The aim of this article is to put forward a proposal for deepening the social dimension within the European Union and thus to contribute to the debate surrounding the future of Europe’s Economic and Monetary Union. In doing so we are, on the one hand, following on from our ‘European Policy Manifesto’ (verdi 2010), which we submitted back in 2010, and, on the other, from ideas that emerged from the EU Commissioner for Social Affairs, László Andor, in March of this year. Given that these ideas distance themselves from neo-liberalism they unfortunately have little chance of seeing the light of day as a European Commission communication. It is our objective to submit the most comprehensive concept possible for how the Union’s social dimension can be further developed as we consider this to be the decisive desideratum in the current debate.
We perceive social policy not just as the policies relating to social security systems (pensions, health care, family, unemployment), i.e. social policy in the narrow sense, but also encompassing all policies pertaining to the social situation of dependent employees. These people are largely dependent on three aspects: A) the labour market situation, B) wage and income developments, and C) the protection provided by welfare state systems (pensions, health care, etc.). Social policy in its broader sense therefore includes labour market and employment policy, wage and income policy as well as welfare state policy.
European social policy aims to eliminate inequalities and disparities in existence in Europe’s labour market, in wage and income developments at the EU level, and in European social security systems. By striving to overcome the aforesaid inequalities and disparities, European social policy is, above all, taking on a social stabilisation function.
Our proposed consolidation of the social dimension of the European Union involves all three policy areas. This proposal comprises two dimensions across all three areas:
1. a set of indicators that provide details of inequalities and disparities in the labour market, in wage and income development, and in social security systems, and
2. a set of instruments suited to eliminating the respective inequalities and disparities.
As regards the indicators and instruments, we further differentiate between main parameters and supplementary parameters. This differentiation serves to establish priority levels for political action and thus also priority levels for deepening the social dimension within the European Union. By way of example: loan and income policy has one main indicator, ‘share of the low-wage sector’, which indicates disparities in wage and income developments, plus one main instrument for eliminating these disparities: coordination of national minimum wages at the European level. In addition there is the ‘Gini coefficient’ indicator in this area, which measures the extent of inequality in the income distribution, plus the supplementary instrument of ‘tax policy’ to overcome the income distribution disparities. European solutions are required, above all, with respect to the main instrument ‘minimum wage’, plus, during a later phase, the supplementary instrument of ‘tax policy’.
With respect to all of these indicators, we believe that analyses should be submitted every year in which, for each individual member state, the development of the indicators, their current deviations from the historical trend in each respective country, and their deviations from the mean value across the EU states and/or the member states of the Euroarea are examined. Threshold values should be established for deviations, which would trigger preventive measures. On top of this, threshold values should be set which result in sanction-related corrective measures. Based on such analyses, the European Commission would then need to submit an annual report on ‘The development of the social situation in the EU’. In turn, the member states would each need to draft a national action plan describing the envisaged preventive and corrective measures and discussing the achievements and failures recorded to date in implementing the agreed European instruments.
European labour market and employment policy
Since the beginning of the global financial crisis in 2008, a rise in unemployment rates has been observed within the EU, as has a dramatic spike in youth unemployment rates and a significant increase in precarious employment. Historically speaking, the inequalities and disparities in the labour market are at an all-time high.
There should be three main indicators in this policy area: the unemployment rate, the youth NEET rate (Not in Employment, Education or Training) and the share of precarious employment. These parameters shed light on labour market inequalities, on the share of young people not in employment, education or training as well as on the number of people in part-time employment, temporary work, on fixed-term contracts, contracts for work and services as well as in mini and midi jobs (labour market disparities). Since the statistics on precarious employment in the EU are incomplete, the share of employment in the low-wage sector could be used as an auxiliary parameter. These indicators should be recorded over a period of ten years, with national and European mean values being established and threshold values for national and European deviations being set. National and European reports should analyse the causes for such developments and deviations: cyclical development, impact of austerity policy, potential shifts in the country’s competitiveness, exogenous influences of the global market, etc.
