dundancy programmes and decent work, tives. Within the private sector, more than joint facilities of the social partners and 98 per cent of all employees are covered matters which are referred to collective by collective agreements negotiated at the agreement by law. sectoral level and more than 500 collective agreements are concluded each year. While bargaining coverage in industry is 100 per Effects of collective agreements cent, it is lower in some private services, such as insurance, real estate and commu- Provisions of collective agreements are di- nity, social and personal services. While rectly legally binding for all contracts of some of the groups without coverage grew employment in the professional, local and in the 1990s (e.g. employees of non-profi t personal area of validity of the agreement. organizations), unions have made some Employees can assert their rights directly successful attempts to widen the cover- vis-à-vis the employer and if necessary sue age of collective bargaining. on this basis in the labour and social secu- The reason for the high density of cov- rity court. erage is that entrepreneurs are organized

63 by law in the Austrian Federal Economic opened with an exchange of basic bar- Chamber and, based on this fact, sectoral gaining positions by the social partners subdivisions of the WKÖ engage in nego- in September and collective bargaining tiations with the corresponding sectoral proper was due to start in October. For the nationwide union. As a result of the social fi rst time, the Metalworking Union and the partners’ high capacity for problem-solv- Union of Salaried Employees jointly de- ing, strikes are very infrequent in Austria cided on the issues to be put on the nego- by international standards. Annual down- tiating table for both blue-collar and white- time due to strikes (including all employ- collar workers in the industry. This year, ees) amounts traditionally to only a few negotiations became very diffi cult and seconds per head. However, major indus- contentious, as the unions were seeking trial action has occurred in the public sec- to compensate employees for their loss of tor and in aviation. purchasing power resulting from the Gov- In general, and as long as they are not ernment’s expenditure-cutting reforms. political, strikes cannot give rise to court Under the deal, minimum wage rates in- actions. Legal regulation is disliked by the crease by 3 per cent and the new minimum trade unions, because it is considered as an monthly wage is thus 1,187.92 euros. interference in trade union autonomy. Fritz Verzetnitsch, President of the The sectoral bargaining system is dif- ÖGB, asserts that a big advantage of the ferentiated according to employee cat- Austrian collective bargaining system is its egory (blue-collar workers and white- calculability. However, he also recognizes collar workers) and also to industry and that negotiations may possibly become small-scale enterprises. Most of the secto- more diffi cult over the next few years, ral agreements cover the whole national due to political circumstances. territory. Company agreements are an ex- The industrial sector is by far the most ception. important level of wage bargaining. How- Traditionally, the collective agreements ever, collective agreements concluded for for blue- and white-collar workers in the the industry as a whole do not always en- metal industry are the fi rst to be negoti- tirely exhaust the scope for wage increases. ated each year, in early autumn. The metal- Hence, depending on the situation of the workers set the pace for the other unions individual enterprise, workers’ representa- (including the public sector), which enter tives at the company level may bargain for into these bargaining processes in the en- additional wage increases. suing months. This leading role is shared Finalized collective agreements are between the Metalworking and Textile binding for all members of the signatory Union (GMT), representing the highly un- parties. By law, they are automatically ex- ionized blue-collar workers in the metal- tended to an employer’s non-unionized working industry, and the Union of Sala- workforce. Collective agreements may ried Employees (GPA). also be extended to unaffi liated businesses Generally, all agreements are within within the domain of a signatory voluntary just 2 or 3 per cent of the average wage in- organization. When some territorial sub- crease. There are no wage guidelines, and units of the WKÖ do not join a nationally the Government never intervenes in the negotiated collective agreement but others bargaining process. If negotiations reach do so, extension is also possible. deadlock, the presidents of the central as- sociations (the Trade Union Federation and the Economic Chamber) usually step New forms of work in as intermediaries. In 2001, Austria’s “leading” metal- In Austria, a growing number of jobs can working agreements were negotiated for no longer be described as based on a stand- about 105,000 waged and 95,000 salaried ard employment contract. More than 30 per employees. Negotiations were formally cent of the total workforce is involved in

64 atypical employment relationships, with a such forms of self-employment are not yearly rate of growth of 12 per cent. The going to disappear, so they would like to reasons for this development are changes contain this phenomenon and be able to set in demand for labour, e.g. extended open- a framework for remuneration and work- ing hours in commerce. Part-time work is ing conditions, such as was achieved for growing constantly, since part-time work journalists in 1999. is more common in the service sector than Generally, the ÖGB demands that the in industry. It is mainly performed by Government includes new forms of em- women. ployment within the insurance system. The spread of temporary employment has been limited; therefore, it is not regu- lated by collective agreements. In 1997, a Future trends collective agreement was concluded for the fi rst time on teleworking in the min- At the national level, since a new coali- eral oil industry. A typical worker is sala- tion Government of the populist Freedom ried; in contrast, the more common term Party and the conservative People’s Party for a teleworker is “external employee”. came to power in February 2000, the tra- The agreement is important for several ditional consensual atmosphere of pub- reasons. It was a fi rst attempt at negotiat- lic policy-making has been greatly dis- ing agreements covering activities in the rupted. In particular, organized labour fi eld of new technologies. As a precedent, has been forced on to the defensive by it will ease negotiations in other signifi cant the Government’s policy of limiting so- industries with external employees such as cial partnership. The Government was services, commerce, banking, etc. implementing a variety of reform meas- When new sectors emerge, unions try ures and initiatives, covering a wide range to achieve collective agreements. For in- of economic and political issues. It did not stance, employees in computers and in- consult with social partner institutions on formation technology were covered by a important economy policy decisions, such collective agreement that was not sector- as social benefi ts reform and balancing the specifi c and deals with and budget. The reform package included lots fl exibility. of measures in the social and employment As collective agreements are valid fi eld such as shifting inter-company co-de- for employees only, the small but grow- termination down to the company level in ing group of self-employed persons is not relation to working hours or the right to covered. In 1999, the union succeeded in collective bargaining. concluding a binding agreement with the That Government was undermining voluntary association of Austrian news- the system of social partnership, which is papers, fi xing minimum fees for self-em- in fact very strong. Thus, political tensions ployed journalists. The ÖGB opposes non- between the Government and the trade un- inclusion of certain groups of employees ions have continually increased. into collective bargaining coverage, be- There is widespread consensus among cause as a consequence these groups often social partners that strikes and other forms cost less and wherever possible employ- of industrial action should be prevented. ers try to substitute covered employees However, debates about the Government’s by non-covered. Therefore, when groups measures have resulted in warning strikes without coverage emerge or grow, unions and other action by the ÖGB and its affi li- try to achieve a collective agreement for ates. Demonstrations and a very successful them. Regarding the self-employed, the membership ballot in 2001 have indicated ÖGB would like as many of them as pos- notable discontent with social and employ- sible to have employee status (especially ment policy. those whose work situation is the same Whereas in other European countries, as that of employees). Unions realize that such rhetoric is a usual part of labour dis-

65 putes, at least as carried out by left-wing change working time legislation in order unions, the established Austrian model is to meet the employers’ demands. not really prepared for such a confl ict. The The Austrian system of collective bar- neo-liberal shift implemented by the Gov- gaining has not undergone large-scale ernment challenges the economically suc- structural changes. Some of the challenges cessful Austrian model of industrial rela- have been resolved fi rstly by the extension tions, all the more so since the Freedom and modifi cation of provisions, particu- Party has never been an integrated part of larly the inclusion of non-covered groups the model and has thus opposed it for po- of employees and, secondly, by increasing litical and ideological reasons. fl exibility in organized decentralization. In early September 2002, the coalition Collective bargaining as an instrument Government collapsed due to the resigna- of wage settlements is an indispensable tion of ministers of the Freedom Party as a tool for the attainment of trade union tar- result of internal rows. Now it seems likely gets in future. Collective bargaining can that the Government will dissolve soon achieve the complex balance between and elections will take place this year. operational decentralization and general A big challenge for collective bar- legislation. Thus, social partnership must gaining is the growing internationaliza- maintain its autonomy vis-à-vis the State. tion and European integration. Generally, Collective bargaining plays a crucial more fl exibility in collective bargaining is role in establishing labour relations not demanded in order to meet the require- only in the European Union, but also in ments of stronger competition. Efforts are the globalized economy of the twenty- concentrated on issues of working time, fi rst century. which is regulated by legislation. More fl exible working time benefi ts employers, who no longer have to pay for References and who see their labour costs reduced. European Trade Union Institute. 1998. Handbook of Employers are urging further liberaliza- trade unions in Europe. tion (e.g. Sunday working and prolonged Greif, Wolfgang. 2002. Arbeitnehmervertretung in opening hours), while the ÖGB wants em- Österreich. ployees to have more control over their Ullmann, Erich. 1997. Die kollektive Rechtsgestaltung working time and is in favour of working im Arbeitsrecht. time reduction. Flexible worktimes should, the unions say, be implemented within the existing framework, i.e. by law, collec- Note tive agreements or company agreements, 1 The Chamber of Labour represents all em- whereas the employers want to leave this ployees vis-à-vis the Government and the European issue out of collective bargaining. It is not Union. Membership is compulsory. The Chamber of certain that the Government will try to Labour, like the ÖGB, is a social partner.

66 Fighting poverty: The minimum wage

How to get the maximum out of the minimum wage

Establishing a minimum wage may positively affect employment and industrial peace and is a means of fighting poverty. States have a major role to play in this and certain conditions have to be met. One of them is social dialogue.

