Are statutory minimum wages or collective-bargaining coverage the answer to low pay? Both, actually.
Decent wages matter in normal times. When many in the European Union are struggling to pay their bills, they become crucial.
The minimum-wages directive adopted in mid-October by the Council of the EU and the European Parliament is most timely in this context, adding credibility and substance to Europe’s social dimension while at the same time testing the limits of the union’s power in this arena. For the first time, the EU has taken legislative action not only to ensure fair minimum wages but also to strengthen collective bargaining.
The directive has two ambitious objectives. First, it aims to elevate minimum wages to 60 per cent of the gross median wage in each member state. Secondly, it requests member states to increase collective-bargaining coverage (CBC) to 80 per cent of workers.
Minimum wages may be established in one of two ways. Instead of statutory minimum wages (SMWs), countries may set the wage floor through collective bargaining between employers and trade unions (‘the social partners’). Are these alternative routes towards decent wage floors, as the directive seems to assume, or do they complement each other?
Wage floors obviously matter for workers, especially those at risk of low pay. What is often missing from discussions is that they also influence the social protection which can be provided without compromising work incentives: they constitute a ‘glass ceiling’ for out-of-work benefits. Determining the wage floor is thus very important for large sections of the population—not least the poor who are not working. It is key to making progress on poverty in Europe.
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All this matters even more in the context of the ‘great decoupling’ between productivity and profits on the one hand and wage growth on the other. Furthermore, economic globalisation, skill-biased technological change and the ever-more-dominant monopsony power of big corporations are thought to be pushing wages down, especially for the least skilled. Soaring inflation of late is adding extra urgency.
The provision in the directive that adequate wage floors can be set through collective bargaining only came after strong opposition from Sweden, Denmark and some other countries with strong roles for collective bargaining. Somewhat ironically, a directive aiming to add substance and credibility to Europe’s social dimension received most opposition from countries with the most exemplary social and employment outcomes.
Leftist parties and trade unions in Denmark and Sweden saw the directive as a threat to their labour-market model, because it implied political interference in a field where the social partners cherished their autonomy. The European Commission tried to counter these concerns by giving collectively bargained wage floors and SMWs a status of equivalence.
This however begs the question of whether collective bargaining is indeed equally able to uphold wage floors. Declining CBC was a major contributing factor to the introduction of SMWs in Germany in 2015 and Cyprus in 2023. A critical level of bargaining coverage may thus be necessary if it is to combat low pay.
We conducted research on the role of SMWs and CBC in regulating low wages in 30 European countries. We found they each have distinct roles in establishing an effective wage floor.
Countries with an SMW have a lower share of workers earning below 60 per cent of the gross median wage, sometimes referred to as the ‘living wage’. Remarkably, this is despite the fact that SMWs are not close to this objective except in a small handful of countries.
Yet higher rates of collective bargaining coverage are essential to push down the share of workers on below-decent pay. Crucially, this effect is the same in countries with and without SMWs—but with the combination delivering the most promising results. Increasing CBC to 80 per cent in a country with an SMW could push the share of low pay to less than 6.5 per cent of full-time workers.
Measures to reduce the share of workers in relative low pay, while important, are not enough to support the most vulnerable during the cost-of-living crisis: money, not percentages, is needed to pay the bills. Therefore policies also need to focus on the absolute wage floor.
So we looked at real wages at the fifth percentile (the top of the lowest 20th) of the wage distribution. Here, high CBC only seems to be associated with higher real wages in countries without an SMW; in SMW countries, CBC has a far smaller impact. So SMWs are not an inferior mechanism for regulating the effective wage floor: higher SMWs correspond with higher real wages for the low-paid, and with generally few effects on employment.
The implications for the minimum-wages directive are cautiously encouraging. While member states have final authority on their implementation, both policy objectives—statutory minimum wages and collective-bargaining coverage—are important in reducing low pay. Non-SMW countries require CBC in excess of 60 per cent to achieve lower shares of low-paid workers than SMW countries with lower rates of CBC. And if countries with SMWs were to reach the objective of 80 per cent CBC, they could reduce the share of low-paid workers below those seen in the most equal non-SMW countries.
This suggests the role of collective bargaining in achieving adequate and fair minimum wages is perhaps even more significant than many would have assumed.