Miracles, it seems, are still of this world. Last week, The Economist, a journal that is otherwise not known for its progressive views, took it upon itself to defend minimum wages. Moderate minimum wages, so The Economist claimed, “do more good than harm”.
At the same time however, two important caveats were formulated: A minimum wage could boost pay without having destructive effects on jobs but only of it is set not too high. Moreover, minimum wages should be decided by technocrats, not by governments and politicians. What should we make of this?
Minimum wages and job performance
The Economist wants minimum wages to be set at a pretty low level, at no more than 50% of the median wage with even lower levels for young workers and long-term unemployed. France, having the rich world’s highest wage floor with a minimum wage of 60% of the median wage, is quoted by The Economist as an example not to be followed.
The graph below, taken from a Commission publication, contradicts this view. It shows that higher minimum wages tend to go together with improved employment rates for low skilled workers, the category of workers which, according to classical economic theory, would suffer the most from minimum wages acting as a barrier to job creation.
Moreover, this positive relationship between higher minimum wages and more jobs does not break down at the highest levels of minimum wages, as illustrated by the case of France. Even if France has one of the highest minimum wages, its employment rate for low skilled workers is higher compared to Poland, Hungary, Czech Republic, Ireland and on a similar level with Spain, the UK and Romania. All these countries have lower relative minimum wages compared to France. The only two countries where job performance is better are the Netherlands and Portugal. However, it cannot be claimed that these two countries have set their minimum wage substantially below the French minimum wage level. All of this discredits The Economist’s argument on the perverse employment effects of a high minimum wage in France.
(Note that the Commission’s graph relates minimum wages to the average wage whereas The Economist uses the concept of median wage. On both measures however, France scores the highest, with a minimum wage of 60% of the median wage and close to 50% of the average wage).
The statistics provided by Johannes Schweighofer’s recent blog here on Social Europe Journal shed some light as to why minimum wages as high as 60% of the median wage do not lead to poor job performance.
These statistics compare the distribution of competences of adult workers (as measured by OECD PIAAC scores in numeracy) with the distribution of earnings. It appears that in almost all European member states, the numerical competences of the lowest ten percent of employees reach 70% to 75% of the competence level of the median employee. This would suggest that fixing wage floors for the first decile of workers as high as 70% to 75% of the median wage or income is not out of line with the distribution of skills and educational attainment. In other words, lower skilled workers in Europe do possess (in relative terms) enough numerical competences allowing them to fill in jobs that are productive enough so as to be able to finance wage floors as high as 70% to 75% of the median wage. In the next graph, I have rearranged the figures of Johannes Schweighofer on relative competences and earnings. It appears that wage floors or earnings of the lowest decile in Germany, Austria, Spain, Netherlands, Ireland, UK and several CEE member states are actually much lower if compared with the relative distribution of competences. There is no single member state where the opposite is the case and where wages and earnings at the bottom as a percentage of median earnings would be too high relative to the distribution of skills.
Power to the technocrats? Why The Economist is wrong
The Economist wants about giving the power to set minimum wages to technocrats. Technocrats, or so the argument goes, would advance minimum wages in a steady and gradual way whereas politicians would be prone to go for irregular but big hikes in minimum wages.
One can have some sympathy with this view, although for a different reason. Indeed, leaving the power to set minimum wages solely in the hands of governments could have unexpected effects. This is especially so in Europe where governments of the Euro Area have now signed up to the idea of internal wage devaluation in order to replace the missing instrument of a currency devaluation. In this context, minimum wages set by governments would only provide politicians an easy tool to intervene in overall wage dynamics by freezing or cutting statutory wage floors. In fact, the Commission, in its 2012 Employment Package Communication, already announced such a use of legal minimum wage floors by claiming that minimum wages should be ‘sufficiently adjustable to reflect overall economic developments’. In other words, it should be possible to cut minimum wages in case of crisis (as was done in Greece at the troika’s request at the beginning of 2012 – see also here).
However, the trust which The Economist places in technocrats is not at all justified. In Europe, we have already outsourced monetary policy to the most independent central bank of the world, the ECB. In Europe, governments are also keen to impose a set of rigid rules upon fiscal policy and then give technical watchdogs (DG ECFIN or a Brussels based Fiscal Council) the mission to watch over the strict execution of those rules.
Experience with both these types of outsourcing is not particularly good. The ECB, for example, is systematically misjudging the economic situation. It has repeatedly raised interest rates while the economy was facing recession (in 2007/2008 and 2011). And, through its interventions in member states’ labour markets, the ECB is now struggling with the fact that Euro Area economy is on a path towards deflation.
At the same time, fiscal policy rules as developed and promoted by European technocrats have been very helpful in pushing the Euro area economy into a double dip recession and in pushing unemployment up to a record level of 26 million unemployed.
One can expect similar developments in case minimum wages are set by technocrats. These technical bodies will soon be hijacked by the usual set of vested interests, working to submit minimum wage policy to the (non-)logic of a wage race to the bottom in the name of ‘competitiveness’.
So, then, what is the solution? The Economist will certainly not agree but it is part of the European tradition to respect and promote the autonomy of collective bargaining and social partners. Social dialogue has the potential to achieve balanced outcomes without (minimum) wage policy being hijacked by politicians or technocrats acting on behalf of the business lobby. If politicians, technocrats and central bankers are now turning their backs to this principle of autonomy of social dialogue, they are committing a grave error, an error which threatens to unleash societal forces which we would rather not want to see reappear.