Minimum Wage Wars in Europe
Dorottya Tornai // 3 December 2020
At the end of October, the European Commission proposed a Directive to introduce adequate minimum wages across the EU. Although the end objective is socially considerate and far-reaching, the means of achieving statutory minimum wage would not only be harmful for the most vulnerable workers in society, but would negatively affect the economies of Eastern Europe.
The economic convergence of the European area has been a goal since the establishment of the EU, and was revitalised after President Juncker’s 2015 SOTEU address and the introduction of the European Pillar of Social Rights. At the heart of this non-binding declaration lies the attempt to develop legislative initiatives on social rights, and targets improving fairness on the EU labour market.
Despite the fact that: firstly, the EC promotes collective bargaining to agree upon an adequate minimum wage; and secondly, it limits EU intervention due to the principle of subsidiarity – these minimum requirements have repercussions on employment. As economic theory suggests, as soon as wages escalate the increase in the unemployment rate is inevitable. When the price of employment hikes, employees tend to look for cheaper alternatives such as automation or redundancy of lower skilled individuals. The US demonstrated this in Seattle when they raised hourly minimum wage from $9.47 to $13, which resulted in a reduction of $62 million paid to low-wage employees a year. Thus, this would be especially harmful for Eastern Europe, since this area has a lower collective bargaining coverage which is in direct correlation with higher proportion of lower-skilled workers. Amongst the vulnerable social groups, we find the young people (aged 16-24) as well. Research suggests that increasing minimum wages results in a significant drop in youth employment. Even just a 10% increase in minimum wage effectuates around a 2-3% fall in youth employment.
On a larger scale, the implementation of the Directive would have detrimental effect on Eastern European countries’ economic competitiveness. There is a reason why Commissioner Nicolas Schmit said on 28 October that if ‘Bulgaria were to introduce the same wages as his native Luxembourg, the very next day there would be “no Bulgarian economy”’. The economic competitiveness of Eastern Europe – and the structure of economy itself – is based on services which are heavily dependent on cheap and unskilled work. Foreign businesses would no longer need to have Eastern Europe as a cog in their supply chain, as lower wages would no longer compensate for the distance, lower demand and less developed infrastructure of the region. Moreover, employers facing significantly higher minimum wages are likely to turn towards the shadow economy. Instead of employing individuals full-time, businesses lean towards part-time employment to curtail expenses, and they supplement the wages of their workers unofficially under the table. in the form of an envelope.
Besides the social and economic consequences of this directive, it is also worth mentioning the effects on regulation. The rationale behind the introduction of adequate minimum wage lies in convergence and improvement of working conditions all over Europe. Yet, there are multiple barriers when it comes to regulating labour markets on EU level. First of all, the nature of this declaration is non-binding, which leaves Member States with their rights of regulating minimum wage. Also, the Treaties clearly state that the EU can act in the field of social policy and complement Member States’ policies to improve working condition, but this right does not include changes made to pay. More importantly, EU competence falls short due to the considerable divergence existing in the labour market. The Directive proposes reference values for minimum wage based on either gross minimum wage compared to median wage or net minimum wage compared to net median wage. If the latter is the case, the EU would get a really inaccurate picture of the workers’ situation. Member States have highly different tax systems, some with bigger tax burden on minimum wage workers. This explains why some countries – like Lithuania – reach the benchmark interval advocated by the EC based on gross minimum wage, but do not meet the criteria if net minimum wage is taken into account.
Overall, the EC’s Directive to introduce adequate minimum wages across Europe would be a damaging step for Eastern Europe. Despite good intentions, it would not (and could not) facilitate the convergence of Member States and would harm the most vulnerable workers in our society.
EPICENTER publications and contributions from our member think tanks are designed to promote the discussion of economic issues and the role of markets in solving economic and social problems. As with all EPICENTER publications, the views expressed here are those of the author and not EPICENTER or its member think tanks (which have no corporate view).