The main instruments for combating inequalities and disparities are a national and European macroeconomic policy designed to overcome unemployment, a coordinated European youth guarantee as well as a set of European labour market regulations to combat precarious employment, e.g. equal pay for permanent and temporary workers, strict limitation of contracts for work and services, plus stringent controls of posted workers within the EU based on the principle of ‘equal pay for equal work at the same location’ (host country principle). By establishing an indicator for the labour market situation (unemployment rate) and an expansive macroeconomic policy for overcoming the labour market crisis, European social policy would consciously be providing a contrast to the macroeconomic policy that prevails in the EU. If such a European social policy were to be taken seriously, and if it were set on the same pedestal as economic policy, the EU would be forced to end its neoliberal austerity policy and focus on a new economic policy paradigm.
The supplementary indicators for labour and employment policy could include: the number of long-term unemployed, the average duration of unemployment, the share of hidden unemployment as well as the employment rates for various groups (men, women, young people, older employees).
The supplementary instruments would be an increase in the share of active labour market policies, the number of people employed with secondary and tertiary qualifications; investments in primary, secondary and tertiary education as a percentage of GDP, as well as investments in further education/training and preventive health care as a percentage of GDP.
European wage and income policy
Wage and income development within the EU has also been characterised by significant inequalities and disparities for over a decade: virtually everywhere, income has been redistributed in favour of capital income, no more so than in Germany. At the same time, many countries have seen a dramatic growth in the low-wage sector and poverty rates.
The main indicators in this policy area are: real unit labour costs, the share of the low-wage sector, and poverty rates. These indicators show the change in the share of labour and capital in total income (income distribution), the degree to which the low-wage sector has expanded, and the number of people having an income of up to 60% of the mean equivalent income. Here, too, the development of these parameters should be examined over a period of ten years and the causes of the potential income distribution inequalities analysed. By the same token, any diverging developments among the EU member states should be recorded and explained. National and European threshold values could be established for the share of the low-wage sector and poverty rates. Deviation margins could be agreed for income distribution, which would indicate when redistributions detrimental to wages and salary incomes necessitate corrective measures.
In this area, the main instruments for avoiding inequalities and combating disparities are: Europe-wide coordination of national collective bargaining policies based on the rule ‘inflation rate plus productivity growth’; European rules for national minimum wages as well as European rules for national minimum income (social welfare standards). Whilst the parties involved in collective bargaining would be vested with the task of coordinating collective wages, the rules for minimum wages and minimum income would need to be agreed upon by the legislators. One major stumbling block is the current weakness of European trade unions, which, for various reasons, are frequently no longer in a position to assert pay increases on the basis of the aforementioned rule. The supplementary instruments (see below) are of great significance here.
The supplementary indicators of inequalities and disparities in wage and income development within the EU could be: the development of real wages (coupled with a reduction in real unit labour costs, countries can record significant differences in the development of real wages due to their differing productivity advances, e.g. Sweden and Germany); collective bargaining coverage rates; the Gini coefficient; income replacement rates in retirement and of unemployment benefit. The supplementary instruments would be: measures to strengthen the collective bargaining systems (e.g. rules for the general bindingness of collective wage agreements; precedence given to industry-wide agreements); regulations aimed at restricting precarious employment (see labour and employment policy); European rules for replacement rates in retirement and for unemployment benefit; redistributive tax policies. (To be able to introduce indicators and instruments at the EU level which seek to correct wealth inequality, the comparative statistics used for the development and distribution of the various types of wealth in the member states must be improved at all costs).
European rules for coordinating social security systems
Up until 2007, the year preceding the crisis, the levels of social protection expenditure among member states and their economic development bore a close statistical relationship. The higher the per capita income, the higher the per capita social protection expenditure. The coefficient of determination stood at over 90%. The variation in social protection expenditure therefore ‘avowed’ itself to be 90% derived from the per capita income variation of the countries. Even in the years preceding the crisis, however, some states had rates below this figure – in other words, they were spending less on social protection than befit their level of development. This was, above all, true of Ireland, but could also be found in Estonia, Latvia, Lithuania, the United Kingdom and Spain. It is to be expected that, due to austerity policies pursued in Southern European countries, which have also resulted in drastic cuts in welfare state spending, the negative deviations will have increased again within the EU (cf. Busch/Hermann/Hinrichs/Schulten 2013). Prior to the crisis, a very close connection could be observed between total social protection expenditure and the level of development. But no such connection existed between individual areas of social protection and per capita income. Hence, the coefficient of determination for pensions in relation to per capita income was a mere 60%. Therefore, EU member states set different priorities when it comes to allocating social protection expenditure to individual functions (pensions, health care, families, unemployment benefit). Countries in Southern Europe prefer pension schemes and spend less on families and the unemployed in relative terms, unlike countries in Central and Northern Europe, where, in relative terms, more funds are ploughed into families and unemployment.
