Why we need a European minimum wage

What will the new EU directive achieve, and what more do we need?

At the plenary session on Thursday 25th November, Members of the European Parliament (MEPs) voted to endorse the Employment and Social Affairs Committee recommendation for a European Directive on fair and adequate minimum wages. Proposed last year by the Progressive Alliance of Socialists and Democrats (S&D Group), the directive would lay down a minimum requirement for wages of a ‘decent standard’ across the European Union, requiring Member States to assess and report on the level of their statutory wages, governed either by minimum wage legislation or collective bargaining agreements.

We welcome the action to promote a decent standard of living for all workers, but the current proposal does not go far enough. Much more is needed to reach the goal of fair and decent living standards throughout the European Union. In this article, I discuss why we need a minimum wage, what this new directive will achieve, and what else we need to realise the goal of fairer living standards across Europe.

What is a minimum wage and why do we need it?

A minimum wage is the lowest level of remuneration that a worker can legally receive from their employer for their labour. By determining the minimum level of income that workers can receive, the minimum wage acts to reduce inequality by lifting the living standards of the most vulnerable workers. This means that minimum wages have a similar general goal to other types of welfare or social policies, but unlike welfare payments, a minimum wage isn’t a payment from the government and isn’t financed by taxation. While welfare transfers to those who can’t work act to redistribute income after market earnings and taxation, the minimum wage affects the initial distribution of income in the labour market by ensuring that workers are not unjustly exploited by employers paying an unreasonably low wage. Although, from a Marxist perspective, the exploitation of labour is the basis of all profits in a capitalist system, a minimum wage helps to fight inequality under capitalism by ensuring that an adequate proportion of what we collectively produce is distributed to workers, and not owners (capitalists).

One of the main arguments against a minimum wage is that it can reduce levels of employment and increase prices (inflation). This is based on a model of the economy which assumes that most profits are reinvested by capitalists – the owners of businesses – into production. The idea is that if wages go up, capitalists won’t be able to afford to hire the same number of workers, so the number of jobs available will go down and unemployment will increase. And if employers are forced to pay more for labour, in order to keep businesses profitable, they will have to raise the price of goods and services, so that the increase in wages doesn’t actually mean workers can afford to live a better life.

But while a very sharp rise in the minimum wage might put jobs in danger, stagnant low wages have a far worse impact on poverty and inequality. Studies of changes in the distribution of income and wealth over the last 120 years tell us that while income from wages has stayed about the same, the ‘rate of return’ on capital - that is, the money that owners make from both profits and interest - has tended to increase over time relative to the rate of growth in the economy. One of the ways we can and should deal with the accumulation of wealth is through taxes on wealth and inheritance, but a decent minimum wage also helps to promote a fairer distribution of income. As long as we live with capitalism, we need mechanisms like the minimum wage to help protect the many from the few.

What would the proposed European directive achieve?

The proposed European directive aims to guarantee decent living standards for workers and their families by setting a minimum standard for wages, although it isn’t exactly a European minimum wage. The draft directive proposes that all countries should have statutory wages that are set, at a minimum, at the benchmark for a ‘decent’ level of at least 60% of the median wage, or 50% of the average gross wage, in that country. What would this look like in practice?

The figure below plots the level of existing minimum wage legislation against the benchmark of 50% of average wages in 35 OECD countries for which data is available. Both rates are expressed in US dollars adjusted for ‘purchasing power parity’, or in other words accounting for the price of goods and services in each country. I’ve included countries outside of Europe for reference.

Figure: Minimum wage vs a ‘decent’ wage in Europe and beyond

Data Source: OECD.Stat

The Nordic countries, along with Austria, Italy, and Cyprus, are the only Member States without an existing minimum wage law. We can see that countries like Slovakia, Hungary, Greece, Portugal, Poland, and France already have minimum wages at or very close to the benchmark. This means that these countries could report positive compliance with the proposed directive already. The new German government has also promised to raise the minimum wage to 12 Euro per hour, which would lift the annual rate above the minimum standard. 

But, despite a ‘decent’ minimum wage, the actual purchasing power of a Hungarian minimum wage earner is about half of that of a Dutch minimum wage earner, even accounting for the difference in prices across the two countries. It is a good thing that the directive will encourage many Member States to lift the level of their minimum wage, but this would not address the disparity in wages and living standards across countries. To achieve fairer wages across Europe, we’ll need to see something more.

But there is one other important limitation to the directive. Although it requires Member States to assess and report on the level of their statutory wages, it does not require countries to legislate a minimum wage. They could meet the directive by expanding the proportion of wages set by collective bargaining agreements, as long as these agreements deliver an adequate level of remuneration. The directive explicitly aims to strengthen and extend the coverage of collective bargaining, especially in Member States in which collective bargaining is available to less than 80% of the workforce. This accommodation of ‘due respect for the autonomy of national social partners and well-functioning collective bargaining models’ has not been enough to gain the support of the Nordic countries.

Why do the Nordic countries oppose the directive?

The argument made by trade unions in countries such as Sweden is that the directive will undermine the existing system of collective bargaining. They argue that a minimum wage will likely be set at a relatively low level, and that that legal minimum will offer employers greater leverage in collective bargaining discussions so that workers will end up losing out. But employers associations in Sweden also oppose the minimum wage, even though the unions suggest that employers would win from the legislation by being able to pay less. The general view is simply that wages are not a matter for central government, and certainly not a matter for European level institutions, but are a matter for unions and employers associations to negotiate and decide for themselves.

But a minimum wage does not preclude the possibility of a higher wage, or collective bargains, and because the collectively negotiated wages are much higher in Sweden than a lot of Europe, the agreements made between unions and employers shouldn’t have any problem exceeding a ‘decent standard’. 

The unions also argue that statutory wage regulation might reduce the incentive for people to join unions, but Sweden has already been experiencing a decline in unionisation. Even though almost 88% of workers have access to collective bargaining in Sweden, only 65% of workers in Sweden are members of a union. The unionisation rate has dropped dramatically, from 82% in 1990. The proposed European directive aims to promote both minimum wage regulation and the expansion of collective bargaining

In addition, the types of workers that are excluded from collective bargaining are often the most vulnerable workers, especially new migrants and temporary migrants. These types of vulnerable workers would benefit most from minimum wage regulation. Setting the minimum wage at a decent standard of living provides protection for all workers, while collective bargaining and other union protections strengthen the power of organised labour. In my view, all European countries should have both.

What more do we need to reach fairer living standards across Europe?

Today’s European Union is an economic union that sets minimum standards on social policy in an attempt to protect its core values, but for real social change that promotes the European values of equality and inclusion, we need more uniform policies that move the continent toward a European social union. A binding directive for statutory minimum wages would be one step in the right direction.

But equalising standards of living across the continent also requires investment to improve skills and job quality in the regions of Europe with lower incomes, to promote the convergence of wages and purchasing power. We also need wealth taxes, which presently exist in only four EU countries. As discussed above, these are even more powerful instruments to address inequality.

The proposal for a European minimum wage is just one part of the S&D Group’s programme for a ‘Great Shift’ to sustainable wellbeing which includes a proposal for an EU wealth tax. The programme also presents tools to move beyond purely economic indicators of wellbeing. While we should absolutely support action to improve the distribution of income, it’s also time to recognise that economic wellbeing is just one indicator of living standards. Opportunities vary even within income levels, especially for women and minorities.

The EU could be a powerful force to overcome vested interests at the national level and drive transformative change. To achieve that, European citizens like you can elect MEPs that support this change and fight with us at Arbury Road for the democratisation of the EU. Because we need a European minimum wage, and much more.