EurWORK European Observatory of Working Life

Denmark: Wage formation

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  • Observatory: EurWORK
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  • Published on: 30 March 2009



About
Country:
Denmark
Author:
Carsten Jørgensen
Institution:

Disclaimer: This information is made available as a service to the public but has not been edited or approved by the European Foundation for the Improvement of Living and Working Conditions. The content is the responsibility of the authors.

Wage formation in Denmark is mainly based on collective and to a lesser degree individual bargaining. There is no legislation neither regarding wage formation in general nor regarding a national minimum wage. Wage formation in the trend-setting private sector is mostly settled at sectoral level as a minimum increase, which is then followed up by company level bargaining. Wage formation in the IT sector mainly follows the same pattern, but individual negotiations about pay are dominant in highly skilled, innovative companies and within the internet related businesses. Wage formation in the public sector is traditionally centralised and a system called New Pay has not been the success it was meant to be.

1. Systems of wage formation

a) Please briefly describe the main systems of wage formation in your country (when relevant please distinguish between private-public sector). For example:

  • Is the system underpinned by legislation or collective bargaining, a mixture of both, or other factors, such as the labour market?
  • who are the main actors?
  • do state bodies play a role in wage setting?

Wage formation in Denmark is underpinned by collective bargaining only. The main actors in the private sector are the labour market organisations at sector level. Important actors in the wage formation are the parties at local or company level, where the actual wage in most systems is negotiated.

The main actors in the public sector are the Ministry of Finance and the employers in the municipalities and regions and on the employees’ side a federation of unions in the state sector, a federation of unions in the municipalities and regions, and a federation of unions in the health sector.

No state bodies play a role in wage setting.

The systems of wage formation are:

The private sector operates with four wage systems:

standard-wage: wages are negotiated by sectoral level bargaining. In principle this system does not allow any local bargaining on adjustments of pay.

minimal-wage: By means of the minimal wage system, the rates represent no more than a basic ‘floor’ and the intention is that minimal wages should be used only for very young or inexperienced employees. For other employees covered by the same collective agreement, the pay indicated in the agreement must therefore be supplemented by a personal pay supplement. In principle, this is negotiated individually between the employer and each employee on the basis of qualifications, training, seniority, degree of responsibility, etc. In other words, in companies covered by a minimal wage agreement, more experienced employees must always be paid a personal pay supplement above the minimal rate. Thus, under the minimal wage system there is a presumption that pay will be negotiated locally while the collective agreement is in force. This allows adjustments to pay during the period concerned, and for this reason the minimal wage system is also called the adjustable pay system.

minimum-wage: This is based on the principle that pay is negotiated at local level in accordance with what the parties estimate to be the most appropriate, but in this case with the relevant collective agreement merely establishing a ‘safety net’ in the form of a minimum hourly rate that must be paid under all circumstances. Under the minimum wage system, therefore, there is in principle no collectively agreed basic rate on which to build. Actual pay is not necessarily based on individual negotiation based on the employee's qualifications, length of service, training, etc. (as is the case under the minimal wage system). Still, it should be emphasised in actual practice there is only limited differences between the minimal and minimum wage systems.

In 1989, 34% of the employees in the large private sector under Confederation of Danish Employers (Dansk Arbejdsgiverforening, DA) and the Danish Confederation of Trade Unions (Landsorganisationen i Danmark, LO) were covered by standard wage agreements; in 1994, however, the rate had fallen to 16%. This rate has remained stable for the past decade. The minimal wage and the minimum wage systems cover the majority of employees in the LO/DA area. By the mid 1990s three quarters of all employees in the LO/DA area were included under these two systems; that figure is lower today; which is, however, solely due to the fact that pay systems with no centrally agreed pay rate have advanced, from covering 11% of all employees in the area in 1995, to 23% in 2006.

Members of the Confederation of Professionals in Denmark (FTF) that has members in the private sector and (the most) in the public sector are mainly covered by collective agreements concerning wages (Wage systems in the public sector: see below). For members of the Confederation of Professional Associations (Akademikernes Centralorganisation, AC) i.e. employees having a university degree, wage formation is a little different. Members of AC working in the public sector are employed and paid according to a collective agreement that covers 100% of the public sector. In the large private sector under DA, however, members of AC have individual contracts including wage. Historically, employers’ associations under DA do not have collective agreements with academics/highly educated because they most often perform trusted managerial tasks in the companies.