Catherine Saget* Employment Strategy Department ILO

inimum wage regulation prohibits any interest in the introduction of, or in- Mthe payment of wages below a spec- crease in, the minimum wage. However, ifi ed threshold. The main aim of such leg- from the employer’s point of view, paying a islation is to sustain the living standards minimum wage may increase productivity of low-paid workers. Empirical evidence in three main ways: by minimizing shirk- (minimum wages have been in operation ing, reducing labour turnover and contrib- for years in most countries of the world) uting to social peace. Firstly, the minimum shows that other objectives are also in- wage is a way of raising productivity by voked when setting up a minimum wage motivating workers. Secondly, uniform system. While supporting a minimum wages, such as the minimum wage, con- wage, governments, employers, workers tribute to reducing labour turnover, which and trade unions may indeed pursue dif- can be very costly for fi rms. Thirdly, the ferent objectives. minimum wage strengthens social cohe- For the workers, the minimum wage sion and is a way for employers to ensure represents a basic requirement and a social peace by avoiding confl icts. good way of improving or maintaining For governments, a major purpose of the standard of living of the low-paid the minimum wage is certainly to con- and their families. The minimum wage is, tribute to alleviating poverty. The mini- furthermore, a way of protecting vulner- mum wage can act as a social safety net able workers who are not able to organize in countries where social security is as yet and thus prevents exploitation. It is also a little developed. Governments have also means of redistributing income from capi- used the minimum wage to redistribute tal to labour. Finally, negotiations around income in society, to promote productive the minimum wage promote social dia- employment and to enhance demand- logue. driven growth.1 In developing countries, At fi rst sight, it might seem surprising the minimum wage is often at the core of to state that employers, for whom wages social dialogue. Removing it may amount mainly represent a cost of production, have to seriously damaging the quality of so- cial dialogue. * The views expressed in this article do not nec- Furthermore, in countries where essarily represent the views of the ILO, but those of the author herself. The author is very grateful to D. waged employment is developed, increas- Campbell, S. Dasgupta, Ph. Egger and R. van der Ho- ing the minimum wage might lower wage even for commenting on an earlier draft. in equality and thus help to reduce income

67 inequality.2 In these countries, coordinated ment? What kind of work do they do? Do wage bargaining also acts as an important they need training or not? Depending on tool to achieve low infl ation combined the answers, it might be that the minimum with a low level of unemployment when wage is not the appropriate tool for allevi- the growth of the economy leads to pres- ating poverty, though it might still be able sure on wages to increase (ILO, 2000). to achieve other objectives. In a period of high demand (high growth), fi rms tend to hire more people to meet the demand and unemployment Problems in determining tends to reduce. People have more wages, the minimum wage system they spend more, enterprises also buy more input and infl ationary pressure develops. In practice, problems arise as to the deter- In short, the higher the employment, the mination of the right level and coverage higher the infl ation.3 Higher employment of the minimum wage system, if it is to is good, but higher infl ation is not. To avoid fulfi l the functions outlined in the previ- this dilemma, as infl ation is the continu- ous section.5 ous increase of prices (price of output and There are several criteria to consider price of labour), one way to keep infl ation in the determination or the adjustment of low without reducing demand is to control the level of the minimum wage. The ILO’s wage increases. How? The best way to ad- Minimum Wage Fixing Convention, 1970 just wages seems to be to look at real wages (No. 131) identifi es four of them: the needs (the increase in the purchasing power of of workers and their families, the capacity wages) and the other sources of infl ation of fi rms to pay, the level of incomes and such as budget defi cits. other wages in the economy, and the re- Another function of the minimum quirement of the economic development of wage is to ensure a better match between the country. These criteria, though, might workers’ skills and job requirements. The be contradictory and priorities therefore minimum wage, by increasing the ex- have to be established. pected earnings from a future job, provides In some developing countries, it is un- a feeling of security to workers, and gives likely that the minimum wage can cover them more time to fi nd the job correspond- basic needs. It might be useful to defi ne ing to their qualifi cations. Promoting a bet- what is meant by the “basic needs” of ter match between workers’ skills and job workers, and by the word “family”, when requirements is an important and under- setting mid-term or long-term objectives estimated role of the minimum wage. This for a minimum wage policy in terms of is especially so in developing countries, basic needs. Once basic needs are defi ned, where there is no unemployment benefi t the automatic adjustment of the minimum system to play such a role, but also in in- wage to the increase in consumer price dustrialized countries, where some groups index, which seems logical, might not of the population such as fi rst-jobseekers be such a good idea in countries where are often not covered.4 waged employment is developed, because Finally, the minimum wage is an incen- of infl ationary pressure. In such countries, tive for employers to provide training for minimum wage agreements now refer to workers. This could contribute to increas- changes in the purchasing power of the ing the quality of the labour force. minimum wage in relation to the macro- The objectives of social partners over- economic situation, rather than just the lap, but not completely. Precise objectives consumer price index. are imperative in determining the mini- As to the second criterion, fi rms’ ca- mum wage system. If the State’s objective pacity to pay might be estimated from the is to relieve poverty, the questions that average growth in the economy, or in the have to be answered are: Where do the sector, and from data on labour productiv- poor work? Are they in waged employ- ity when available. Other indicators such

68 as the size of enterprises and/or the struc- in Botswana in the 1990s. Finally, it is now ture of production costs in the sector (e.g. less than 35 per cent in Brazil, Chile and whether fi rms use a lot of capital or not) Spain and above 30 per cent in Bulgaria may be useful. and Hungary. Defi ning the minimum wage in terms These fi gures are taken at one point in of other incomes and wages in the econ- time. The minimum wage, which in theory omy, which is the third criterion in the ILO should preserve the standard of living of Minimum Wage Fixing Convention, might the lowest-paid workers, in practice often raise another problem of data availability. varies more than economic activity, and It draws attention to income inequality in more than the average wage. society, and to income generated from al- There is a big problem in comparing ternatives to minimum wage jobs such as the minimum with the average wage: the subsistence agriculture, informal employ- average is extremely sensitive to very low ment, unemployment benefi t, etc. and very high wage values.6 It has there- The fi nal criterion to determine the fore been suggested that the minimum level of the minimum wage, “the necessity wage should be compared with the me- of economic development”, refers amongst dian wage, defi ned as follows: 50 per cent other things to the constraint of remaining of workers receive less than the median an attractive destination for foreign invest- wage and, of course, 50 per cent receive ment, which is an important channel of de- more. In this case, a relatively low mini- velopment. mum wage would be something like 30 to The main dilemma in choosing the level 40 per cent of the median and a relatively of the minimum wage can be summarized high minimum wage would be more than as follows. 70 per cent of the median. Above a certain On the one hand, a high level of mini- threshold, which is diffi cult to estimate be- mum wage is an effective way of protect- cause it depends on the structure of skills ing low-paid workers from poverty, but it in the industry, the minimum wage no might cover few such workers because of longer acts as a threshold for unskilled and job losses, or non-compliance following inexperienced workers, but becomes the the introduction of the high minimum maximum wage that even experienced and wage. On the other hand, a low minimum semi-skilled labour can expect in their pro- wage might cover more workers but offer fessional life. A maximum wage may lower a weak protection against poverty. the incentive to acquire skills and deter the To help us in judging what is a high employment of new entrants to the labour or a low minimum wage, we might com- market, i.e. cause unemployment. pare it with another wage. Comparing the minimum wage with the average wage has three advantages: the average is readily The impact of a minimum wage understandable and easily available, and it on the economy and on society represents more or less the wage of skilled labour, while the minimum wage is often The international evidence of the effect of aligned on the wages of unskilled labour. the minimum wage on employment, in- There is a wide variation across countries dustrial peace and poverty can be summa- with a very similar level of development. rized as follows (Saget, 2001). Many recent For example, the minimum wage repre- studies have concluded that for a relatively sented more than 70 per cent of the av- low value of the minimum wage, small and erage wage in El Salvador, Italy and Ven- regular increases in the minimum wage ezuela in the 1990s, while it was close to have no negative effect on the level of (for- half the average wage in France, Poland, mal) employment. This is because there are Sweden, Switzerland and Thailand in the several ways an employer and the econ- second half of the 1990s. The proportion omy as a whole can react to an increase in was relatively stable, at around 40 per cent, labour costs, not all leading to redundan-

69 cies. A modest increase in the minimum decrease in gross domestic product (GDP) wage can be compensated by a decrease per capita (see Saget, 2001; van der Hoeven in profi ts. This represents a redistribution and Saget, 2002). The informal economy of national income away from profi ts to- thus seems to result from a macroeconomic wards wages. There might also be an in- problem rather than from the rigidity of crease in the price of goods. In this case, the the labour market. However, in some cost of the minimum wage to the employer countries, growth and informal-sector de- is passed on to the consumer. velopment coexist, so institutional factors Another possibility for the employer, cannot be completely ruled out. especially in the case of more substan- In countries where the minimum wage tial increases in the minimum wage, is was low, such as Mexico in the 1990s, vir- to increase productivity, for example by tually no workers in the formal sector re- making work more effi cient and avoid- ceived the minimum wage. Yet the mini- ing waste, by substituting capital for la- mum wage played an important role in bour and by substituting skilled for un- the determination of wages in the infor- skilled labour. mal economy, with a potential benefi t for In the case where increases in the mini- the poor. mum wage lead to the dismissal of some A few studies also conclude that, workers, at least some displaced workers amongst similar countries, those with a may be able to fi nd another job if external higher minimum wage have a lower rate or internal demand is growing, or they of poverty (Lustig and McLeod, 1997; may not be able to do so and become un- Saget, 2001). For at least two industrial- employed. The closure of some fi rms may ized countries, there is evidence on the follow a more substantial increase in the role of the minimum wage in explaining minimum wage. the level of wage inequality. The study This fact highlights, once again, the role by Lee (1999) concludes that most of the of the State in setting a growth-friendly growth in inequality between the lower policy and providing the social partners categories and the median of the US wage with good forecasts on the state of the distribution was attributable to erosion of economy. the real value of the minimum wage dur- If increases in the minimum wage are ing the 1980s. The impact of the minimum offset by increases in labour productivity, wage on inequality was also confi rmed by demand will probably increase.7 Finally, data on the Netherlands (see Teulings, Vo- an increase in the minimum wage may in- gels and van Dieten, 1998). crease the level of employment if the wage Besides the traditional concerns about paid previously was also below the com- its effect on the level of employment, pov- petitive wage.8 In some rarer cases, even erty, productivity and social dialogue, the sizeable increases in the real minimum minimum wage has many other social and wage (15 to 20 per cent) did not result in economic effects which tend to be ignored. higher unemployment. This depends on In some developing countries, particularly the initial value of the wage and the ca- in Africa, a high proportion of employees pacity of the economy to absorb any dis- in the public sector receive the minimum placed workers. wage. A low minimum wage (and low A growing economy, which creates jobs, wages in general) may, therefore, cause is able to absorb the small losses in employ- professionals and skilled workers to leave ment which may possibly be caused by the public employment, with negative effects adjustment of the minimum wage. on the quality of work performed and on There are indications that the growth service delivery. of the informal economy in the fi rst half While keeping the level of total em- of the 1990s in Latin American countries ployment constant, the minimum wage was not mainly due to the level of the min- can have a different effect on the relative imum wage, but rather was linked to the employment of various groups of work-

