Wage-setting mechanisms: Pay - Q3 2014 (EurWORK topical update)

In the recent past, the policy debate around wage setting – both at European and the national level – has reflected the view that wages should better reflect differences in productivity developments. This article provides an overview of related debates in a number of Member States in 2014. By and large, there seems to be some ‘convergence at the level of debates’: with reflections about the possible introduction of universal minimum wages in some of those Member States with collectively agreed minima, while Member States that already have a statutorily set wage floor are considering different ways of introducing more differentiated minima. This would eventually move them closer to the prevailing system in the first set of Member States as regards the setting of wages at the lower end of the wage distribution.

Recent changes in wage setting in Europe

Within the European Semester, wage-setting mechanisms have been part of the country-specific recommendations (CSRs) for a number of years. Once again in 2014, a number of Member States have received recommendations to look into their wage-setting mechanisms (see map). The 2014 recommendations convey the idea of aligning wages with (differentiated) productivity developments and with employment promotion, be it via reforms of the minimum wage-setting system (in Bulgaria, Croatia, Romania and Slovenia) or the indexation mechanisms (in Luxembourg). For Germany, however, the recommendation was to improve conditions that further support domestic demand and to monitor the employment impact of the implementation of the general minimum wage.

The implicit assumption in such recommendations is that certain wage-setting mechanisms, in particular more decentralised forms, can influence overall pay outcomes (such as the development of pay in real terms, or how wages are linked with productivity). Recent research by Eurofound (2014) has shown that, on the basis of data from 1999–2013, there are no strong grounds to believe that certain wage-bargaining regimes deliver different results in terms of pay outcomes than others. In particular, countries with purely decentralised bargaining are not ‘better’ in linking pay with productivity than others.

This article presents a brief update of the most recent developments, debates and actual changes in Member States along these lines and beyond.

Source: Eurofound’s network of European correspondents. Quarterly reports Q1–Q3 2014

Minimum wages – statutory and collectively agreed

Debates around introducing statutory minimum wages

Since the introduction of the statutory minimum wage of €8.50 per hour in Germany, to be applied from 1 January 2015, debates or proposals around the introduction of statutory minimum wages have taken place in some of those countries which to date have minimum wages set within collective agreements.

The most recent proposal to introduce such a statutory minimum wage came from the Danish white-collar trade union FTF in August and September 2014. The president of FTF, Ms Bente Sorgenfrey, put forward the view that increased migration of workers from eastern Europe and pressure stemming from the economic crisis had resulted in social dumping and that a national minimum wage could be an effective tool against wage dumping. This position was rejected by the mainly blue-collar trade union confederation LO, which argued that wage determination should remain within the authority of the social partners. Shortly after this, the social partner organisations in retail, the Danish Chamber of Commerce (Dansk Erhverv) and the union of mainly IT, clerical and commercial employees HK rejected the proposal in a joint press release (in Danish).

Other cases include Finland, where Suomen Yrittäjät, an employers’ organisation representing SMEs, which is not itself involved in collective bargaining, has advanced a similar proposal for a statutory minimum wage, while reforming the collective bargaining system. This proposal has not received wider support to date. In Italy, the new Jobs Act also includes the possibility of introducing statutory minimum wages. This is currently under consultation with the social partners.

Minimum wages reflecting differences in labour productivity

In a number of Member States which have statutory minimum wages, some debates and proposals were recorded relating to whether these should better reflect differences in labour productivity. This essentially means suggesting more differentiated minima – be it by region, group of workers, sector or economic circumstances.

In Croatia, for instance, there are ongoing discussions in relation to the formula used in minimum wage setting. In 2013, the Croatian government put forward the Minimum Wages Act (MWA, OG 39/13), according to which the value of the minimum wage would be established in relation to indicators that are more ‘socially sensitive’ (among them the monthly poverty risk threshold for a single-member household and changes in the index of consumer goods prices). In December 2013, the government, on the basis of the MWA, decided the increase in the minimum wage for 2014. This was the second time in 2013 that the minimum wage went up while all economic indicators were going down and was criticised by the Croatian Employers’ Association (CEA), which argued that the formula did not take economic factors into account, and that the statistical data used were not stringent enough in terms of the reference period.

In Bulgaria, Yordan Hristoskov, Minister of Labour and Social Policy, announced in a news release (in Bulgarian) that an increase in the minimum wage in 2015 would follow new rules. The idea is that the minimum wage would be increased automatically, taking into account labour productivity, inflation and average wages in the country. Despite repeated attempts, so far unions and employers have not reached agreement on this.

Another example is Lithuania, where during the annual discussions on increasing the monthly minimum wage, employers representatives’ announced that they would agree to an increase on condition that it would be differentiated based on regions and business sectors. In their view, a higher minimum wage rise is not possible when the country is about to adopt the euro (on 1 January 2015). Finally, at the end of March, social partners agreed to establish a task force under the LRTT tripartite council to analyse possibilities for increasing the minimum wage and to submit proposals to the LRTT.