Wages negotiated on enterprise level are usually higher than the minimum gross wage settled through collective bargaining. Even starting salaries are often higher than the minimum. Half of all newly employed in the private sector receive a starting salary that is considerably higher (18% or more) than the required minimum of the collective agreement. Hence, it has been discussed if it makes sense to maintain the minimum wage and the minimal wage systems since every one seems to go over the level stipulated in the collective agreements. However, the systems play important roles. Firstly, the rates stipulated in the collective agreements do work as a point of reference for company based negotiations on wage adjustments. As such, it is an indirect tool for controlling wage developments. Secondly, the fact that employers and trade unions themselves stipulate a minimum level for wages is a safe guard against political intervention and thereby a confirmation of the principle of self-regulation. (Source: Yearly labour market reports made by the Confederation of Danish Employers; Dansk Arbejdsgiverforening, DA: DA Arbejdsmarkedsrapport)

Wage systems in the public sector

Public sector wage developments are important for the whole economy due to the fact that around 37% of the total employment is within the state sector, including regions and municipalities. Public sector collective bargaining has been highly centralised and agreements were traditionally standard-wage agreements, i.e. establishing fixed rates of pay. The outcome of the collective bargaining round completed in 1997 signaled a decision to go ahead with the proposal to conduct a reform of Denmark's public-sector pay system. The decision was reached primarily to meet employer demands for a more flexible pay system. The previous system was based on the principles adopted when passing the Act on Statutory Civil Servants in 1919 - a system which has also governed the public sector employees only covered by collective agreements, even though they have gradually become the dominant group in the sector, and even though their working conditions are in some respects fundamentally different from those of the traditional statutory civil servant group.

It was agreed that the main aim of the so-called ‘New Wage’ was to devise a public-sector pay system in which aggregate pay would consist of four separate pay components:

  • A basic wage fixed at centralized level
  • A supplementary amount negotiated at decentralized and/or centralised level based on job-function (special areas of work, responsibility, etc.)
  • A qualifications allowance (education/further training, experience, etc.); and
  • A component based on results/performance (i.e. efficiency), to be agreed at decentralised level.

Considered as a whole, the reform can be perceived as a determination to replace the automatic, seniority-based pay-increment system with a system in which pay reflects more accurately the actual qualifications and performance of a single public sector employee or of groups of employees.

New Wage was introduced in the middle of the 1990ies and seen in the perspective of a passed decade it has not been completely adopted among the employees. The large group of teachers for example is very critical and New Wage has not yet changed the fact that a considerable part of wage formation in the public sector is still centralised.

There is furthermore a built-in ‘catch-up’ adjustment regulation scheme in the public sector, which in principle secures that pay is adjusted continuously in line with developments in the trend-setting private sector.

b) If collective bargaining is the main determinant, what is the main level at which this takes place (national, sectoral, and/or company level)? Where relevant, please refer to other European Foundation studies that you have written in this context. Where collective bargaining fails, what is the role of labour market institutions (i.e. labour court, labour commission)? Provide an example if relevant.

Main levels are sectoral and company level. There are no extension mechanisms with regard to collective agreements in Denmark.

c) Monitoring. What monitoring of collective bargaining is carried out (if any)? Who carries this out? (Joint /Tripartite body at national/sectoral level)? How does it do this? Are there any studies or surveys?

There is no monitoring of collective bargaining as a whole. The system is built on self-regulation.

However, as part of the work leading to the conclusion of the 1987 ‘joint declaration’ (see 2.f. for more information on this) the so-called Statistical Committee (Statistikudvalget) was established with representatives from the Confederation of Danish Employers (Dansk Arbejdsgiverforening, DA), The Danish Confederation of Trade Unions (Landsorganisationen i Danmark, LO) and representatives from the Ministries of Employment, Finance and Economic Affairs. It was decided that the committee should follow the current development in trends of labour costs in Denmark as well as abroad with a view to the competitiveness of Danish companies. Later, following a major industrial conflict in 1998, the tasks of the committee were further specified: Firstly, they shall analyse and estimate developments in indirect and direct labour costs in Denmark and abroad. Secondly, they shall report on trends in consumer prices and real wages. The committee produces an annual report on these issues. The ‘joint declaration’ has no binding legal effect but serves mainly as a set of guidelines.