70 ers (men/women, youth/older workers). crease in productivity in France after it leg- For example, a decrease in the minimum islated for a 35-hour week are a complex wage may cause a shift away from older and costly process requiring the support workers towards younger workers, as ap- of both workers and managers. According pears to have happened in Mexico in the to Islam and Nazara (2000), consultations 1990s. A decline in the minimum wage in with unions and business organizations in this country was also found to have a posi- Indonesia helped to ensure that minimum tive effect on the employment of women. wage increases did not damage employ- The skill profi le of minimum wage work- ment between 1990 and 1998. The authors ers may also shift away from those with compared the level of waged employment more formal education towards those with in several areas of that country when the little education. Similarly, a differential im- ratio of the minimum to the average pact of the minimum wage by sex and age wage was low and when it was high, and was also found for the United States, to- growth was constant. They found no evi- gether with an adverse effect on the em- dence that the increase in the ratio of mini- ployment of younger workers. mum to average wages damaged waged employment. Finally, the participation of social partners in the setting up of the mini- Best practices mum wage system is a good way of en- suring compliance with wage regulations The previous arguments outlined the po- in developing countries where only lim- tentially benefi cial role of the minimum ited resources can be spent on labour in- wage in the economy and society as a spection. The necessity of reaching a com- whole, as well as the problems encoun- promise between the interests of workers, tered in determining the level and cover- employers and the State may ensure that age of the system. Certain conditions have the minimum wage is the “right minimum to be met if a country is to enjoy the benefi ts wage”. of a minimum wage system while avoid- Small and regular increases in the mini- ing negative consequences such as unem- mum wage are better than brutal adjust- ployment, widening income disparities ments following years of stability in nomi- and infl ation. nal terms. In some cases though, even size- Social dialogue is a prerequisite. As able increases in the minimum wage were mentioned, coordination of wage bar- estimated to have no negative effect on the gaining could be used to reduce infl ation level of employment. arising from expectations of wage infl a- Linking wage increases, including the tion. The quality of social dialogue at the minimum wage, to productivity at a time enterprise level is also crucial in ensuring of sustained growth is in principle a good that wage increases translate into produc- idea. In practice, it raises numerous prob- tivity increases through changes in work lems due to the diffi culty of measuring la- organization. At the national level, more bour productivity at the sectoral, national, objective discussions on the distribution workplace and individual level (see, for ex- of national income and in particular on ample, United Nations, 1995). the share of wages in national income Minimum wages and more generally are needed. It is well-documented that labour costs are not the main variables the share of wages has been declining in that investors compare. At least, they are most developed and developing countries not what investors should be comparing. for which data are available. What are the Foreign investors should compare many consequences of this trend on people’s factors before investing in a given country, well-being, social cohesion and long-term including political stability, exchange rates economic development? and unit labour costs, which are the cost of Changes in work organization which labour per unit of output, rather than just are the main factors responsible for the in- labour costs. Trends in labour productiv-

71 ity and the transparency of the minimum information. In many cases, plenty of in- wage system seem crucial, particularly at a formation is available, but not discussed. time of renewed emphasis on sound mana- Third, the State should decide whether gerial practices. agreements reached by means of collec- ILO Convention No. 131, which can ac- tive bargaining should be extended or not commodate very different systems of mini- to other sectors or groups of workers. mum wages, provides a good framework Coming back to the fi rst and second for best practices. Ratifying the Conven- points, there is no magic formula for cal- tion implies three obligations: the obliga- culating the value of the minimum wage tion of consulting the social partners, the on the basis of economic and social data. four criteria to consider in fi xing the mini- The absence of sophisticated data, while mum wage discussed above, and the bind- always regrettable, is not the main obsta- ing nature of the minimum wage. cle to the success of the minimum wage The Convention, although rather old system. Extensive discussions and debate (1970), contains all the elements for mak- within society on such a complex and po- ing minimum wage policy a successful tentially confl ictual issue can produce a tool of labour market policy. The Con- solution. vention makes references to the partici- pation of social partners, the state of the economy, the economic activity of the References poor, etc. It also contains implicit refer- Hoeven, van der, Rolph; Saget, Catherine. 2002. “La- ences to all the elements that go to make bour market institutions and income inequality: up decent work. Social dialogue has al- What are the new insights after the Washington ready been mentioned. Social security is Consensus?”, in Andrea Cornia (ed.), Inequality, another determinant in the fi xing of the growth and poverty in an era of liberalization and globalization, Oxford University Press (forthcom- minimum wage. As the Convention was ing). born before the years of hyperinfl ation of ILO. 2000. Organization, bargaining and social dialogue the 1980s, it is much less explicit as to the in a globalizing world. Geneva. potential role of wage bargaining in fi ght- Islam, Iyanatul; Nazara, Suahasil. 2000. Minimum ing wage infl ation. The Convention was wage and the welfare of Indonesian workers. Occa- also formulated at a time when there was sional Discussion Paper Series, No. 3. Jakarta, less stress on human resource develop- ILO Jakarta Offi ce. ment and changes in work organization Lee, David S. 1999. “Wage inequality in the United as a way for employers to adapt to the States during the 1980s: Rising dispersion or fall- ing minimum wage?”, in The Quarterly Journal minimum wage rise. of Economics (Cambridge, MA) Vol. 114, No. 3 (Aug.), pp. 977-1023. Lustig, Nora Claudia; McLeod, Darryl. 1997. “Mini- Conclusion mum wages and poverty in developing countries: Some empirical evidence”, in Sebastian Edwards The potential benefi ts of the minimum and Nora Claudia Lustig (eds.): Labour markets in Latin America: Combining social protection with wage for the economy and society are un- market fl exibility. Washington, DC, The Brookings deniable, provided some conditions are Institution Press, pp. 62-103. met. The State has a major and triple-lay- Saget, Catherine. 2001. “Poverty reduction and de- ered role to play in ensuring that bargain- cent work in developing countries: Do minimum ing on minimum wages is successful. First, wages help?”, in International Labour Review (Ge- it has to establish and maintain an insti- neva) Vol. 140, No. 3, pp. 237-269. tutional framework for minimum wage Teulings, Coen N.; Vogels, E.H.; van Dieten, J. 1998. setting and collective bargaining. Second, Minimum loon, arbeidsmarkt en inkomensverdeling. The Hague, SDU. it has to provide the social partners with United Nations. 1995. “Some causes and conse- good-quality, up-to-date information, so quences of changing methods of production”, in that both parties can decide on their posi- World Economic and Social Survey 1995, New York, tion and bargain on the basis of accurate United Nations, pp. 225-262.

72 Notes wage. The value of this average wage, which is driven by a small group of the population, will mean very 1 This is because low-income families tend to little to most workers. consume more and save less, in proportion, than do 7 People benefi ting from the rise in the minimum higher-income families. wage consume more and, providing they consume 2 Most economists would agree that inequality domestic goods, employment will increase if there is affects growth of the economy through a combina- no constraint on the supply side of the economy. tion of inequality of access to credit markets, 8 Imagine a situation where a major employer inequality and human capital inequality. in a given area deals with workers who are not very 3 This is a conventional explanation of infl ation. mobile: wages will be very low, lower than if the 4 One of the main arguments in favour of an un- workers could easily move. In this case, introducing employment benefi ts system is that it gives recipients the minimum wage will actually increase employ- time to fi nd the appropriate job, which matches their ment. The agriculture sector in Morocco in the 1980s qualifi cations, instead of taking any job just to sur- is often given as an example of such a situation. In vive. It therefore contributes to higher productivity. Morocco, there is a minimum wage specifi c to agri- The minimum wage acts in a similar way: jobseekers culture, which is substantially below the minimum know what to expect and do not have to accept just wage payable in other sectors and seems to have any job. They can afford to look for a suitable job. been more or less enforced at that time. At a con- 5 stant market price for wheat and other cereals, an This paper ignores the problems that might increase in the real minimum wage in agriculture is arise in the determination of the right minimum found to increase wheat production and therefore wage fi xing machinery; whether by statute, wages the demand for labour. The minimum wage thus in- boards or councils, labour courts, etc. creases employment and, as the agricultural labour- 6 A country where a small proportion of the popu- ers are amongst the poorest workers, contributes to lation receives very high wages shows a high average alleviating poverty.

73 Fighting poverty: The minimum wage

Wages, employment and prices

Cut real wages and you will create more jobs. So say the neoclassi- cal economists who are behind the current push for more “flexible” labour markets. But are they contradicting themselves? Could wage rigidity be our main bulwark against deflation? And what happens if this barrier is breached?

Hansjörg Herr Professor Berlin School of Economics Germany

he labour market and its reform are at the technology. The latter depends on tech- Tthe centre of theoretical and political nological improvements and the distribu- discussions about how to achieve high em- tion of income and is not predictable. This ployment. There are two basic approaches. means that, on a theoretical level in the long The neoclassical paradigm – the present run, there is no clear relation between the mainstream approach – assumes that volume of production and the demand for cuts in real wages will increase employ- labour. Labour demand will equal labour ment. Reforming labour markets in order supply only by chance. Thus, unemploy- to make them more fl exible is thus one of ment is a normal state of affairs in a capi- the key recommendations for improving talist economy. Most importantly – in con- employment and growth. trast to the neoclassical approach – in the The Keynesian paradigm rejects the neo- Keynesian model, the labour market has no classical view. According to Keynes, there mechanism to create higher employment is a hierarchy of markets. Economically, the by itself. Capital and goods markets can be most important is the capital market (in- in equilibrium and at the same time the la- cluding the banking system). In this mar- bour market can be in a stable situation of ket, the portfolio decisions of households, unemployment (Heine and Herr, 2002). banks and enterprises and credit demand and credit supply are analysed. The capital market determines the interest rate and, to- Wage levels and prices gether with profi t expectations, the invest- in the Keynesian model ment demand. Also, consumer demand can be affected, for example via changes in In the Keynesian approach, the wage stock prices. Investment is the most impor- level does not determine employment, tant element of demand and at the same but it is an important factor in determin- time the most important link between the ing the price level.1 In explaining infl ation/ capital and the goods markets. As long as defl ation, Keynes distinguished between there are free capacities in the goods mar- cost infl ation/defl ation and demand in- ket, demand determines supply. fl ation/defl ation. The labour market is at the bottom of the In the case of cost infl ation, a mark-up hierarchy of markets. Demand for labour pricing is assumed. If costs increase at the depends on the volume of production and macroeconomic level, enterprises will in-