In the United Kingdom, a report by the City Growth Commission recommended – among other issues – introducing locally set minimum wages to take into account the nature of the local labour market. It suggests that local authorities could apply to the Low Pay Commission to review and recommend a ‘metro minimum wage’ covering a specific geographical area.  Applications would need to assess the overall impact on employment, as well as considering any boundary effects.  The arrangement would encourage local authorities to combine to put in joint applications to cover several authorities at the scale of functional economic geographies, mirroring the approach taken (in England) which resulted in the creation of the Local Enterprise Partnerships.

Another case is that of Spain, where the Spanish Confederation of Business Associations (CEOE) proposed the establishment of a special minimum wage for young workers, lower than the general minimum wage, in order to facilitate their access to the labour market. This was rejected by trade unions, who argued that such a wage would create more discrimination and precariousness for young people.

Also in Spain, social partners are gearing up to negotiate the next tripartite agreement 2015–2017. On 18 September 2014, Juan Rosell (president of CEOE) said that the economic context had improved recently, so that perhaps the new ‘Agreement for Employment and Social Dialogue’ should include a sectoral perspective concerning wages. Whereas in the 2012–2014 agreement social partners agreed on overall wage moderation, for the next agreement some pay increases could be approved for specific economic sectors which were showing signs of economic recovery.

In Hungary, some attempts to loosen the single minimum wage system were reported. One related to the security services sector for which the government published a decree in July making hourly rates mandatory, as in the construction industry. In addition, the Ministry of Human Resources (Emberi Erőforrások Minisztérium, EMMI) will launch negotiations (in Hungarian) with the Association of Hungarian Residents (Magyar Rezidens Szövetség) on a special minimum wage for specialist medical doctors.

Similarly in Latvia, the idea of introducing a higher minimum wage in the construction sector was raised for the first time from the employers’ side, by Normunds Štals, chair of the strategic council of the Latvian Chamber of Commerce and Industry. However, the idea was not supported in the sector.

In Poland, finally, a recent legislative initiative foresees introducing the statutory minimum wage on an hourly basis. This initiative received high public support: a nationwide public opinion survey by the Public Opinion Research Centre (Centrum Badania Opinii Społecznej, CBOS) in August revealed that 74% expressed a favourable opinion. The mean expected hourly wage was 17.3 PLN (some €4.1), while the median was 15 PLN.

Around the (automatic) indexation of wages

Another set of CSRs has been given to countries in which wages are indexed according to fixed formulas, which are essentially based on changes in prices. In Luxembourg, the automatic indexation mechanism has been ‘modulated’ between 2012 and 2014, while no changes were made in Belgium and Malta.

In Luxembourg, the government has now announced a return to the full wage indexation system. In July 2014, a meeting was held between the government, employers (UEL) and trade unions (OGBL, LCGB, CGFP) to discuss the government’s announcement, made in June, of a return to the full wage indexation system. Trade unions have confirmed their satisfaction with the government’s position, whereas employers have reiterated their concern over the evolution of labour costs. No further debates regarding sectoral differentiation of the mechanism were noted.

In Belgium, wage indexation in 2014 has led to a decline of sectoral wages in some cases. The automatic indexation system means that wages follow price changes (measured in the so-called health index, which excludes the prices of tobacco, alcohol and fuel). Since June 2014, several sectors have had a negative indexation and thus a decrease in wages. The timing of wage changes depends of the exact system of indexation, which can differ by sector. Employees in the banking sector (Joint Committee 310) have already had a salary reduction and a reduction is expected for Joint Committee 218 (white-collar employees). However, not all employees will experience a reduction: in some sectors, there is an agreement at sectoral level not to apply negative indexation (for example the construction sector, Joint Committee 124). In other sectors, agreements can be made at company level not to apply the negative indexation.

In Malta, social partners are entering the annual debates around the cost of living allowance (COLA), which is given annually to all Maltese workers. Employers (the Malta Chamber of Commerce, Enterprise and Industry (CCEI) and the Malta Employers' Association (MEA)) are critical of the COLA mechanism and wish it to reflect productivity as well as inflation.

Commentary

Overall, the reported debates and initiatives – even though many if not most remain at the proposal stage to date – seem to point towards some kind of potential convergence in wage setting at the lower end of the wage distribution. On the one hand, countries with a long tradition of minimum wages being set by sectoral and company-level agreements are – if not introducing a generally binding minimum wage, as in Germany – at least reflecting on the possibility of doing so. On the other hand, in some countries with a universally binding wage, in which collective bargaining coverage rates are otherwise very low, proposals to ‘differentiate’ minimum wages by sectors or regions could result in a greater diversity of wages at the lower end of the distribution.

It is too early to suggest that such a convergence is actually happening, as in most cases the status quo seems to prevail. Yet the European-level discussions around wage setting related to the CSRs show that, at the level of debate and proposals, some potential for convergence can be detected.

About this article

This article is based mainly on contributions from Eurofound’s network of European correspondents. Further resources on wage setting can be obtained from the following recent reports:

Eurofound 2014: Developments in collectively agreed pay

Eurofound 2014: Pay in Europe in the 21st century

Eurofound 2014: Changes to wage-setting mechanisms in the context of the crisis and the EU’s new economic governance regime

For further information, contact Christine Aumayr-Pintar: cau@eurofound.europa.eu

Country-specific recommendations related to wage setting 2014

 Source: http://ec.europa.eu/europe2020/making-it-happen/country-specific-recommendations/index_en.htm