2. Wage developments

a) Please briefly describe any major overall wage development trends over the past five years (refer to previous EIRO updates where appropriate)

Table 1. Change in rate of growth of hourly earnings on a yearly basis (%)
  2003 2004 2005 2006 2007
Private sector 3,7 2,9 2,8 3,1 4,0
State 3,4 3,8 3,0 2,5 3,4
Local government 4,9 3,9 2,2 3,6 3,3

Source: Statistics Denmark. Statistikbanken. Løn. Wage index for the private sector, state and local government, 3rd quarter: ILON3, ILON7, ILON8 (1996=100) – and EIRO updates on pay.

b) What developments have there been regarding equal pay between men and women in your country? Is this an issue for debate?

In 1976, the Equal Pay Act was launched in Denmark in line with the EU directive from 1975. However, research has shown that despite promises during the preceding two decades to solve the income disparity between men and women, the wage gap is still considerably – 17% in the private sector and 10% in the public sector. Of the 17% wage gap in the private sector, a full 12% could not be accounted for in terms of differences in qualifications etc. In other words, 12% of the wage disparity is inexplicable, or under strong suspicion for being gender-based discrimination (Danish Institute of Social Research, SFI, 2000). A report from 2003 published by DA and LO showed an income disparity of around 15% for blue-collar employees and 19% for white-collar employees. Here, 11% of the wage gap among blue-collar employees and 12% among white-collar could be linked to differences in qualifications, etc. The conclusion is that a large part of the gender-pay gap can still not be explained by different qualifications, seniority, job function and equal ‘hard’ indicators.

Equal pay was certainly an issue for debate during the last bargaining round in 2008 in the public sector. Before and during the negotiations the nurses, the youth and childhood educators, and the elder care workers campaigned under the slogan ‘men’s wage to women’s occupation’. In average 85% of the employees in these occupations are women. They claimed that they lack behind considerably in comparison with the normal average wage developments, mainly due to gender differences, and demanded very high wage increases. They also demanded the foundation of a ‘wage commission’ with the aim to study gender-related pay. In august 2008 the Prime Minister declared that a wage commission will be formed, but its terms of reference will encompass wage development in public sector as a whole.

c) Please briefly describe the main recent sectoral agreements and outcomes in terms of pay

The collective agreements in force in the trend-setting private sector were renewed in 2007. Concerning pay there was an increase of 8.4% in minimum hourly pay in the pace-setting Industry Agreement. The increase will be distributed over the next three years in relation to the former agreement from 2004, thus adding up to €13.85 per hour worked for a metal worker in the last year of the period (March 2009 – March 2010). The agreement in the manufacturing sector is trend-setting for the private sector. Again, the deal only provides for the minimum rates since actual pay increases are negotiated at company level every year.

The collective agreement 2008 in the public sector provides for an average pay increase of 8.17% over the next three years and 1.5% for local pay rises. This adds up to a total of 9.67% pay increase over three years.

d) Are there any noteworthy trends at company level, such as an increasing individualisation of pay setting?

The most noteworthy trend is the increased decentralisation of pay setting from the sectoral level to the company level. A certain individualisation is thus taking place, but a study on individual pay-setting in three large companies in Denmark reveals that in many cases the management has already decided the individual wage increases ‘on grounds of the current economy of the company’ before the pay negotiations with the single employees take place. (Study: Andersen, P.T. and L. Bloksgaard: Individuel forhandling – reel forhandling eller symbolpolitik. In Tidsskrift for Arbejdsliv, nr. 4, 2005)

e) Recent main actions/strikes /protests on wages

The most recent strike due to disagreements about wages was in the public sector in spring 2008 in connection with the renewal of collective agreements in the state, regions and municipalities. More than half of the employees in the public sector made up of occupations such as nurses, social and health care workers and child and youth educators were striking eight weeks for ‘Men’s wages to women’s occupations’.

f) What are the main social partners’ views on wage developments in your country?

The main social partners’ views on wage developments in Denmark can be summarised to the following.

Wage formation is entirely a matter for the social partners and consequently wage developments are the result of a bargaining process.

They also agree that the private export sector, i.e. the manufacturing industry in a broad sense, is trend-setting regarding the determining the level of pay increases. Developments in the public sector are secured through a special ‘adjustment regulation scheme’.

Since the end of the 1980ies the social partners in the private sector have also agreed to prioritise competitiveness and employment rates before pay increases. Since 1987 the main rationale of the ‘joint declaration’ has been to maintain relatively moderate wage increases similar to countries Denmark usually is compared with.

On the other hand, wage restraint is mostly a point of view expressed at confederation and union leader level. During the last two bargaining rounds in 2007 and 2008 rank and file members have increasingly expressed dissatisfaction and called for pay increases above the moderate level laid down in the ‘joint declaration’, the main reason for these demands being economic growth and a shortage of labour.