These observations give rise to two conclusions:
1. In order to maintain the close connection between social protection expenditure and the level of development, and to suppress the negative deviations found in certain countries and thus to avoid social dumping, it is expedient to agree on coordination rules at the EU level.
2. The regulatory approach should not relate to the individual social protection functions but apply to overall social protection expenditure (neither absolute nor relative minimum standard rules make any sense in the light of the empirical knowledge). The corridor model proposed below takes these prerequisites into account. It is a quantitative regulation approach, which can be supplemented by qualitative regulations at the additional instrument level.
The main indicator in this policy area would be the social protection expenditure per capita in purchasing power standards (PPS) since the year 2000. The main instrument would be a corridor of 5%, 10% or 15% around the regression of social protection expenditure in PPS per capita in relation to per capita income in PPS (see graph). Given the very close relationship between social protection expenditure per capita and income per capita, the corridor model can be very easily presented with the help of the indicator ‘social protection expenditure per capita in PPS’ (cf. Busch 2011; 4f). For each value of per capita income in PPS a range of variation could be established for per capita social protection expenditure in PPS which individual states would have to keep to. A point on the y-axis can now be assigned to every point on the x-axis using the formula given above the regression lines: y = 0.3672x – 2.9719. The regression line is the locus of the intersection of the y-target values for social protection expenditure per capita and the x-actual values for GDP per capita for the various countries. For each y-target value for individual states, two points are calculated which are five per cent (7.5 per cent, 10 per cent …) higher or lower than the y-target value (the particular percentages would be decided on politically). In this way, a range of variation would be laid down for each member state for the values of social protection expenditure per capita whose mid-point is represented by the value on the regression lines. The distance of the two lines of deviation from the regression lines would increase as per capita income grows because the absolute amounts of deviation increase with higher incomes at the same percentage of deviation.
Using the supplementary indicators for the key social security functions (see table below), supplementary instruments could be developed at a later stage of the deepening of the social dimension within the EU, which would be heavily geared towards the quality of services. With respect to pensions policy, these could be European minimum replacement rates as well as health care and further education/training measures which help raise the de facto retirement age. In the health care sector, these could be minimum standards for the quality of the services, which would deviate according to the level of economic development of the individual countries. A case in point would, for example, be data on life expectancy, infant mortality, heart disease, strokes and cancer survival rates. The quality of the labour market measures should be improved through European standards for minimum replacement rates among passive services as well as a relative increase in expenditure for active labour market policies. In the mid-term (and also for economic reasons), the possibility of a European supplementary unemployment insurance plan could be considered. In family policy, the main focus would be on measures to raise the level of employment among women.
The concept for deepening the social dimension within the European Union put forward here breaks with the prevailing neoliberal EU policies. It calls for a policy of sustainable growth as well as European regulations to eliminate precarious employment in order to overcome the labour market crisis. With respect to wage and income policy, the concept above all advocates measures which will ensure that ruinous wage competition and wage dumping in Europe are overcome. Regarding social security, the development of the welfare state should be pegged to the economic efficiency of the respective countries so as to prevent social dumping.
Our proposal should be seen as an enhancement and substantiation of the Social Compact for Europe, which the ETUC published in June 2012 (ETUC 2012). By catering to all three policy areas, i.e. labour and employment policy, wage and income policy as well as social security policy, the concept already represents a very comprehensive approach. It could be completed by considering further enhancing the instruments of European economic democracy (works councils, co-determination, social dialogue) as well as the European dimension of services for the common good (services of general interest).
Busch, Klaus (2011): The corridor model – relaunched. Short version. International Policy Analysis, Friedrich Ebert Foundation, Berlin
Busch/Hermann/Hinrichs/Schulten (2013): Euro Crisis, Austerity Policy and the European Social Model. International Policy Analysis, Friedrich Ebert Foundation, Berlin
ETUC (2012): A Social Compact for Europe, Brussels
Verdi (2010): European Policy Manifesto, Berlin