74 crease prices. They are able to do so as all in productivity 2.5 per cent, the nominal enterprises are affected by the same cost wage rate has to be increased by about increases. If costs decrease, the competi- 4.5 per cent in order to achieve the target tion between enterprises leads to falling infl ation rate and thus become the nominal prices. It follows that even in a situation anchor of the price level. of low capacity utilization, increasing costs According to Keynes, a typical infl ation lead to higher prices. Unit-labour costs – process develops as follows. Let us assume i.e. the nominal wage rate divided by pro- there is a long period of high investment ductivity – are an important cost factor. which drives demand. If capacities are When the nominal wage rate increases fully utilized and higher demand cannot by the same percentage as productivity, be met by higher production, demand in- unit-labour costs do not change and have fl ation will result. This leads to falling real neither an infl ationary nor a defl ationary wages. If workers do not accept a reduc- effect. When nominal wages increase by tion in real wages and successfully increase more than productivity, unit-labour costs nominal wages, both demand infl ation and increase and lead to an infl ationary push. cost infl ation will increase the price level. There are other cost factors which are It is very likely that demand infl ation and covered by prices. If, over a longer period, cost infl ation will stimulate each other and the level of interest rates increases, prices lead to an accelerating wage-price spiral must increase. Given the interest rate, capi- and a cumulative infl ationary process. In tal intensity determines interest costs.2 In such a situation, sooner or later a central addition, cost-push infl ation can occur if bank will push up the whole interest rate taxes increase (for example, value-added structure. This leads to a fall in investment tax), if import prices increase (as the result and demand defl ation. At the same time, of a devaluation), or if prices of natural re- the stabilization crisis caused by anti-in- sources increase. fl ationary monetary policy reduces the Demand-driven infl ation takes place if growth rate and employment. Higher un- capacities are fully utilized and aggregate employment changes the situation in the demand exceeds aggregate supply. In this labour market. Nominal wages do not in- case, the enterprise sector achieves an extra crease as much as before and the cost in- profi t. A lack of demand not only reduces fl ation fades out. the quantity produced, it can also reduce For smaller countries in particular, ex- the price level. In such a situation enter- ternal cost factors are important. If a coun- prises are confronted with losses. try devalues its currency, import prices and In equilibrium and in the long term, the the domestic cost level increase. As higher price level is determined by productivity, prices reduce real wages, it is very likely the nominal wage rate, the interest rate, that a devaluation will trigger a wage-price capital intensity and some other cost fac- spiral. The higher the infl ation, the higher tors. Productivity and capital intensity can the likelihood of further devaluation. In hardly be controlled by economic policy. such a situation, a country is caught in a Also, the central bank is not completely devaluation-infl ation spiral which is com- free to set the interest rate. This means bined with a wage-price spiral (cp. Herr, that nominal wages are of paramount im- 1997; Herr and Priewe, 2001). portance for the price level. Unit-labour costs become the nominal anchor of a mon- etary economy. Wages and positive At the centre of Keynesian wage the- macroeconomic regimes ory is the recommendation of productivity- oriented wage increases.3 Most of the world’s It is the function of central banks to guar- central banks have a positive target infl a- antee a stable currency. Central banks po- tion rate. If, for example, the target infl a- tentially always have the power to reduce tion rate is 2.0 per cent and the increase infl ation rates by a policy of high interest

75 rates. But the problem is that the short- of markets in the Keynesian paradigm. term costs in reducing infl ation may be If infl ationary pressure comes from other very high. Restrictive monetary policy sources, for example from a high budget will create a collapse in investment, a lack defi cit fi nanced by the central bank, a func- of demand, demand defl ation and enter- tional wage policy is not possible. In such prise losses. The stabilization crisis leads a situation, nominal wages have to be in- to low or even negative growth rates and creased in order to prevent an erosion of increasing unemployment. real wages. Furthermore, nominal wages If there is no infl ationary pressure, there cannot normally be kept stable when the is no need for restrictive monetary policy. domestic currency is devalued by a high This is the point where a labour market and percentage and imported goods make up incomes policy becomes very important. In a large part of wage goods. a market economy, it serves to establish a It has become very fashionable to cal- nominal wage anchor. If an incomes policy culate a so-called NAIRU (non-accelerat- establishes a productivity-oriented wage ing infl ation rate of unemployment). The development, the central bank does not NAIRU is the unemployment rate that have to implement a restrictive monetary keeps the infl ation rate at a certain level, policy in order to stabilize the price level. for example at a low percentage target in- There is no guarantee that a productivity- fl ation rate. In some respects, the NAIRU oriented wage policy will lead to higher concept fi ts into Keynesian thinking, as a growth and higher employment. But such a certain rate of unemployment may be nec- policy improves the macroeconomic condi- essary to prevent an infl ationary wage- tions and increases the probability of higher price spiral.4 The better an incomes policy growth rates and higher employment. functions, the lower the NAIRU. It should Especially in a situation of high em- be clearly understood that not every em- ployment, it can become diffi cult to fol- pirically measured unemployment rate is low a productivity-oriented wage policy. identical with NAIRU. In the Keynesian In such a situation, the bargaining power model, capital and goods markets can cre- of unions is high and this may lead to ate unemployment rates which are much higher nominal wages. Even if unions ac- higher than the unemployment rate nec- cept moderate nominal wage increases essary to prevent a wage-price spiral. In in a situation of high employment, high Europe, for example, unemployment rates demand in the labour market can lead to since the 1970s cannot be explained by ex- wage drift and cost infl ation. The more a cessive wage pressure. The problem was country can stabilize wages in a situation that growth rates were too low because of high growth and high employment, the demand – and especially investment de- higher is the likelihood of continual long- mand – was too low. It would be particu- term growth. A successful interaction be- larly misleading to use the NAIRU concept tween nominal wage development (un- to explain the high unemployment rates in ions) and monetary policy (central bank) is developing or transitional countries. of paramount importance for a prosperous The power of central banks to control economic regime. the price level is asymmetric. So far, we A functional interrelation between have pointed out that central banks (at nominal wage developments and mone- least potentially) can always successfully tary policy is only one element of a suc- fi ght against infl ation. For central banks, it cessful economic regime. As wages can is much more diffi cult to prevent, or fi ght never be a compensating factor for other against, defl ation. The limited power of destabilizing sources, incomes policy can central banks to stop defl ation becomes be a force for stabilization only when the obvious if low interest rates do not stimu- other macroeconomic markets are in a sta- late investment demand and fail to in- ble constellation. This shows the limited crease the money supply. If expectation role of labour markets in the hierarchy and the state of confi dence are negative,

76 there may be no interest rate low enough general wage level. Changes in minimum to stimulate investment and prevent a per- wages according to this rule will not set off manent lack of demand. The crucial barrier a wage-price spiral. At the same time, they against cumulative defl ation is the nomi- will prevent a growing gap between low- nal wage anchor. If this dyke breaks and paid work and the minimum wage. On nominal wages start to fall, a defl ationary the other hand, if average nominal wages wage-price spiral and a defl ationary de- fall, the level of minimum wages should mand constellation will stimulate each be kept unchanged. other and lead to a cumulative defl ation- ary process. Any sharp defl ation leads into a deep depression. Labour market institu- Different wages in the same tions which help to establish a productiv- industry – an example of changing ity-oriented wage development and es- the wage structure pecially prevent wages from falling are extremely important for the stability of a There are many ways to make the wage market economy. Rigidity of wages is de- structure more fl exible. Here only the ef- sirable in order to stabilize the price level fects of different wages in the same in- and it is not a disruptive factor which pre- dustry are discussed. The basic law of one vents full employment. If the central bank price dictates that all companies in an in- is responsible for preventing infl ation, then dustry have to pay the same prices for all unions or labour market institutions are re- inputs – for oil, computers, pencils, drill- sponsible for preventing defl ation. ing machines, etc. and also for labour. Let us analyse what happens if the law of one price is violated and labour inputs have Minimum wages different prices for different companies. At least in the short term, perspective Where unions are weak, minimum wages wage differentiation within one industry become important. Minimum wages that can protect employment. This is the case can be enforced can prevent a defl ationary if less productive companies can survive wage-price spiral. They set a fl oor for nom- by paying lower wages. The price of this is inal wage cuts and compensate for weak lower nominal and real wages for employ- unions and an underdeveloped system of ees in companies with lower productivity. wage negotiations. If the level of minimum For an economy, this employment strat- wages is substantially lower than the nom- egy amounts to a policy of reducing av- inal wage of low-paid workers, it cannot erage productivity in order to protect em- prevent the general nominal wage level ployment. The big disadvantage of such a from decreasing. On the other hand, if a policy is the reduced incentive to restruc- minimum wage is so high as to increase ture fi rms and to innovate. Lame ducks are the wages of the group of low-paid work- subsidized by labour and innovative en- ers, they may compress the wage struc- terprises are punished, as they have to pay ture. As a rule, minimum wages should higher wages and are not permitted to ex- not be much lower than the wage level of pand in accordance with their competitive the least-paid groups of workers. As the power. One of the most dynamic elements wage level is different in different indus- of capitalism is the quest for extra profi ts tries, minimum wages should be defi ned through innovation, new management for each industry. In an infl ationary situa- methods, etc. Wage differentiation within tion, fi xed minimum wages quickly be- one industry hinders the process of creative come ineffective as the general wage level destruction, as Schumpeter (1942) called it, increases and a considerable gap develops which is a basic element of capitalism.5 between the wage level of low-paid work- For market economies, wage negotia- ers and the minimum wage. Minimum tions on the basis of the same wage level for wages should be adjusted in line with the all fi rms in an industry are functional, as

77 they enforce the law of one price which in oping countries we can see a similar devel- general should also hold for labour. Only opment. The phenomenon is also known in in special cases and for a limited period of developed countries in the group of low- time should the law of one price for labour paid workers. On the other hand, increasing be violated. It can make sense to reduce the real wage rates do not in any case increase wage costs for individually underperform- labour supply, as leisure time becomes more ing companies for a certain time in order to and more precious for households. support restructuring. This may be desir- The smooth demand function for labour able if the bad performance of a company is based on dubious methodical grounds. It does not lead to an immediate expansion depends on a macroeconomic production by other companies and the development function. Such a function suggests that the of an industry is path-dependent. enterprise sector of a country can be boiled down to one large company using labour and one capital good for production. The Shortcomings of striking fact of this function is that it im- the neoclassical model plicitly assumes that there is no interac- tion between companies and no interac- The neoclassical model usually applies tion between different markets. A lengthy a smooth labour supply function which discussion since the Second World War has increases with higher real wages and a shown that the inverse relation between smooth labour demand function which real wages and labour demand in the neo- decreases with higher real wages. Flex ible classical model depends on the existence of real wages lead to market clearing – as in only one capital good. Two or more capital a normal goods market – and full employ- goods destroy the relation between lower ment. real wages and higher labour demand. It is One conclusion of the Keynesian ap- a scandal that many – though not all – neo- proach is that real wages do not depend classical writers suppress this debate. on nominal wages. “The traditional theory maintains, in short, that the wage bargains between the entrepreneur and the workers References determine the real wage” (Keynes, 1936, p. 11). But: “There may exist no expedient Heine, M.; Herr, H. 2002. Volkswirtschaftslehre. Para- digmenorientierte Einführung in die Mikro- und by which labour as a whole can reduce its Makroökonomie. 3rd ed. Munich. real wage to a given fi gure by making re- Herr, H. 2002. Wages, employment and prices. An analy- vised money bargains with entrepreneurs” sis of the relationship between wage level, wage struc- (Keynes, 1936, p. 13). Reductions in wages ture, minimum wages and employment and prices. do not lead to higher employment, they Working Paper of the Business Institute Berlin, lead to defl ation and to a destabilization Fachhochschule für Wirtschaft Berlin, No. 15. http://www.fhw-berlin.de/fhw2000/lehre_ of the economy. und_forschung/working_paper_15.pdf There are more problems with the neo- Herr, H. 1997. “The international monetary system classical analysis of the labour market. The and domestic policy”, in D.J. Forsyth and T. Noter- smooth functions are not based on neoclas- mans (eds.), Regime changes. Macroeconomic policy sical microeconomics, they are assumed. and fi nancial regulations in Europe from the 1930s to In complete harmony with the neoclassi- the 1990s. Cambridge, USA, pp. 124-168. cal model, a more differentiated supply Herr, H.; Priewe, J. 2001. The macroeconomic framework for poverty reduction. http://www.macropolicies- function for labour is possible. When real berlin.de wages become very low, any further reduc- Keynes, J.M. 1936. The general theory of employment, tions in real wages may increase the supply interest and money. Cambridge. of labour. In this case, people have to work Keynes, J.M. 1930. Treatise on money, Vol. I, The pure more to survive. This phenomenon could theory of money. Cambridge. historically be noticed during the industrial Schumpeter, J. 1942. Capitalism, socialism and democ- revolution. In many transitional and devel- racy. New York.