The ‘joint declaration’ is after all only a declaration of intent without binding legal effect.

3. Minimum wages

In this section, we are aiming to update information from the previous study on the minimum wage (http://www.eurofound.europa.eu/eiro/2005/07/study/index.htm)

a) Does your country have a national minimum wage?

No

b) How is it defined? How is it set and uprated? Do you have any data as to its level and coverage rates?

c) Are there minimum wages (sectoral, regional) covering a major part of the workforce?

Minimum wages are negotiated at sectoral level in the private sector, but it is not known how many employees are actually paid only the agreed minimum wage. As mentioned above, actual wage increases are determined at company level and it is probably only few employees that are paid the minimum wage, but this also depends on the sector. The highest percentage of employees receiving the minimum wage is most probably in retail and restaurants.

d) What are the views of the social partners and the government on the minimum wage(s)?

From time to time, a national minimum wage is an issue for heated debates between the social partners and the political system including the government. Unions and employers’ associations still stand firmly on the view that pay-setting and minimum wages are issues for collective bargaining and not for legislation. A fixed minimum wage would in the long run render the bargaining system, the so-called Danish Model, superfluous, they claim. The government does not disagree with this interpretation.

On the other hand, some politicians have spoken in favour of a fixed minimum wage, as it would automatically be illegal for any employer to pay under this level. Under the current system, a non-organised employer can in principle pay below the agreed minimum wage. But if so, according to the system, the unions can take industrial action towards the company and demand a collective agreement.

Recently, the Laval-ruling brought the question of fixed minimum wages in focus again. In short, the ruling said that a foreign provider was only obliged to pay a minimum wage in the Swedish construction sector, and that the unions could not take industrial action on this background. It made some politicians and lawyers take the discussion up again, as a fixed national minimum wage could be more helpful in order to avoid social dumping. As a result, it would no longer be possible for employers to pay posted workers, for instance from Eastern Europe, according to the workers’ domestic wage standards.

A committee with participation of the social partners was formed with the purpose to investigate the consequences of the ruling for the Danish system with no fixed minimum wage. The committee advised to add a new paragraph to the Danish law on posted workers which should establish that posted workers are employed under the provision of the relevant Danish collective agreement and that the unions should have the right to conflict if this should not be the case.

e) Is the minimum wage a subject for debate in your country?

Is there any debate on minimum wage and minimum income? Please indicate the main issues and policy implications that are debated in this respect.

See above 3.d. Furthermore the relationship between the minimum wage and the level of unemployment benefits has been discussed. Considering the political colour, some parties claim that the unemployment benefit is too high and that people might not be motivated to work if the difference in pay in relation to the minimum wage is insignificant. The other side focuses on the same difference but favours an increase in the minimum wages in order to avoid a growing share of ‘working poor’.

f) Do you have any data on the minimum wage in relation to average wages, how it interacts with the tax system and any effects it is having on employment?

No fixed data. There is no particular interaction between minimum wage and the tax system.

4. Wage formation within the IT sector

Please describe in detail the wage formation process in the IT sector in your country.

I Please give the main features of the sector

a) Importance of the sector in the economy

The internationally harmonised definition of ‘the IT sector’ is based on the international branch nomenclature, ISIC2, and is used in the following covering the Danish IT-sector.

The IT sector, or more correct the ICT sectors, i.e. IT-consultancy, Telecommunications, IT-wholesale and IT-industry, are important sectors in Danish economy. The joint IT sector produces an important part of the supply of goods and services to the Danish information society. The sectors that together form the IT-sector are different in nature and contribute with widely different products. The facts, figures and information in the following are put together from these sectors by Statistics Denmark in a publication called ‘Information Society Denmark’ (se www.dst.dk, and search).

26% of all research & development (R&D) in the private sector takes place in the IT sector.

It is estimated that the average collective bargaining coverage is 60% - spearheaded by the hardware sectors whereas the coverage within software and services is low.

b) % of the workforce in the sector

There are approx 96-97,000 full-equivalents employed in the sector, which is around 7% of the workforce in the private sector (corresponding to 4% of total workforce). The largest sub sector is IT-consultancy with around 35,000 employees. The share of employees with a university degree in the IT-sector is twice as high as in the private sector as a whole – 17.4% of the IT-employees in 2004 had a university degree.

c) Main pay-related characteristics, such as: low pay, differences in pay between men and women and/or older and young workers, wage drift;

II Describe the main characteristics of the sector pay decision process

a) Is the wage formation process in this sector shaped by institutions? If there is a collective bargaining process, how does it work? Eg:

  • at sector level only;
  • at sector level, which then provides a framework for company level;
  • at company level only

Who are the main actors?

