Differentiated integration: A solution to the EU’s Minimum Wage Dilemma?

Alexander Evison, MSc Public Policy, University of Edinburgh

Whilst the Covid-19 pandemic has shown the vital importance of low-paid workers to the European Union’s (EU) economic survival, it has also increased awareness of the pervasiveness of in-work poverty throughout the Union. Since almost one in ten EU workers are living in poverty, it has shown the inadequate nature of the current national systems of minimum wage regulations (Europa, 2020).

In recent years there has been increasing interest in an EU-level intervention to tackle Europe’s rising in-work poverty rates. In 2017 the adoption of the European Pillar of Social Rights established the principle that the EU would work towards ensuring ‘adequate’ minimum wages for all, in order to ensure that everyone could enjoy a decent standard of living (Europa, 2020). Since then, Commission President von der Leyen has committed her Commission to implementing a minimum wage directive and has gained the backing of the European Parliament and the Council, in order to translate this principle into legislation (Ammann, 2021). This directive aims to tackle in-work poverty through establishing a framework for statutory minimum wages and by encouraging collective agreements between social actors on wage levels (European Parliament, 2020).

The two measures within the directive represent the two main ways to institute minimum-wages. A statutory minimum wage is a wage-floor that has been set by the government. Conversely, wage-floors that have been set through collective agreements are non-statutory and involve employers and workers associations. Although the Commission’s desire to establish a framework to cover the member-states with statutory minimum wages, it recognises that collective bargaining between social actors is the most effective means of reducing in-work poverty (European Commission, 2020). Despite the existence of statutory minimum-wages in 21 of the 27 member-states, in-work poverty has increased most in the member-states with statutory minimum wages, which suggests that it is an ineffective mechanism for ensuring the normalisation of ‘fair wages’ (European Parliament, 2020). Nevertheless, it represents a stop-gap measure for the EU to ensure progress towards tackling poverty whilst it promotes the extension of collective bargaining.

Collective agreements between social actors are the most effective means of reducing in-work poverty, as the experiences of Finland, Sweden and Denmark have shown. Unlike the majority of EU member states, these countries do not have a statutory minimum wage. Instead, their wage-floors are the result of collective bargaining between associations of employers and workers (Crespy, 2020). These systems are maintained through high levels of trade union and employer association memberships (Torgeir, 2008, p.7). The pervasiveness of these collective agreements means that they set a benchmark for wages levels to even cover workers who were not part of them (Torgeir, 2008, p.7). Consequently, the promotion of collective bargaining represents the primary means through which the Commission wants to improve minimum wage levels in the long-term.

Will the Directive Undermine the Collective Bargaining Model in Scandinavia?

Although the Commission argues that its minimum wage directive will not upset the successful functioning of the Scandinavian countries’ collective-bargaining models, in reality it is likely to undermine them. The Commission has promised that the directive will not affect the Scandinavian systems, as it does not require them to introduce statutory minimum wages and because the directive explicitly encourages the further strengthening of collective bargaining (Paterson, 2021). This assurance has been enough to overturn the Swedish Government’s previous opposition to the directive (Ammann (2021). Consequently at the surface level, the directive appears to enable the Scandinavian states to continue functioning as they were before, whilst it simultaneously encourages the other member-states to follow their lead.

Nevertheless, the directive may undermine the viability of the Scandinavian systems for regulating wages, as the implementation of the directive would mean that the Scandinavian states would also come under its provisions. Although the Swedish Government claims that the autonomy of Scandinavian collective bargaining processes will be maintained since the directive does not require member-states to intervene unless less than 70% of the workforce is covered by a collective agreement, in reality this claim is tenuous. Since Denmark already does not meet this target and because the European Parliament wants to raise it even further, it is likely that the Scandinavian governments would at some point be obliged to intervene (Paterson, 2021). This would undermine the autonomy of the Scandinavian collective bargaining process, which would be detrimental as this is what encourages both employers and workers to participate in it.

Moreover, there is a wider concern that the directive’s misrepresentation of the Scandinavian collective-bargaining system will eventually oblige the states to intervene legally in the setting of minimum-wages, either through a statutory minimum wage or by requiring the extension of collective agreements to all employees. Bender and Kjellberg (2021) use the example of Sweden to show how the Scandinavian systems do not guarantee the existence of identifiable wage floors. They show how the majority of collective wage agreements do not contain any mention of minimum-wages, and how 10% of workers are not covered by a collective agreement at all. Although this system’s success lies in how the collective agreements that do exist provide sectoral benchmarks that most employers follow, this reality of some workers not being covered by identifiable minimum wages may leave the member-states vulnerable to being challenged by the European Court of Justice (Duxbury, Charlie, and Tamma, 2021). Consequently, although the Commission is aiming to strengthen collective bargaining across the EU, in reality its measure may lead to the undermining of it in Scandinavia.

Additionally, this directive may undermine the political legitimacy of the Commission and the EU in the Scandinavian countries, as the directive is a largely unnecessary measure for these countries. According to Eldring and Alsos (2012) minimum wages are usually only introduced when the economic system is not functioning well enough to benefit workers. Crespy (2020) agrees as she admits that the directive would be ‘irrelevant’ to the Scandinavian countries that already have high-wage floors. This reality explains why there is such opposition to these policies from progressive forces within these countries (Ammann, 2021). Consequently, the measure would challenge the viability of the functioning Scandinavian system without promising any significant improvements to it.

Is Differentiated Integration the Answer?

A re-development of the proposed directive to enable a differentiated integration process on minimum wages represents the most viable option for ensuring that the Commission can achieve its aim of improving wage-floors across member-states without undermining the Scandinavian systems.

For instance, Danielsson (2021) proposes the incorporation of a ‘social partners’ option into the directive to enable the differentiation of the Scandinavian countries. He argues in favour of specific criteria which would enable member-states that only have wage-floors agreed through collective bargaining to opt-out of the directive, if they have the agreement of the social partners.

This conditionality of this differentiation would mean that if the situation within the Scandinavian countries changed and minimum-wages began to decrease, then they would then be obliged to join the EU scheme. Consequently, the EU scheme would become a safety-net for the Scandinavian states and would it would meet its objective of ensuring fair wages across the EU.

This approach would protect the Nordic member-states from being inadvertently drawn into introducing minimum-wage legislation by the European Court of Justice, whilst simultaneously enabling the other member states to improve the wages that they are giving to their workers.

Although it can be argued that this would weaken the symbolic significance of the directive by limiting how many countries it is applied to, in reality however differentiation represents the progressive option, especially since the existence of specific criteria would enable the Nordic states to join the scheme in the future if their rates of minimum-wages provided through collective bargaining declined.

Therefore, whilst the proposed directive represents a positive step towards reducing in-work poverty across the EU through its emphasis on extending collective bargaining systems, it is flawed because its implementation in its current form would undermine the viability of the Scandinavian collective bargaining systems. The encouragement of collective bargaining is by the EU is important because it is the most effective means of ensuring higher wage floors. However, a differentiated approach is required to enable the other member-states to strengthen collective bargaining in their countries, without undermining the autonomy and strength of collective bargaining in Scandinavia.