Addressing In-Work Poverty: The EU Minimum Wage Directive and Collective Bargaining

Ben Paterson, European Social Policy MSc, School of Social & Political Science, University of Edinburgh

 

In 2019, the rate of workers at risk of in-work poverty within the twenty-seven European Union countries (and the UK) was 9.2%. The growing number of working households in poverty has facilitated a debate on an EU-wide minimum wage directive. This rate will only have been exacerbated by the economic difficulties resulting from the COVID-19 pandemic, bringing a renewed vigour to the policy proposals to ‘make work pay’.

To prevent poverty it is important to establish a ‘wage floor’- a minimum income level from working. There are generally two methods: to institute a statutory (legally mandatory) minimum wage; or through agreements established through collective bargaining (negotiations between employers and employees). The minimum wage proposals have generally been welcomed by the European Trade Union Confederation (ETUC), however, its Nordic members express concerns about the directive, fearing that statutory minimum wage laws will undermine their wage-setting practices. While the EU minimum wage directive is a positive policy, it should be considered the first step, while strengthening collective bargaining rights across Europe will improve worker pay in the long term.

Minimum wage laws have been discussed as a means of addressing in-work poverty, which has been growing since the 1990s to 2000s but has accelerated since the Global Financial Crisis in the late 2000s. However, statutory minimum wage laws exist in 21 out of 27 member states and have been implemented while in-work poverty has grown, which suggests that their effectiveness is limited.

Arguably, this simply means that current minimum wages are not satisfactory, and EU legislation may set regulations that ensure that workers receive enough to achieve a decent standard of living. Evidence has shown that 16% of workers would benefit from a minimum wage set at 60% of their national median wage. This suggests that a minimum wage could be an effective means of ending in-work poverty, assuming that this level would be initially correct and adjusted over time.

Setting levels in countries with very low wages is particularly difficult, as 60% of the median wage would not be satisfactory, requiring real-life testing to ensure a minimum standard of living. Statutory minimum wages currently are below what is typically referred to as a ‘living wage’ which is a wage that provides a certain basic standard of living. This suggests a limitation to the effectiveness of statutory minimum wages in reducing in-work poverty.

Collective bargaining arrangements appear to be the best means of ending in-work poverty. Finland, Denmark, and Sweden do not have statutory minimum wages, yet they have some of the lowest levels of in-work poverty in the EU. Nine out of the eleven countries with the lowest rates of low pay (calculated as two-thirds of the national median wage) had more than 70% of workers covered by collective agreements. The extent of coverage for collective agreements is essential for creating a wage floor and protecting workers from low pay, which is recognised by the EU.

Many of these nations have relatively low-income inequality as well. Bargaining at the industry level (in contrast to the company level) is more effective at raising the wage structure overall. Furthermore, the EPI in the US found that collective bargaining also primarily benefits low-wage workers more than higher-wage workers, thereby reducing wage inequality. Collective bargaining is therefore capable of reducing wage inequality in addition to reducing in-work poverty.

The Nordic countries are interesting and effective examples of collective bargaining, primarily achieved through voluntarism with limited government involvement. This is often referred to as an organised-decentralisation system of collective bargaining, whereby wages are set by sectoral (industry-level) bargaining, but negotiations also occur at the company level.

Sectoral bargaining establishes wage floors within industries, but the company level bargaining allows for more specific demands. This typically involves the particular economic situation of the company, including boosts to productivity. Firm-level bargaining often results in ‘profit-sharing’ between employers and workers. Part of its success is its voluntarism, as the employees and employers are not obligated to negotiate, fostering more amicable negotiating. As a consequence, they experience a more co-operative relationship between workers and employers in contrast to the more activist and conflict-orientated trade unions that exist in the rest of the EU.

The success of the Nordic wage setting model is crucial to understanding the objection of Nordic unions in the EU debate surrounding the minimum wage directive. Their model is founded upon the voluntary nature of the negotiations, with limited interference from the government which would be violated by an EU directive. An EU directive on the minimum wage — which these unions argue is beyond the scope of the EU — interferes with the autonomy of their ‘social partners’ (trade unions and employers associations) and as a result threaten the nature of their system.

While the levels set by the EU would have only a limited impact on workers’ pay directly, it may in practice develop a ceiling rather than a floor for wages. Many Nordic unions also expressed worry that EU minimum wage legislation would disincentivise union membership. This would ultimately prove detrimental to the aims of the EU directive: reducing in-work poverty. While the Nordic trade union confederations acknowledge promises to protect the Nordic bargaining model have been made, in practice, this would not be achievable due to the EU’s legal framework, as there are no exceptions to the legislation once in place.

However, this does not mean that the EU minimum wage directive should be opposed. While the ETUC’s support of the legislation is conditional, it supports the principle of the minimum wage directive. European trade unions prioritise collective bargaining as their favoured method of increasing worker pay, but only Nordic and Portuguese unions state their opposition to a minimum wage directive.

A factor in explaining the differing opinions between these unions and other European unions is their relative strength. Unions in the Nordic countries are strong, Sweden for example has 70% of workers unionised; in Finland, the unionisation rate is 74%. Furthermore, the level of coverage of collective agreements is higher, reaching 88% and 91% of workers respectively. Unions in other member states do not have the leverage or influence that the Nordic states have to set a wage floor, and therefore are more inclined to influence policy decisions at national and European levels.

While Nordic unions may be concerned about their wage-setting system, unions in other countries cannot set wages alone and therefore influence policymakers to legislate on their behalf. Other nations are not able to achieve the extent of coverage that already exists in the Nordic countries in the short term. In the long term, coverage of agreements can be extended, but workers across the EU could benefit in the short term from the EU directive while building bargaining capacity.

Furthermore, the proposed EU directive does not appear to threaten the Nordic collective bargaining model. As the directive states, it does not impose a statutory minimum wage on any nation that does not already have one, nor does it make collective agreements universally applicable to all workers. Member states are not obligated to create a minimum wage, and collective agreements are not undermined by disincentivising union membership. Additionally, member states may leave the implementation of the legislation to their social partners, meaning that unions and employer associations can influence how the regulation is executed in practice, which protects their autonomy.

Article 4 of the directive requires all member states to promote collective bargaining, encouraging members to achieve over 70% coverage from collective agreements, which Sweden and Finland already have, while Denmark is just under this target at 67%. Although arguably more could be done to incentivise collective bargaining, there is little in this directive to suggest that it will undermine the existing arrangements. Arguably this is a step towards convergence with the Nordic model, rather than a threat to it.

As Alsos, Nergaard, and Van Den Heuvel state, “the key to securing minimum wage levels and an adequate standard of living seems to be coordinated wage bargaining supported by strong social partners, with mechanisms to raise low-wage industries, in combination with a generous welfare state.” However, they also express the difficulty to ‘export’ this Nordic model to other countries, as it requires structural changes to bargaining models and the welfare state. Despite this, there are lessons that other member states can learn from, and a significant step is to increase coverage of collective agreements, which is already part of the proposed directive. In the context of a worldwide pandemic, however, there is increased urgency for a short-term solution to the issue of in-work poverty, to which EU minimum wage legislation would be an effective method of ‘making work pay’.

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