78 Notes people, and it increases during an upswing as com- panies use the existing stock of workers to produce 1 The analysis follows Keynes (1930). more. Thus productivity-oriented wage policy 2 It could be argued that wages make up only a should follow the medium-term trend of productiv- small part of total costs and thus the price level does ity changes. not change by the same percentage as unit-labour 4 NAIRU is often and wrongly identifi ed with costs change. This argument is false as higher unit- the natural rate of unemployment. The latter is the labour costs increase the price level of capital goods. employment rate that the real sphere (real wage ri- In the simple case when only wage costs and capital gidity, low mobility of labour, mismatch of labour costs exist it can be shown that a certain percentage demand and supply, etc.) in the neoclassical world change in unit-labour costs leads to the same per- creates. The neoclassical model explains infl ation by centage change in the price level (cp. Heine and excessive money supply and not by nominal wage Herr, 2002). increases. But nominal wage increases are behind the 3 Statistically, productivity drops during re- NAIRU concept. cession as companies cannot immediately dismiss 5 Karl Marx also stressed this point.

79 Fighting poverty: The minimum wage

Minimum wages and employment: The positive UK experience

Prior to its introduction by the Labour Party in 1999, the minimum wage raised many eyebrows in the United Kingdom. Conservatives predicted that massive unemployment would result. It did not hap- pen. The evidence suggests that the move has benefited the country in general and the poor in particular.

Damian Kyloh Economics Student

n the mid-1990s, the Labour Party in industries”. At their peak in the 1960s, the Ithe United Kingdom made it clear that Wage Councils set minimum wages in they would introduce a national minimum some 60 sectors. After this, the number of wage (NMW) if they won the next elec- sectors covered fell and in the early 1990s tion. Their objective was to use an NMW to there were 26 remaining Wage Councils. help reduce poverty and income inequal- But in 1993, the Trade Union Reform and ity. This led to much political and economic Employment Rights Bill abolished all of debate about the likely impact of an NMW. these. Thus, from 1993 there were no mini- Much of this focused on the employment mum wages in operation in the United impact. For example, in 1995 a former Con- Kingdom, except in agriculture. servative government minister, Iain Lang, In 1997, the Low Pay Commission said that a minimum wage set at £4.15 an (LPC) was established to recommend hour would cost at least 950,000 jobs.1 to the Government a level for the initial Yet by March 2001, nearly two years rate of the NMW. The LPC did a lot of re- after the introduction of an NMW (in search and spent a lot of time talking to April 1999), the Low Pay Commission trade unions and employers before mak- was able to conclude: “We were espe- ing recommendations to the Government. cially concerned about the possible nega- At the start, there were large differences tive employment effects of the minimum of opinion about the introduction of the wage. Employment has continued to grow NMW and about what level it should be. strongly since the introduction of the mini- In fact, up until the mid-1980s, the mum wage, and there were no discernible Union Congress (TUC) had been against a adverse effects at the aggregate level.”2 In minimum wage because they felt it might fact, total employment increased signifi - damage collective bargaining. But they cantly during the fi rst two years after the changed their mind and in the mid-1990s introduction of the NMW. were arguing for an NMW of over £5. The head of the LPC, George Bain, points out that employers also changed A brief history of the minimum wage their minds about the NMW. In 1995, the Confederation of British Industry (CBI) Wage Councils were fi rst established by argued that “even a low minimum wage Winston Churchill in 1909 to protect the would reduce job opportunities and create pay of workers in the so-called “sweated major problems for wages structures in a

80 wide range of companies”.3 But by 1997, stood at 5.3 per cent in the fi nal quarter of Bain says, the CBI had accepted the idea 2000. It said this was the lowest level since of an NMW and was concerned only about the UK adopted the ILO system of measur- the level of the wage fl oor. It would seem ing unemployment in 1984. The LPC said: the LPC was pretty successful in bring- “On the basis of this measure over the pe- ing employers and unions closer together, riod since the minimum wage was intro- demonstrating that social dialogue does duced unemployment had fallen by just work. In its initial decision, the LPC rec- under 235,000.” 5 ommended a fairly modest NMW. It sug- Consider the updated fi gures. Stand- gested a rate of £3.60 with a lower devel- ardized unemployment fi gures from the opment rate for workers aged 18-20 and for OECD show that UK unemployment fell those aged 21 and over but starting a new from 6.3 per cent in 1998 to a low of 5.0 per job or undertaking training. It also sug- cent in the second quarter of 2001. Since gested that workers under 18 and appren- then, there has been a very slight increase tices should not be covered by the NMW. to 5.2 per cent in August 2001. This might In April 1999, the Labour Government be due to the downturn in the US and glo- led by Tony Blair implemented most of the bal economies which commenced in 2001. LPC’s suggestions, but decided to intro- Despite this, the OECD data show that in duce an even lower rate for young people. mid-2001 UK unemployment levels com- They decided on an NMW of £3.60 an hour pared very favourably with the OECD av- for workers aged 22 and over, with a lower erage of 6.8 per cent and the Euro-zone fi g- rate of £3.00 for those aged 18-21. Since that ure of 8.4 per cent. time, there have been some slight increases These aggregate unemployment data in the NMW and in October 2001, the main strongly suggest that the UK labour mar- national wage for adults aged 21 and over ket was not adversely affected by the in- was adjusted to £4.10 per hour. troduction of the NMW. If anything, there The LPC and the Government deliber- may have been a positive effect. How- ately adopted a careful approach. As Bain ever, before drawing any sweeping con- said: “We believe that by taking a cautious clusions, it is necessary to go further and approach, the NMW can be introduced carefully examine the implications in those without signifi cant extra cost to business. segments of the labour market where the Nor in our judgEment should its impact low-paid workers are concentrated. If any- on the wage bill adversely affect employ- one had stood to lose their jobs as a result ment or lead to any substantial increases of the NMW, it would have been workers in infl ation.”4 The LPC estimated that the in marginal low-productivity sectors of the wage bill would increase by only 0.6 per economy. cent and infl ation by 0.2 per cent. Figure 1 shows changes in employment The union movement and many low- levels in some low-paying sectors of the paid workers were rightly disappointed economy, namely cleaning, security, hos- with the LPC recommendations, and pitality, retail and textiles. somewhat disillusioned with their Labour It may be seen that employment in the Government. Nevertheless, after decades security sector has risen relatively quickly of Conservative attacks, this was seen as while employment in the hospitality and a small step towards providing much- retail sectors has increased in line with needed protection for the low-paid. the national average. On the other hand, employment in textiles and cleaning has declined dramatically. However, the LPC The labour market impact has argued that employment in the textiles and the cleaning sectors has declined in When the Low Pay Commission issued its accordance with longer-term trends and third report in March 2001, it was pleased structural changes in these sectors. to note that the rate of unemployment

81 Figure 1. Employment change in low-paying sectors, 1997-2000

Employee jobs index Dec. 1997 = 100 130

120

110

100

90

80

70 Dec. 97 Jun. 98 Dec. 98 Jun. 99 Dec. 99 Jun. 00 Mar. 98 Sep. 98 Mar. 99 Sep. 99 Mar. 00 Sep. 00

Cleaning Hospitality Textiles Security Retail All sectors

Source: Employee jobs series, CNS, 1997-2000.

The LPC commissioned a survey of fects is an LPC survey of fi rms affected by fi rms affected by the NMW in Northern the NMW. The results of this survey are Ireland. This found that textiles and cloth- summarized in fi gure 2. This shows that ing fi rms accounted for 73 per cent of the about 13 per cent of fi rms said they had reported direct job losses and employers made signifi cant reductions in their staff- in this sector were generally unable to ing levels as a direct result of the NMW, raise prices in adjusting to the minimum while almost 40 per cent of fi rms claimed wage. The results of this survey would either a signifi cant or slight decline in em- suggest that, in particular sectors and in ployment. particular regions, there have been some What is clear from fi gure 2 is the ex- negative employment effects from the tent to which some industries have been minimum wage. However, the long-term affected. According to this survey, 65 per employment decline in the textiles sector is cent of hairdressers and 56 per cent of busi- probably also due to reduced international nesses in the hospitality sector have made protection as well as to the movement of some staff reductions as a direct result of textile production offshore. the NMW being introduced. Other evidence suggesting that there Figure 3 demonstrates exactly why have been some negative employment ef- hairdressers have been so dramatically af-

82 fected. It shows the impact on the wage bill If the NMW were to have negative em- after the introduction of the NMW. ployment effects on the low-paid, an in- It may be seen that the hairdressing sec- crease in might be tor experienced the greatest increase in the expected. However, fi gure 4 shows that wage bill, about 7 per cent. This evidence unemployment is now lower than in the suggests that in certain sectors and occupa- previous trough, in 1990, across most age tions, namely hairdressers and textiles in groups. There are two exceptions, namely Northern Ireland, there has been a slight 16-17 year-olds and 22-24 year-olds. For negative employment effect. the former group, the rise in unemploy-

Figure 2. Reductions in staffing levels as a result of the National Minimum Wage

Total Significant reduction in staffing

Textiles Slight reduction in staffing

Childcare

Social care

Hospitality

Hairdressing

0 10 20 30 40 50 60 70 Percentage of firms affected by the minimum wage

Note: Base, all firms affected by the National Minimum Wage in any way. Source: Low Pay Commission Survey, September-November 2000.

Figure 3. Impact on the wage bill of the introduction of the National Minimum Wage in low-paying sectors

Increase (%) 8 No differentials

7 Differentials 6

5

4

3

2

1

0 Agriculture Clothing Retail Hospitality Security Cleaning Residential Hairdressing & footwear care

Source: LPC Calculations Grossed NES data, April 1998.

83 ment was concentrated among those in tion of the NMW may have had a small full-time education. For the latter group, positive employment effect. From fi gure 5, the increase between spring 2000 and au- it can be seen that between spring 1999 and tumn 2000 appears to be related to those autumn 2000, the unemployment rate for who left full-time education. whites fell by 0.6 percentage points. In the Ethnic minority groups are dispropor- same period the unemployment rate for tionately represented among low-paid black, Indian and Pakistani/Bangladeshi workers. If there were a negative employ- workers declined by between 1 and 1.3 ment effect for the low-paid, we might ex- percentage points. pect a rise in the number of people unem- Another group in society that is con- ployed from these ethnic groups. But it centrated among the low-paid is disabled may be seen from fi gure 5 that the number people. In the 18-month period after the in- of unemployed people from these ethnic troduction of the NMW, there was a fairly groups has continued to fall. signifi cant fall in the number of people In fact, the number of unemployed unemployed who had a work-limiting from minority ethnic groups has fallen disability. Their unemployment rate fell faster than for the majority population. If by some 1.6 percentage points over this anything, this suggests that the introduc- period.

