Wage setting and indexation in Europe
Pact for the Euro: what future wage-setting?
The recently adopted Pact for the Euro establishes a mechanism for the coordination of economic policies. The Pact emphasises the importance of increasing competitiveness and promoting employment along with strengthening and stabilising public finances. One of its proposals, that competitiveness could be improved by adjusting wage-setting arrangements or wage-indexation mechanisms, has sparked a debate across Europe.
Wage formation in general – and the periodic adjustment of wage levels in particular – is the result of a complex process that is shaped by industrial relations outcomes, as well as considerations such as economic growth, inflation, productivity and labour market developments. In the majority of countries in the European Union, systems of wage formation are based on collective bargaining. Major differences exist, however, as regards the predominant level of bargaining and the links between these levels. One of the main differences in this regard concerns the involvement of either individual employers or an employer association, the latter resulting in so-called ‘multi-employer bargaining’. Some EU Member States apply a system of ‘automatic’ wage adjustment procedures – also known as ‘wage indexation’.
In contrast to autonomous collective bargaining, wage indexation allows for employees’ current purchasing power levels to be maintained, regardless of the outcomes of industrial relations processes. Wage indexation thus provides for wages to be adjusted – and usually increased – on a regular basis, according to an agreed indicator that reflects general price developments. Where they exist, wage indexation systems are subject to debate among the social partners as well as academics in the field of economics and industrial relations. As a major point of concern, wage indexation has been held responsible for fuelling inflationary pressures. In countries with high levels of inflation, wage indexation is perceived as encouraging a self-perpetuating inflationary spiral. These views have consequently led to the abrogation of indexation as a means of controlling inflation in a number of European countries during the 1980s and 1990s.
Eurofound has carried out significant work in the area of wage setting mechanisms over a number of years. Highlights of its most recent work can be accessed below:
Findings
- New Recent developments in wage setting and collective bargaining in the wake of the global economic crisis - Background paper
An overview of recent developments in wage setting in the EU Member States, including wage setting mechanisms and 'average' collectively agreed pay in 2009 and 2010 for those countries where databases of collective agreements are available, information on wage-related collective bargaining in 2011 as well as discussions on the reforms of wage setting mechanisms. - Wage indexation in the European Union (2010)
This background paper investigates the different forms of wage indexation that can be found across Europe. It presents the main characteristics of wage indexation, and looks at the legislation and levels of bargaining to this end, as well as the views and positions of the social partners and the role of the state. - Derogation clauses on wages in sectoral collective agreements in seven European countries (2010)
This report looks at the specific case of company-level agreements deviating from (inter)sectoral wage agreements. The possibility to deviate from pay norms set under intersectoral or sectoral agreements has received growing attention in the policy debate since the present economic and financial crises started to put many companies under pressure and jobs at risk. The report provides detailed information on regulations and practices for seven EU countries, Austria, Belgium, France, Germany, Ireland, Italy and Spain - Working poor in Europe (2010)
Being in work greatly reduces the risk of poverty. Nevertheless, in the European Union, 8% of the employed population fell into the category of ‘working poor’ in 2007, in the sense of having an income below 60% of the national median. The proportion varies markedly across countries and social groups. In most countries, the issue of working poor is not a policy priority of either the government or the social partners, although it can be included in general policies to combat poverty and social exclusion. Although there is little evidence to prove it to date, the working poor are likely to have been particularly affected by the current economic recession. - Pay developments in 2009 (2010)
EIRO’s annual analysis of pay trends finds that the average collectively agreed nominal wage increase across the EU fell from 5% in 2008 to 4.2% in 2009. In the former EU15, the average nominal increase declined from 3.8% in 2008 to 3.1% in 2009, while in the 12 new Member States that joined the EU since 2004 (NMS12), the average dropped from 7.1% in 2008 to 5.9% in 2009. By contrast, taking into account inflation (which fell steeply in 2009), the rate of real increase across the EU rose sharply, from 0.5% in 2008 to 2.9% in 2009. In the EU15, the real increase rose from 0.4% in 2008 to 2.4% in 2009. In the NMS, the real increase rose from 0.8% in 2008 to 3.9% in 2009. The report also examines collectively agreed pay increases in three selected sectors (chemicals, retail and the civil service), increases in minimum wages (as well as current rates), increases in average earnings, and the gender pay gap. - Wage flexibility (2008)
Increased competition has created pressure for flexibility or variation concerning wages. This can involve the localisation of basic pay-setting, which may or may not be governed by multi-employer bargaining arrangements, and the development of new variable payments systems (VPS) linked to measures of performance. This study reviews both sets of developments, focusing on two economic sectors – manufacturing and banking. It finds only limited use of ‘downwards’ wage flexibility but evidence of an increasing decentralisation of wage-setting through supplementary bargaining and the introduction of VPS which, especially in banking, are often at the employer’s discretion. Both developments threaten to erode the traditional regulatory function of multi-employer bargaining in particular. - Wage formation (2009)
This report examines wage formation in the EU from a range of perspectives. It analyses the main systems of wage formation in operation and looks at the main wage developments of the past five years. This includes an overview of recent sectoral agreements, along with an analysis of trends at company level and of the social partners’ views. The report also explores key issues pertaining to the minimum wage, including how national rates are set and upgraded. The final section of the report analyses wage formation in the dynamic and fast-growing IT sector, which tends to yield higher wages than elsewhere in the economy. Among the report’s findings are the variable levels of wage growth across the EU countries, along with the widespread use of individualised pay and other variable pay elements at company level.
More to come
Eurofound is working on the issue of variable pay and will publish its findings in June 2011. The annual updates on pay and collective bargaining will, as usual, be published online during the summer.