Minimum Wages Resume Growth – Largely

Karel Fric

Statutory minimum wages are an important instrument for ensuring decent pay for work and avoiding a race to the bottom in living standards. Twenty-two EU Member states have a generally applicable statutory minimum wage. Recent discussions among social actors about exemptions from minimum wages for refugees so as to ensure faster labour market integration have largely met with resistance from trade unions.

Minimum wages rise in wake of economic growth

During the economic crisis, increases in the minimum wage across the EU were only very moderate; indeed, many countries froze the minimum wage in this turbulent economic period. But European economic performance improved in 2015; it is predicted that growth in 2016 will be the strongest since 2007. And the most recent increases in minimum pay reflect this improving economic environment. Between January 2015 and January 2016, the greatest increases in the minimum wage (of more than 10%) took place in Bulgaria, Lithuania and Estonia. Romania plans a significant increase (by 19%) in May 2016. Overall, eight of the 12 new Member States (which joined since 2004) that have a generally applicable statutory minimum wage have implemented wage increases of over 5%.

Christine Aumayr-Pintar

However, this comparatively high rate of growth in the minimum wage has to be seen in the context of low minimum wage rates in a majority of the new Member States. The rates of the statutory minimum wage vary greatly among European countries, reflecting differences in levels of economic development and pay. With monthly rates of less than €300, Bulgaria and Romania have the lowest minimum wages in the EU. Luxembourg is on the other end of the spectrum: its monthly rate of €1,923 is about nine times that of Bulgaria.

Minimum wage on hold in some Member States

Over the course of 2015, minimum wages remained stable in Belgium, Germany, Greece, Luxembourg and Slovenia. With many countries returning to their previous custom of raising the minimum wage, Belgium and Greece are the only two countries that have not changed the minimum wage since 2012 – arguably because their rates were perceived to be too high. In Belgium, the automatic indexation of the minimum wage was paused in order to reduce the wage gap with neighbouring countries and to boost the economy’s competitiveness. In 2012, the Greek government passed a law stating that the statutory minimum wage will remain unchanged as long as the ‘Fiscal Adjustment Programmes’ are being implemented.

Council recommendations on minimum wage

When EU proposals are made regarding minimum wages, these are issued by way of country-specific recommendations as part of the European Semester. In 2015, the Council recommended that both France and Portugal ensure that developments in their minimum wage promoted employment and competitiveness. It recommended that Portugal also keep employment and competitiveness in mind when adjusting the minimum wage.

The Council recommended that Bulgaria establish a transparent mechanism for setting the minimum wage in consultation with the social partners and in accordance with national practices. And it made the same recommendation to Romania. Clear, transparent guidelines for setting the minimum wage are meant to eliminate uncertainty as to whether the right balance will be struck between supporting employment and competitiveness, and safeguarding labour income.

Slovenia was advised to review how it sets its minimum wage in light of the impact on in-work poverty, job creation and competitiveness. Even though Slovenia has been among the EU Member States hardest hit by the economic crisis, it has also had one of the highest real increases in the minimum wage. This has contributed to the narrowing of wage inequality; it has also impeded wage adjustment and contributed to the loss of cost competitiveness and employment.

In other EU countries, a few initiatives were launched during the economic crisis aiming to change the way the minimum wage is set. However, they led to barely any real change in the method of setting. At the national level, debates in 2015 focused on how high to set the minimum wage: trade unions argued that, in many cases, it was too low; employers usually counter-argued that a higher level could cause a loss of employment and competitiveness.

Introduction of statutory minimum wage and National Living Wage

The statutory minimum wage was most recently – in 2015 – introduced in Germany, partly as a reaction to the decline in collective bargaining coverage. This has triggered discussions about introducing a statutory minimum wage in other EU countries but few tangible actions have so far resulted. One year after the introduction of the minimum wage in Germany, the evidence suggests that millions of workers have benefited from it without the predicted negative impacts on the labour market.

The UK is planning to introduce (and Ireland is discussing the introduction of) a National Living Wage – effectively, a higher level of statutory minimum wage for those aged 25 years or more. In July 2015, Chancellor of the Exchequer, George Osborne, declared that ‘Britain deserves a pay rise’ after years of austerity. However, the Office for Budget Responsibility forecast that the measure could cost 60,000 jobs; it also said that some older workers could also be replaced by under-25s, who would be cheaper to employ. Mr Osborne dismissed the warnings.

Specific rates for refugees?

In some countries, specific minimum wage rates apply to certain groups (younger workers, trainees). And in some Member States – in particular, Germany – social actors have suggested that refugees could be integrated faster into the labour market if they worked for lower pay than the minimum wage. While employers did not categorically reject this measure or were lukewarm about it, trade unions insisted that the working conditions of refugees (including pay) should not diverge from those of other groups.

In Denmark, the government proposed using phased-in pay for refugees below collectively agreed minima, but this was met with resistance from the main trade unions who argued that it would keep refugees in poverty. Employers were also unenthusiastic about the proposal, since – within the current scheme in use, the so-called ‘staircase’ model – job placements for refugees are subsidised and less costly for the employer than the proposed phased-in wage would be.

Figure 1: Increase in level of statutory minimum wage, 1 January 2015 to 1 January 2016

Source: National correspondents from Eurofound’s Observatory of Working Life (EurWORK)

Further reading:

Eurofound (2015), Wage setting mechanisms: Pay – Q3 2014, Dublin.

Eurofound (2016a), Statutory minimum wages in the EU 2016, Dublin.

Eurofound (2016b), Approaches towards the labour market integration of refugees in the EU, Dublin.