Figure 4. ILO unemployment rates by age, 1993-2000

ILO unemployment rate (%) 25

20

15

10

5

0 aut. 93 aut. 94 aut. 95 aut. 96 aut. 97 aut. 98 aut. 99 aut. 00 spr. 94 spr. 95 spr. 96 spr. 97 spr. 98 spr. 99 spr. 00

16-17 18-21 22-24 25-34 35-49 50-pa

Source: LFS data, spring and autumn 1993-2000.

84 If there were to be a negative employ- have resulted from some other factor, such ment effect resulting from the introduction as the retraining and other help that the of the NMW, we would expect there to be Government provides to disadvantaged a rise in unemployment in lower-paid re- groups in order to fi nd employment. In gions. But again this was not the case. In fact, the Government has introduced a fact, the lowest-paying region, the North- number of “New Deals” to help young East, had the largest increase in employ- people and the long-term unemployed ment and the largest fall in unemployment get jobs over the last few years. It has also post-minimum wage. made changes to the system of social se- The labour market trends for youth, curity benefi ts, in order to discourage un- ethnic groups, disabled people and work- employment. These changes probably help ers in low-paid regions are consistent explain the good employment outcomes with the view that the introduction of the for low-paid workers in recent years. NMW had a small positive impact on em- However, the evidence collected by the ployment for some low-wage groups. Of LPC is also consistent with the view that course, this evidence alone does not prove the NMW helped boost incomes and con- that the NMW defi nitely caused these re- sumption spending by poor workers. This ductions in unemployment. They could might suggest that an economic multiplier

Figure 5. ILO unemployment rates by ethnic group, 1993-2000

ILO unemployment rate (%) 35

30

25

20

15

10

5

0 aut. 93 aut. 94 aut. 95 aut. 96 aut. 97 aut. 98 aut. 99 aut. 00 spr. 94 spr. 95 spr. 96 spr. 97 spr. 98 spr. 99 spr. 00

White Indian Black Pakistani/Bangladeshi

Source: LFS data, spring and autumn 1993-2000.

85 effect occurred after the introduction of the tivity and offset the increase in their la- NMW. But this is possible only if, after that bour costs after the NMW was introduced. introduction, the real income for the low- These include improving the quality of paid rose – despite fears of a poverty trap service, increasing the use of technol- or the potential for heightened infl ation. ogy, boosting investment in training and In fact, the Government took steps in the changing their work organization. Figure 7 March 1998 budget to ensure that a po- also shows that many employers reduced tential poverty trap was avoided. They al- labour costs by cutting absence from work, tered the tax and benefi ts that applied to paid breaks, staff meals and overtime rates. low-paid workers, in order to ensure that Thus, this evidence suggests that, rather the benefi ts of the NMW were not lost in than laying workers off, fi rms have tried higher taxes. As a result, the LPC was able to raise productivity. to conclude that “for many employees in Figure 7 is based on a survey of small receipt of in-work benefi ts, the NMW will and medium-sized enterprises conducted not only substantially increase their earn- for the LPC. It attempts to show the im- ings, but also increase their total income”. pact of the NMW on staff motivation, staff This would support the idea that the NMW turnover and fi lling of vacancies. Accord- could have boosted consumption, aggre- ing to this survey, over 20 per cent of fi rms gate demand and employment. had higher staff motivation, 10 per cent re- One of the reasons why there appear to ported lower staff turnover and 8 per cent be only very minor negative employment said they could fi ll vacancies faster. effects is that fi rms faced with the rise in All these factors would have either low- their wage bill took direct action to make ered labour costs or increased productivity. their businesses more productive. A sur- For example, lower staff turnover means vey of employers by the LPC found that fi rms do not waste the time and money about 40 per cent of fi rms said they had they put into training workers. Based on made some increase in investment and this survey, it would seem the NMW has training as a response to the NMW. This helped fi rms to retain their experienced information is presented in fi gure 6. and more highly productive workers. This It may be seen from fi gure 6 that fi rms evidence would strongly support the the- made many changes to improve produc- ory of effi ciency wages and the notion that

Figure 6. Action taken to improve productivity as a result of the National Minimum Wage

Improved quality of service Significant

Increased use of technology Slight Increased investment in training and development Tightened control on labour costs

Changed work organization

0 10 20 30 40 50 60 70 Firms affected by the minimum wage (%)

Note: Base, all firms affected by the National Minimum Wage in any way. Source: Low Pay Commission Survey, September-November 2000.

86 minimal labour standards make sound sult of the NMW. This suggests that eco- economic sense. nomic conditions were good enough to There is also some evidence to suggest allow fi rms to raise their prices in order that rather than fi rms laying off workers, to protect their profi t margins, instead of they have increased prices to protect profi t laying off workers. Importantly, how- margins. This is especially true in low-paid ever, despite the increases in prices in sectors, as fi gure 8 demonstrates. some sectors, overall infl ation in the UK Here, it may be noted that in the hair- has stayed low. dressing sector – which, as we saw ear- lier, experienced a big increase in its wage bill – 85 per cent of fi rms increased their Conclusion prices as a direct result of the NMW. It seems fairly clear that in several low- In any economy, employment levels are de- paying sectors, prices have risen as a re- termined by many factors. Wages, because

Figure 7. Benefits to business as a result of the National Minimum Wage

Faster filling of vacancies Significant

Higher staff motivation Slight

Lower staff turnover

0 10 20 30 40 Firms affected by the minimum wage (%)

Note: Base, all firms affected by the National Minimum Wage in any way. Source: Low Pay Commission Survey, September-November 2000.

Figure 8. Firms raising prices as a result of the National Minimum Wage

Total

Textiles

Childcare

Social care

Hospitality

Hairdressing

0 10 20 30 40 50 60 70 80 90 100 Firms affected by the minimum wage (%) Note: Base, all firms affected by the National Minimum Wage in any way. Source: Low Pay Commission Survey, September-November 2000.

87 they are a major component of labour costs, ions. Although many unions complained are clearly one important factor. But they that the level was too low, it was proba- are defi nitely not the only one. For exam- bly viewed as fair by most employers. As ple, the levels of aggregate demand, pro- one reporter recently stated, “30 months ductivity and labour skills, plus changes after it [the NMW] was introduced, it is in the costs of other factors of production, generally seen as a success by both em- will also have an impact on employment ployers and workers”.9 This was decisive, levels. It is therefore diffi cult to isolate the as it meant that employers did not think impact of the NMW on the employment their businesses would be adversely af- opportunities of the low-paid. fected in such a way that they needed to Yet, on the basis of the available evi- sack workers. dence, it would seem fair to conclude that The LPC took into account the wider there have been no major negative employ- economic implications of an NMW, and the ment effects for the low-paid as a result of decision to have a lower level for young the NMW in the UK. The predictions in workers was probably important. The the mid-1990s that an NMW would lead Commission believed what was needed to massive job losses have proven incor- for the United Kingdom was a “Plimsoll rect. As the UK Pay and Benefi ts Bulletin line for labour as well as for ships … a line noted: “A surprising consensus has now to limit … the extent of peril and suffrage emerged, with government, business, un- to which the worker is to be liable.”10 The ions and academics all sharing the view level to be set was to be a “Plimsoll line”. that there has been no signifi cant adverse It was to be a low level, to keep low-paid impact resulting from the statutory wage workers’ heads just above water. fl oor … Almost eight in ten fi rms … back The evidence in this article gives con- the principle of a statutory wage fl oor. Just siderable support to effi ciency wage the- 4 per cent oppose the idea.”6 ories. The information concerning im- Even the OECD, which was originally provements in , retention and sceptical about the employment implica- worker motivation after the NMW was tions of the NMW, recently conceded that introduced would suggest that paying “while the minimum wage covers over 1.5 wages at about the market clearing rate million workers, it is too early to assess its can make good economic sense, because impact on employment although, as yet, it encourages higher productivity. there are no discernible adverse effects”.7 Now that an NMW has been opera- But why have there not been increased tional for several years, and conclusive unemployment and a fall in job opportuni- evidence has emerged that minimum ties for the low-paid? Neoclassical theory wages can have positive effects on em- clearly predicts this. One particularly im- ployment and productivity, it is time to portant reason was the strong emphasis push on with this experiment. It is time to placed on social dialogue and steps taken raise the NMW to a level that will make a to promote tripartite consensus. As noted greater contribution to reducing poverty previously, the initial level of the NMW and creating decent work. The “Plimsoll was fairly modest and most employers ac- line” needs to be adjusted so that more cepted it as being fair. As the OECD said in families will have their heads above water. their Economic Survey of the UK for 2000, Providing the LPC continues to promote “the minimum wage was introduced at a social dialogue, and care is taken to ex- prudently low level, and its planned ad- plain the positive experience to date, it justment is limited”.8 should be possible to raise the real value The LPC deserves considerable credit of the NMW in years to come without ad- for this outcome. They talked a lot with verse labour market implications. both unions and employers, and to a large extent the level of the NMW was a compromise between employers and un-

88 Notes 6 Pay and Benefi ts Bulletin, Industrial Relations Services, March 2001. 1 The Independent, 13 September 1995. 7 OECD, Economic Survey, United Kingdom, 2000. 2 Low Pay Commission, Third Report, March Executive Summary p. 17. 2001, Executive Summary, para. 8. 8 OECD, op. cit. 3 Bain, G. The national minimum wage: Further re- 9 Guardian, “Yes, it’s a wage that works”, 21 Oc- fl ections, p. 16. tober 2001. 4 ibid., p. 18. 10 Bain, op. cit., p. 23. 5 Low Pay Commission, Third Report, Vol. 1, p. 43.

89 Fighting poverty: The minimum wage

Uganda: Minimum wages or minimizing wages?

