Social dumping is a practice involving the export of goods from a country with weak or poorly enforced labour standards, where the exporter’s costs are artificially lower than its competitors in countries with higher standards, hence representing an unfair advantage in international trade. It results from differences in direct and indirect labour costs, which constitute a significant competitive advantage for enterprises in one country, with possible negative consequences for social and labour standards in other countries.
The creation of the Single European Market exposes enterprises, operating in the context of a national market, to competition with others in other Member States. This means that pressure will be exerted on enterprises with high direct wage costs to secure the productivity that will enable them to compete with enterprises elsewhere in the Community with lower wage costs. This aspect of competition, aimed at rewarding productivity, was one of the objectives of the Single European Market programme.
However, national systems of labour law and social protection impose indirect labour costs on enterprises, such as the costs of compliance with labour standards and the costs of contributing to social protection schemes. Lower labour and social standards in some Member States may entail lower indirect labour costs for enterprises in those Member States. The result is to give enterprises, in those countries with lower indirect labour costs, a competitive advantage compared with enterprises in Member States with higher labour and social standards. This advantage may be offset by other factors, which favour enterprises in countries with higher labour and social standards, such as better transport infrastructures or a more highly trained and skilled workforce. Nevertheless, differences in direct and indirect labour costs may constitute a significant competitive edge.
One consequence of such differences, it has been argued, is that they raise the threat of ‘social dumping’. As a result of what has been called ‘social policy regime competition’ between Member States, national governments will be under pressure to reduce their labour and social standards, in order to ease the burden of high indirect wage costs on enterprises. Then enterprises – particularly multinational enterprises – will be tempted to locate new investments, or even to relocate existing establishments, in countries where lower labour and social standards lead to lower indirect labour costs.
A conspicuous case occurred in 1993, with the relocation by an American multinational company, Hoover, of a manufacturing plant in Dijon in France to Cambuslang in Scotland, following negotiations that led employees in Scotland to accept inferior terms and conditions of employment. The result was the loss of some 600 jobs in France, and the recruitment of some 400 fixed-term workers in Scotland. French government representatives characterised the decision as ‘social dumping’ by Hoover.
In 2007–2008, the European Court of Justice (ECJ), in its rulings on the cases of Viking, Laval and Rüffert, imposed stringent limitations on attempts to use collective bargaining and the right to strike as measures against social dumping. In the two former cases, the ECJ ruled that, although the right to industrial action constitutes a restriction of the freedom to provide cross-border services, it can be justified under certain circumstances. In the Viking case, this justification is bound to an overriding reason of public interest, such as the protection of workers. Furthermore, the collective action must be suitable for ensuring the attainment of the legitimate objective pursued, and should not go further than what is necessary to achieve that objective. In the Laval case, the ECJ ruled that industrial action is in breach of the freedom to provide services if it is aimed at imposing terms and conditions on foreign undertakings which go beyond the minimum established by national law. Similarly, in the Rüffert case, the ECJ ruling restricts the scope of social clauses in public procurement contracts to labour standards established by law or universally applicable collective agreements. In both cases the ECJ refers to Directive 96/71 on posted workers. According to Article 3 of the directive, only terms and conditions established by law, or by universally applicable collective agreements, apply to posted workers.
Social dumping poses two conflicting scenarios for the institutional arrangements of formulating and implementing EU labour law and social policy. One scenario envisages the transfer of social policy jurisdiction to the EU level. Harmonised or uniform social and labour standards throughout the Community, established through EU legal measures, would secure the objective of greater equalisation of indirect labour costs for all enterprises, and reduce, if not eliminate, the threat of unequal standards distorting competition in favour of Member States with lower standards. The second scenario favours the opposite: retention of national competence over social and labour standards, thus accepting social dumping as a consequence of direct competition between different Member State social regimes.
The confrontation of these two opposite scenarios might also lead to a third scenario of limited European convergence in certain policy areas, such as information and consultation of workers or employment policies. The actual scope and extension of the processes described as ‘social dumping’ remain controversial in the debate between experts, labour relations practitioners and social and political actors.