EurWORK European Observatory of Working Life

Wage spillover

In industrial relations, wage spillover refers to the externalities (side effects) of wages or wage increases. These externalities can take several forms, such as positive or negative effects on employment and wage increases in other sectors or for other groups of workers, for example.

Research on wage spillover has focused largely on minimum wages and wages in the public sector. In the case of minimum wages, spillover can occur as a consequence of an increase in the relative price of low-skilled labour. This is because companies may increase the demand for more skilled labour or reorganise their production in order to adopt labour-saving technologies. In either case, the indirect effect is an increase in the wages of high-income workers. Moreover, the increase in minimum wages may also increase reservation wages for jobseekers, thereby leading to a generalised increase in wages throughout the economy.

Similarly, in the public sector, wage spillover takes place through several channels. Primarily, an increase in public sector wages may have a spillover effect on private sector wages, as it will encourage both unemployed persons and private sector employees to get a job in the public sector, therefore putting pressure on private sector wages.

Under the Economic and Monetary Union, wage developments in the euro zone countries are expected to have spillover effects in other countries. In the case of Germany, for example, it has been argued that the wage moderation policy pursued over the last decade has increased pressure on the other euro zone countries to reduce wage increase or cut real wages.

See also: coordination of collective bargaining cross-border trade union cooperation wage drift.

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