Uganda’s minimum wage was last set in 1984 and has since lost much of its purchasing power, with workers officially entitled to less than one dollar a month. Discussions initiated in 1995 about adjustment have yet to deliver the goods. And prospects suggest Ugandan workers will be only slightly better off. Unless decency gets the upper hand…

Martin Wandera Member of Parliament General Secretary Uganda Hotels, Food and Allied Workers’ Union Mohammed Mwamadzingo Regional Specialist on Workers’ Education ILO Harare

ganda is one of the countries that are rate increased from 56 per cent in 1995-96 Uin the forefront of implementing eco- to 94 per cent in 1998-99. The share of the nomic reforms as prescribed by the Bret- population living in poverty declined to ton Woods institutions. Since the late 1980s 44 per cent in 1996-97, from 56 per cent in the Government, with the support of do- 1992-93. nors, has rehabilitated and stabilized the Yet Uganda remains one of the poor- economy by undertaking currency reform, est countries in the world. The cost of liv- raising producer prices on export crops, ing has dramatically increased, as has the increasing prices of petroleum products number of unskilled workers. As a result, and improving civil service wages. Infl a- working and living conditions have dete- tion came down to 5.3 per cent from dou- riorated. ble digits, and the overall fi scal defi cit (ex- cluding grants) was reduced to 6.5 per cent from 11.2 per cent of national income. The The minimum wage odyssey country has also made a strong economic re- form effort in recent years, including in the In 1963, Uganda joined the ILO and, in the areas of trade liberalization, tax administra- process, acceded to 17 ILO Conventions tion and public enterprise reform. In 2001, ratifi ed by the colonial administration. Uganda completed a poverty reduction One of these was the Minimum Wage-Fix- strategy involving a participatory process. ing Machinery Convention, 1928 (No. 26). Substantial improvements have also Article 1 of this Convention states: been recorded in social indicators, the most notable being the area of primary educa- Each member of the International Labour tion where enrolment reached 6.5 million Organization which ratifi es this Convention children in March 1999 from 2.3 million undertakes to create or maintain machinery in December 1996, and the net enrolment whereby minimum rates of wages can be

90 fi xed for workers employed in certain of the local government authorities. The recom- trades or parts of trades (and in particular, mendations of the Board were widely dis- in home working trades) in which no ar- cussed and underwent all the systematic rangement exists for the effective regulation procedures required by the law. Its report of wages by collective agreement or other- was studied by the then Minister respon- wise and wages are exceptionally low. sible for labour affairs. He submitted it to the Government, which authorized him to The provisions of this Convention were gazette the report in accordance with Sec- translated into national law, through the tion 64 of the law under reference. The re- Minimum Wages Advisory Board and port was gazetted in April 1997. Wages Councils Act adopted in 1964. In The Board was reconvened in May 1997 effect, Uganda has had a statutory mini- to reconsider its report in the light of pub- mum wage since then. It was last adjusted lic comments. The report was then resub- in 1984. mitted to Cabinet. Cabinet made its recom- In 1995, a Minimum Wages Advisory mendations to President Yoweri Museveni Board was established, in consultation in 1998. The 1964 Act gives the President with the Federation of Uganda Employ- the prerogative to announce the statutory ers (FUE) and the National Organization minimum wage. He may accept the Board’s of Trade Unions (NOTU). The Board in- proposals as they stand or hold consulta- cluded representatives of government, em- tions has he sees fi t and amend the pro- ployers and workers. Its terms of reference posals accordingly, prior to implementa- were as follows: tion. At this stage, the President is still re- ⅙ Inquire into wages of unskilled labour portedly pursuing consultations with the throughout Uganda and submit recom- stakeholders. And to date, there has not mendations having regard to the exist- been any end in sight to the process, much ing social and economic conditions of to the chagrin of Ugandan workers. the country. ⅙ Recommend differentials, if any, which The workers’ arguments should apply as between different areas. In fact, despite the Minimum Wages Ad- ⅙ Consider, in accordance with the pow- visory Board’s taking all factors into con- ers under Section (5) of the Minimum sideration and undertaking wide consulta- Wages Advisory Board and Wages tions with all the stakeholders, the Govern- Councils Act, the need for a special mini- ment has, up to now, been hesitant to put mum wage rate and other attractive con- the proposals into effect. Workers, through ditions of work for the large agricultural their representatives in Parliament, have estates as an inducement to labour. pleaded for the reinstatement of the wage- ⅙ fi xing machinery, but to no avail. Consider the need for payment of a For workers, the main arguments in fa- separate minimum rate for earners vour of a minimum wage have been that it other than apprentices and make rec- ensures that the worker is adequately re- ommendations. warded for his/her services and enables ⅙ Make recommendations relating to him/her to attain a decent standard of liv- part-time workers so as to ensure that ing through the provision of the basic ne- an employee who is employed for four cessities of life. A minimum wage is taken or less consecutive hours each day is as a wage suffi cient to cover the worker’s paid at an hourly rate. normal material, moral and cultural needs and to enable him or her to carry out his or The Board held extensive and inten- her duties as the head of a family. Workers sive consultations with a representative were propagating the value of minimum number of lawyers and workers, including wages on the following grounds:

91 ⅙ as part of preventing the exploitation For workers, a minimum wage is not of workers; meant to be a burden to investors as some ⅙ as an assurance of fair or decent remu- may argue. But, yes, it is meant to be a neration; bottom checkpoint against worker exploi- tation. ⅙ as a potential means of improving in- A mini household survey carried out come distribution (without making in 1998 revealed that a low-income worker those at the lower end over-dependent spends Ush36,000 per month in order to on state benefi ts); have shelter and a few basic necessities.2 ⅙ as a way of increasing economic effi - At a take-home package of Ush35,000, this ciency; means that each worker spends Ush1,000 ⅙ more than what he or she actually earns a as a means of determining pay where month. (All values here in old shillings.) collective bargaining is absent or weak; The implication is that most workers are and either perpetually in debt or have been ⅙ as a means of preventing competitive forced to resort to informal or more dubi- tendencies between workers from forc- ous methods to make ends meet. ing wage rates down to very low levels.

For workers and their trade unions, The government attitude where the economy is governed by mar- ket forces, there is a need for standards, for For the Government, the minimum wage laws to protect certain categories of people is perceived as having serious implica- and for basic rules under which the market tions for employment, investment and forces should all operate. With a minimum the economy in general. The argument is wage set at the 1984 rate of Ugandan shil- that “extensive consultations” are hoped to lings (Ush) 60 (new shillings, following the be good for the workers and the country currency reform),1 there is little that can be as a whole. Furthermore, the Government done towards sustainable development. stated that it is very sensitive to the plight The Government’s failure to come up of the workers, and, therefore, it is doing with a minimum wage has made the nu- everything possible within its limited re- merous previous reviews inconsequential sources to ensure the protection and pro- to the workers of Uganda. This failure has motion of good employment conditions no doubt adversely affected the workers in Uganda. and it has far-reaching implications for the While the President is reportedly pur- Ugandan economy. suing consultations with stakeholders on Failure to defi ne the minimum wage adjusting the minimum wage, discussions has sent out the wrong signals to the busi- between trade unions and offi cials from ness community. Investors from Asia, in the Ministry of Finance suggest that the particular, have sadly become known for latter is advising the Ugandan authorities paying Ugandan workers peanuts and against the move. subjecting them to inhumane treatment. In 1998, an Asian businessman was ac- cused in media reports of having grabbed The impasse his employee by the neck and forced her to clean the carpet with her tongue. He was The minimum wage in Uganda was last set paying her only Ush35,000 (old shillings in 1984 and has not been reviewed. In the – less than US$20) per month. 1984 review, the minimum wage was set Uganda’s hard-nosed employers ask at Ush6,000, and owing to the subsequent why they should pay their workers and devaluation and conversion of the shilling, treat them well when the Government does the minimum wage stood at 60 (new) shil- not seem to value their contribution. lings per month by April 1999.

92 On 14 April 1999, Parliament expressed to be too high. As a result, the President concern over the repeated adjournments. has called for new consultations. Several It recalled that it was close to a year since meetings are projected and discussions are the Board’s proposals were passed to the likely to be protracted. Meanwhile, Ugan- President, yet nothing had happened.3 The dan workers will again be asked to tighten minimum wage for workers stood at the their belts. equivalent of 3 US cents per month. Par- liament thus resolved that the President be required to expedite the process of Notes consultation in order to give effect to the 1 In May 1987, the Ugandan Government intro- recommended proposals for the minimum duced a new shilling, worth 100 old shillings, along wage to unskilled labour by the Minimum with an effective 76 per cent devaluation. Ugandans Wages Advisory Board. complained that infl ation quickly eroded the new The Board originally recommended a currency’s value. Indeed, the revised rate of Ush60 per US$1 was soon out of line with the black market minimum wage of Ush75,000 (old shil- rate of Ush350 per US$1. In July 1988, the Govern- lings). This was reluctantly accepted by ment again devalued the shilling by 60 per cent, set- workers, under the circumstances, as ting it at Ush150 per US$1; but at the same time, the a fair compromise. The Federation of parallel rate had already risen to Ush450 per US$1. Uganda Employers opposed it. It said the Further devaluations have now set the shilling at 1,875 per US$1. proposed minimum wage would decrease 2 Food: Ush18,000 (4 bunches of matooke per investment, among other things. The rea- month at Ush4,500); rent: Ush10,000 (one room); sons given were particularly linked to the utilities and non-food items: Ush5,000; and water: comparable wage ranges in neighbouring Ush3,000. (Old shillings.) countries. 3 This section is based on a review of records of Subsequently, the Board reconsidered proceedings of the 6th Parliament and on interviews the issue and lowered their recommenda- with offi cials of the Department of Labour in the Min- istry of Gender, Labour and Social Development. We tion to the President to Ush65,000, with the are grateful to Mr. Francis Kintu, Research Offi cer of support of the Ministry of Labour. The the Uganda Parliamentary Research Service for the employers still considered the proposal review of parliamentary records.

93 Fighting poverty: The minimum wage

An underrated tool?

European experience has shown that the minimum wage is particu- larly useful to workers in countries where trade unions do not have a major say in wage negotiations at national level. The problem lies in setting the right level: too high and it may hinder employment, too low and it could reinforce the “unemployment trap”.