Wage formation is shaped by collective bargaining at sectoral level, which then provides a framework for company level negotiations. IT-engineers that are members of IDA (below) have individual contracts in the private sector. Historically, employers’ associations under DA do not have collective agreements with academics/highly educated because they most often performed trusted managerial tasks in the companies. SMEs are dominant and there is a majority of individual employment contracts in the IT-consultancy sector.

The main actors are:

Employers: the Confederation of Danish Industries (Dansk Industri, DI)

Employees: the Union of Clerical and Commercial Employees (Handels og Kontorfunktionærernes Forbund, HK) HK has a special IT section; HK Samdata;

The Union of Danish Metalworkers (Dansk Metal);

The Danish Society of Engineers (Ingeniørforeningen i Danmark, IDA);

The National Insurance Workers' Association (Danske Forsikringsfunktionærers Landsforening, DFL);

The Association of Computer Professionals (Forbundet af IT professionelle, PROSA);

b) Specific issues : upward pressures on pay such as wage competition between firms, the effects of a tight labour market, and using pay as an attraction and retention tool, the effects of migration on pay, the effects of the presence of multi-national firms within a sector and whether comparisons have been made between the pay offered by multinationals and local companies

III Analysis on trends and views of the actors

a) Are there any major differences between this sector and the rest of the economy in terms of wage formation?

There are no major differences in the wage formation as such in this sector and the rest of the economy. It is mainly based on collective bargaining, and if not, wage formation in independent companies will take the collective agreements into consideration. IT-engineers work on individual contracts, but as mentioned, all with a university degree (highly educated) do not work under a collective agreement in the private sector signed by DA-associations (that covers around 85% of the organised employers).

Wages tended to be a little higher in the IT sector, in particular in the end of the 1990ies but since then the sector seemed to have experienced a mild regression. In the 1990ies companies used wages and fringe-benefits to attract the best employees. There are still special bottlenecks, in software production and system developing for instance. In general the employment fell slightly from 2001 where employment was 102,000 employees. From 2003 to 2005 employment increased to the same level as before and remained stable until the first quarter of 2008 when employment fell to 98,000 full-time equivalents.

The relatively young internet-based business has a reputation of ad-hoc wage formation mixed with more or less atypical fringe-benefits (as free coca-cola and pizza, a yearly collective ski-trip to Norway, etc.). Another kind of atypical pay is a widespread use of ‘employee shares and options’, which was characteristic for the optimism in the sector in the end of 1990ies. In 2000 a small Danish company, Giga, was bought by Intel for the equivalent of €1.4 billion (DKK 9.4 billion). All employees, from the receptionist to the managing director became millionaires.

Differences in actual pay are mostly based on performance and results.

b) Are there any noteworthy trends at company level, such as an increasing individualisation of pay setting?

The small, and often innovative, newcomers and entrepreneurs are characterised by individual pay setting. It is not in this part of the economy that the social partner organisations get most of their members. However, the majority of pay-setting takes place at sectoral level followed by individual negotiations in the companies, with or without the presence of the shop steward.

c) What are the main views of the social partners in this sector on wage formation?

Most unions do not have official wage statistics and do actually not discuss wage formation so much. The employers’ associations have not expressed particular opinions about wage formation in the sector. The principle of the market rules is widely known and accepted, especially in the large innovative/developing part of the IT-sector.

d) Are there any positions of the authorities on the sector’s wage policy ?

The authorities do not express a special point of view on the IT sector’s wage policy. Pay-setting is an issue for the organisations, companies and individuals in the labour market.

So far the overall wage policy in this sector has been guided by the supply-and-demand philosophy and practice.

5 Views of the national centre

Wage formation in Denmark is connected to collective bargaining or the result of individual contracts. It is not subject to legislation or left to be decided in tripartite committees as in other European countries. However, the most interesting issue in this regard is the minimum wage.

A number of factors gave emphasis to the question of a national minimum wage during the last collective bargaining rounds in 2008 (public) and 2007 (private). Among these were the issue of migration of large numbers of workers from Eastern Europe as a result of current labour shortages and also the rulings of the European Court of Justice on the right to take industrial action and to conclude closed shop agreements.

With the debate intensifying, the introduction of a fixed minimum wage got more likely. However, after amendments to the Danish law on posted workers, based on the EU-directive, this possibility has been postponed indefinitely.

Carsten Jørgensen, FAOS

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