Minimum wage: just a suggestion?

Introducing a minimum wage would bolster the integration of member states and improve relations between the people and the institutions

Protesters from the Communist-affiliated trade union PAME march in front the parliament building, during a demonstration marking a 24-hour strike, in Athens, Greece, November 28, 2018. REUTERS/Costas Baltas

Introducing a minimum wage would bolster the integration of member states and improve relations between the people and the institutions

The idea of a minimum wage is certainly nothing new. It’s been a topic of discussion ever since the end of the Nineties of last century, as one of the possible elements of the so called European “social pillar”; a pillar that was supposed to stand alongside stability and growth, guaranteed by macro-economic governance, fairness and social justice. As it turns out the social pillar has never been developed, and the emphasis of European policies has almost exclusively been focused on macro-economic stability.

Nevertheless, the issue of a coordination, or even a harmonisation of European labour policies has never been completely discarded, though it tends not to rank as a high priority, from the European debate. In 2014 Jean-Claude Juncker said that “all EU Member States to put in place a minimum wage and basic guaranteed income.” As so often happens, this statement of principle did not make much leeway. Today, on the eve of the elections, and in the wake of the distress and loud call for social justice of which the gilets jaunes are the most visible expression, the issue is now taking centre stage once more. It’s being raised by the European Socialist Party, and has been discussed by Emmanuel Macron in his “letter to Europe’s citizens” and is often mentioned by the Populist parties.

The issue is an important one, because it is part of a more general discussion on so called “social and fiscal dumping”, meaning the tendency in recent years, by European governments, to compete among themselves by acting on so called cost competitiveness: the reduction of production costs, to be achieved thorough wage depreciation (bolstered by high unemployment figures) and the reduction of corporate and capital taxation. The only objective pursued by European countries at present seems to be to increase exports and corner market shares at the expense of other EU countries which are viewed as competitors and not as partners.

Because this “race to the bottom” seems so entrenched, it’s hard to imagine that a harmonised minimum wage will be enough to change a growth model which seems so strongly rooted in the minds of our managers (and many economists). After all, that the social pillar has been generally neglected is not a matter of chance: it was perceived as a useless ornament of a system in which market flexibility was considered the main path towards growth. With this approach, the only guide for setting wages would have to be labour productivity, and the setting of minimum wages was opposed because it caused distortions and ultimately unemployment. It matters little that the empirical evidence (even that produced by the Commission in recent times) has always shown a limited or possibly non-existent impact of minimum wages on unemployment.

While it may be unrealistic to imagine that the minimum wage alone might stop social dumping (it would at least have to be associated to a harmonisation on corporate taxation and a joint taxation of multinationals), this doesn’t mean it would serve no purpose. In the first place it would make dumping harder. And, more importantly, it would help to fight poverty and reduce inequality, which in Europe has reached levels that are incompatible with stable and balanced growth. Moreover, one of the throwbacks of the crisis on the European economy has been the phenomenon of the working poor, that is to say workers whose wages don’t allow them to significantly lift  themselves above the poverty line. With an economy that’s having a hard time putting the crisis of the previous decade behind it, a European minimum wage could transfer resources to categories whose consumption requirements are fairly high, thus increasing their spending power, general consumption and domestic demand. While consumption is a stable component of wages, a higher domestic demand would help to reduce the European economy’s dependence on exports (especially in certain countries where foreign demand is particularly significant, as is the case of Germany), and therefore on an international situation that is becoming increasingly unstable from both a geopolitical and economic perspective.

Before verifying to what extent one can actually hope to implement a European minimum wage, one should first dispel a misunderstanding. With very few exceptions, almost no one believes in a minimum wage that is the same for everyone. The differences (in prices and wage/productivity ratios) are too vast. The discussion today is on the harmonisation of the minimum wage linked to some national indicator, such as the national median wage (the value for which half of the wage earners earn more and half earn less) or some other indicator. There’s plenty of room for manoeuvre, seeing as there’s currently a great variety of responses to the issue. While it is true that 22 out of 28 countries have a minimum wage (Italy is one of the six without, even though the collective bargaining system has for a long time replaced such a measure), its level, even considering the different living standards and spending power, varies drastically. Eurostat provides statistics that highlight this diversity (and the potential benefits from harmonisation). The richer countries, including the United Kingdom, France and Germany in particular have the highest minimum wage in terms of spending power, while almost all the EU expansion countries lag behind (with the exception of Romania, Poland and especially Slovenia, which have rather high minimum wages). The minimum wage ranges between 39% and 64% of the national median wage.

This diversity is hardly surprising, seeing as the wage structure is the result of a complex institutional system and of the “social contract” that voters in each country are free to choose. That’s why the Maastricht Treaty establishes that wage policies are not a European prerogative and that they are absent from the European fundamental rights charter adopted in 2000 in Nice. So what can be done? One could indicate a threshold value, as a recommendation within the context of the European semester, which countries would be invited to meet, without prescribing an obligation that the Treaty in any case would not allow to be set.

What then becomes crucial is the choice of threshold. During the Nineties of last century the discussion focused on a minimum wage of around 60% of the median wage (conventionally, a wage is considered “low” if it’s two thirds below the median salary and the poverty line stands at 50% of the median). The 60% threshold was and is therefore calculated as a value that on the one hand guarantees decent living conditions (a living wage, a subsistence salary, which has been discussed ever since the Rerum Novarum by Leo XIII), and on the other a minimum level of fairness in the distribution of working wages. A minimum wage of 60% of the median salary could for example reduce the number of working poor.

Today there are only three countries that exceed the 60% threshold (France, Portugal and Slovenia), so it’s hard to see the others wilfully converging towards such a level. One could lower the threshold (for example to the poverty threshold of 50%), thus improving the chances of an agreement between member states, and thus limiting incidents of dumping. But from a macro-economic point of view one would not have the hoped for results in terms of the reduction of poverty and inequality, or support for aggregate demand. A more promising alternative would be to keep the 60% threshold which would however be included within a broader package of indicators (such as for example the indicators of macro-economic imbalances introduced as a result of the crisis, and never truly developed as a tool to coordinate member state policies). Every country would then find a way of introducing such a threshold in its own legislation, via legal minimums, collective bargaining or other systems.


This article is also published in the May/June issue of eastwest.

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