Samuel Grumiau Journalist

he introduction of the euro, the sin- a minimum wage to be introduced because Tgle currency used in 12 of the 15 EU employers are increasingly ignoring wage Member States, has made it easier to com- levels negotiated in collective agreements. pare wage levels in these countries. There According to Eurostat, minimum wage is a national legal minimum wage in nine levels in the European Union in February Member States (Belgium, France, Greece, 2002 ranged from €406 gross per month Ireland, Luxembourg, the Netherlands, in Portugal to €1,290 in Luxembourg (see Portugal, Spain and the United Kingdom), table 1). This compares with €1,011 in the but not in the other countries, making the United States, where certain individual European Union an interesting case study states impose a higher rate. The percent- for those looking to better defi ne the argu- age of full-time workers receiving the mini- ments surrounding the minimum wage de- mum wage varies greatly from country to bate. From a trade union point of view, one country, ranging from 1.4 to 2.2 per cent of thing is immediately striking: “With the ex- workers in Spain, the United Kingdom, the ceptions of the Netherlands, Belgium and Netherlands and Ireland, to 6.2 per cent in Luxembourg, it is in countries where collec- Portugal, 13.6 in France and 15.5 per cent tive bargaining is most diffi cult, or where in Luxembourg. Interestingly, in France it does not cover all employees, that there this percentage is higher than many of the is a minimum wage such as France, the minimums negotiated collectively by sec- United Kingdom (not part of the euro), tor. In general, women are twice as likely Greece, Portugal and Spain,” emphasizes to be underpaid or to be paid the mini- Emmanuel Mermet, economic researcher mum wage. This means that a properly at the European Trade Union Institute. enforced minimum wage should reduce “In countries where collective bargaining wage differentials, particularly between covers more areas, particularly wage ne- men and women but also between older gotiations,” continues Mermet, “it is as if and younger workers. a minimum wage is unnecessary because revaluation is effected every year at all lev- els. We would therefore not need the mini- Trade unions in Europe mum wage if trade unions had real power not in agreement in collective bargaining.” However, it should be noted that in certain countries What do European trade unions think that currently have no minimum wage, about the minimum wage? The European such as Germany, there have been calls for Trade Union Confederation (ETUC) does

94 Table 1. Monthly gross minimum wages Not only do the EU countries have ques- on 1 January 2001 and on 1 February 2002 tions about the advisability of a minimum according to Eurostat estimates (€) wage and the method used to set it initially, but they are also unable to reach agree- Monthly Monthly ment on how it should be subsequently gross minimum gross minimum Country adjusted: in seven countries (France, Ire- wage on wage on 1 January 2001 1 February 2002 land, Luxembourg, the Netherlands, Por- tugal, Spain and the United Kingdom), the Belgium 1 118 1 163 national minimum wage is defi ned as an France 1 083 1 126 hourly or monthly rate set by law, usually Greece 466 473 after consulting the social partners (trade union organizations and employers’ fed- Ireland 945 1 009 erations). Elsewhere, levels are fi xed by Luxembourg 1 259 1 290 agreement and, in Greece, a distinction is Netherlands 1 154 1 207 still drawn between blue- and white-collar workers. In Belgium and Luxembourg, the Portugal 390 406 minimum wage is linked to the consumer Spain 506 516 price index and is adjusted automatically United Kingdom 985 1 124 but Belgian legislation requires unions and management to pay attention to examine United States 951 1 011 the situation within Belgium’s three main Source: Statistics in Focus, published by Eurostat, May 2002. trading partners before negotiating an in- crease in wages (see article by Jonathan Equeter on page 53). In other European not have a fi xed stance on this matter. In- countries, however, changes in the cost of deed the opinion of trade unions in coun- living and wage levels are taken into ac- tries with a minimum wage differs from count when conducting an annual review those without, and these differences are of the minimum rate although this is not a even greater with regard to how a future legal requirement. In short, there is much European minimum wage could be set. to be discussed. “Researchers are now discussing whether or not we should set ourselves the goal of a European minimum wage,” explains Em- Impact on employment manuel Mermet. “This is even more sen- sitive since wage issues do not fall under One of the main arguments used by the EU purview, and employers cite this as those opposing a minimum wage is that a reason for refusing to participate in any it would have a negative impact on em- negotiations. Moreover, wage rates are still ployment if set above a certain – usually not fi xed at national level in all European unspecifi ed – level. Some employers have countries. If one day there were a Euro- put forward the idea of combating antici- pean minimum wage, it would certainly pated job losses by lowering social security not be set at a certain number of euro but contributions for employers. This would would most likely be calculated as a per- reduce labour costs whilst maintaining centage of a value linked to each country, a minimum wage. However, no studies for example a percentage of the average have proven that the minimum wage has wage or of the gross domestic product. Set- a negative impact, except perhaps to a lim- ting the minimum at €1,000 would be no ited extent among young people under 20.1 problem in countries such as France and In practice the opposite has been the case Belgium where the minimum wage is al- in some healthy economies, for example in ready close to this amount, but it would the United Kingdom where the minimum require an enormous effort by countries wage was reintroduced by Tony Blair’s La- like Greece and Portugal.” bour Government in 1999. “The introduc-

95 United States, where the number of part- What is the impact of the minimum time workers increased after the mini- wage on wages as a whole? mum wage was raised.2 More convincing is the fact that the Netherlands, with the Trying to evaluate the impact of the introduc- tion of a minimum wage on the wage levels in second highest minimum wage in the Eu- general is a problematic task. What happens ropean Union, can boast of an unemploy- to other wages when the lowest wage in a ment level lower than in most other Mem- company is increased to meet the minimum ber States of the EU. In the Netherlands, wage? Are inequalities reduced by narrowing the gap between the lower end and middle a balance has been struck by linking the of the salary scale or do employers increase minimum wage to the average increase salaries across the board in order to maintain in wages – provided that unemployment wage differentials according to ability, expe- does not exceed a certain level. rience and/or length of service? In order to answer this question, we would need to ob- serve all wage levels with and without the introduction of a minimum wage. In practice Informing the general public this is virtually impossible. In a study published in 1998, the OECD does however give an opin- The existence of a minimum wage is, in it- ion on this matter: “There is also some evidence of spillover self, not a guarantee against the exploita- effects that lead to an increase in wages for tion of workers. Some unscrupulous em- those previously at or just above the new mini- ployers take full advantage of their em- mum. Partly as a result of these effects, those ployees’ lack of information and ignore countries with higher minimum wage rates legal wage requirements. An effective relative to the median have less earnings dis- persion and a lower incidence of low pay”.1 labour inspectorate and a public infor- mation campaign that is well covered in 1 “Making the most of the minimum: Statutory the media are needed, along with a trade minimum wages, employment and poverty”, in union presence. In the United Kingdom, Employment Outlook, OECD, June 1998. a TUC survey of 508 16 to 21-year-olds showed that the majority of them were not aware of their right to a minimum wage and, when told, were surprised at tion of a minimum wage has had a major how little it was. There are no accurate sta- impact on more than one million work- tistics on how many workers in Britain are ers and has helped to make the United paid less than the minimum wage but the Kingdom a more just country,” said John TUC estimates that there could be more Monks, TUC (Trades Union Congress) than 170,000. The survey also showed that General Secretary. “Contrary to claims 70 per cent of the young people surveyed made by opponents of this policy, there has were against the lower minimum wage for been no analysis to suggest that the mini- people aged 18-21 who are not on appren- mum wage has had a negative impact on ticeship schemes – a form of discrimina- employment; rather, it has meant real ben- tion which the TUC vigorously opposes.3 efi ts for the lowest paid workers.” (See also And yet, this type of discrimination is article by Damian Kyloh on page 80.) found in all the EU countries that have a In support of this statement, the TUC minimum wage, except for Portugal and emphasizes that today there are 1 million Spain – the two countries with the lowest more people in employment in the United minimum wages. Kingdom compared to 1999 when the min- Some advocates of the minimum wage imum wage was re-introduced. Anyway, emphasize that it mainly benefi ts poor British employers are not asking for the families. When the minimum wage was minimum wage to be abolished. Rather, reintroduced in the United Kingdom in they have adapted to the minimum wage 1999, it was estimated that it would ben- although they were originally vocal op- efi t one in three homeworkers, one in fi ve ponents. Another example is that of the part-time workers and one in fi ve single

96 parents. Those earning the lowest wages would earn only roughly €60 more per could expect to see their pay rise by 30 per month than they would if they collected cent. However, a study in Economic Studies, benefi t (known as the “minimum inte- a journal published by the Organisation for gration income” in Belgium) from their Economic Co-operation and Development CPAS/OCMW centre coupled with the (OECD), put into perspective the effect of reductions in certain charges they would the minimum wage on poverty: receive due to their situation. People with dependent children needing to pay for “Among working-poor households, low childcare facilities would, they say, lose pay, at least the bottom decile or so likely €200 per month in comparison. And this covered by minimum wages, is only weakly is in a country with one of the highest mini- correlated with household poverty. OECD mum wages in Europe! Trying to combat (1998) shows that in most countries only this unemployment trap by lowering ben- around 10 per cent of low paid workers are efi ts would not be helpful as, according to in poor households, with only Italy and several studies, this would lead to an in- the United States signifi cantly above this at crease in poverty.5 around 20 per cent. This is simply because An interesting argument in favour of household size, the number of earners the minimum wage, but diffi cult to quan- and hours of work are all making a sub- tify, is that of its impact on the motivation stantial contribution to household income of people already in work. Someone re- and needs assessment implicit in poverty ceiving a fair wage will be more keen to measures. 4 do his job to the best of his ability and, above all, not look for a new job, saving Despite its advantages, according to the the employer the cost of hiring and train- OECD, the minimum wage alone is not a ing someone new. “Trade unions are try- panacea for poverty. The fact that in many ing to show that promoting a decent wage poor families there is no one in paid em- will encourage an increase in productivity, ployment further limits the effectiveness commitment to the job and therefore im- of the minimum wage in the fi ght against prove companies’ competitiveness,” un- poverty in general. derlines Emmanuel Mermet. “More over the European Union, which is spreading its message of promoting high-quality work, A good weapon in the fight against explains that a social Europe is not an ob- the “unemployment trap” stacle but rather an aid to competitiveness. Many still believe the contrary, so we need In countries where the minimum wage is to change attitudes.” signifi cantly higher than unemployment Criticized by some and extolled by oth- benefi ts, it plays a role in encouraging peo- ers, introducing a minimum wage would ple to work, even if there are other factors not have all the qualities attributed to it by involved, such as non-wage benefi ts and its supporters, especially when it comes to costs, personal preferences, travelling ex- fi ghting poverty. Yet, if it remains fi xed at penses and childcare costs. The level still a reasonable level, it does not cause unem- needs to be determined at which a per- ployment, the main complaint of its detrac- son will consider work a more attractive tors. So, with all the advantages, especially prospect than staying on benefi ts; decid- in those countries where trade unions are ing on such a level is diffi cult because it still weak, and few disadvantages, the mini- is subjective. In Belgium, for example, mum wage should be included in a more the federation of CPAS/OCMW centres general approach to social justice. Its effec- (public social assistance centres respon- tiveness will depend on the level at which sible for helping the poorest in society) it is set and the backdrop against which it estimated that in 2001 people living on is negotiated. their own taking low-paid, casual work

97 Notes www.tuc.org.uk/work_life/tuc-4512-f0.cfm. The sur- vey is part of a report entitled “Young people: What 1 However, the available fi gures do not show do they know?”, published on the web at: http:// conclusively that the introduction or increase of a www.tuc.org.uk/organisation/tuc-4504-f0.cfm minimum wage defi nitely leads in all circumstances 4 Gregg, Paul. “The use of wage fl oors as policy to job losses among young people. tools”, in Economic Studies, No. 31, 2000. 2 Ressler, R.W.; Watson, J.K. and Mixon, F.G. Jr. 5 The “unemployment trap” is any situation “Full wages, part-time employment and the mini- where individuals are persuaded not to work because mum wage”, in Applied Economics, November 1996. they see that without a job, benefi ts paid are higher 3 A TUC press release presents the survey than the income they would earn from working. in greater detail on the following web site: http://

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