Low-wage jobs – an efficient tool to combat unemployment?

Low-wage jobs have been a focus of debate in six countries across Europe during 2016. However, the issues discussed have reflected differing national concerns. For some countries, the key issue is the integration of migrants into the labour market; for others, how to stimulate job creation and reduce unemployment.

Introduction

This topical update examines the debate around low-wage jobs during 2016 in six European countries (Germany, Hungary, Norway, Romania, Spain and Sweden), illustrating a variety of objectives, measures, debates and responses. While there are some similarities, each country’s discussion has followed a different path.

In Norway and Sweden, the context is mainly the labour inclusion of migrants and refugees. In Spain, the key issue is unemployment and other domestic labour market difficulties such as the recent salary devaluation associated with the economic crisis and, to some extent, the 2012 Labour Reform. In Romania, there has been controversy about recent increases in the minimum wage. In Hungary, a prominent topic of discussion is the public works programme initiative, which has been a major contributing factor to the significant increase in the number of low-wage jobs. The experience of Germany sets a precedent that has attracted much attention. Its labour market has been characterised by the flexibilisation of employment options introduced at the beginning of the 2000s, which favours low-wage jobs, such as the so-called mini-jobs. Germany’s introduction of a statutory national minimum wage in 2015 has also been presented as a way to contain low wages.

Low-wage jobs on the European agenda

Low-wage jobs have been recently put on the agenda in several countries across Europe as a means to combat unemployment. Some commentators have also suggested that they allow smoother integration of migrants – especially refugees.

The rationale behind these discussions is the principle that the most vulnerable members of the labour market need help to find employment. Because most countries have a shortage of jobs and a surplus of labour, employers have little incentive to invest in helping the most vulnerable workers (including the long-term unemployed and migrants) get a foothold in the labour market.

The refugee issue, as illustrated by the most recent crisis in Europe, has also sparked debate. For instance, in January 2016, the International Monetary Fund published a report, The refugee surge in Europe: Economic challenges (PDF) recommending that European countries introduce ‘temporary and limited derogations of the minimum wage for refugees’, as a ‘short-term differentiation between them and EU citizens’ to help them enter the labour market. It also suggested wage subsidies for companies that employed migrants. Some critics said such measures would create a group of 'second-class' workers.

A number of questions have been raised by recent discussions.

• Does the creation of low-wage jobs address both unemployment and the difficulties faced by vulnerable workers in entering the labour market?
• How can the risks linked to low-wage jobs, such as an increase in the numbers of the working poor and the creation of so-called second-class jobs, be avoided?
• Is it possible to make sure that workers can progress from low-wage jobs to better-paid work?

In many countries, the least-educated workers and those with less work experience face the greatest risk of being in low-paid jobs. An evidence review funded by the European Commission (PDF) found that workers in low-wage jobs are often young and/or female, have low levels of educational attainment and are more likely to be members of a disadvantaged ethnic minority or immigrant group. Part-time jobs and temporary jobs are also more likely than full-time or permanent jobs to be low paid.

Various policies and approaches could help low-paid workers progress to better-paid jobs. Particularly interesting is the possibility of a coordinated approach that takes into account the effects of and the relationship between education and skills policies, active labour market programmes, minimum wages, in-work benefits and bonuses/discounts for employers.

Overall, the low-wage jobs discussion interlinks with broader issues such as minimum wage policies and wage-setting processes, minimum income and workforce shortages.

Some recent debates across Europe

In some of the six countries, the issue of low wages is mainly linked to the influx of refugees and how to include them in the labour market. In others it is part of the discussion about the state of the whole national labour market, mostly as a result of difficulties caused by the recent economic crisis or the particular nature of a country’s labour market or economy. The table below provides an overview.

Low-wage jobs and labour market issues by country

Low-wage jobs as an integration tool

In Norway and Sweden, the most recent discussion on low-wage jobs is centred on migrants and in particular on the integration of refugees. In Sweden, the refugee crisis of 2015 sparked an intensive debate on integrating newly arrived migrants into the Swedish labour market. Many have said that high entry-level wages are a major barrier. One solution, mainly advocated by liberal political parties, is the creation of new forms of employment contract to offer a first job experience that includes occupational and language training and pays a little less than a regular job. Another proposal suggested by several employer organisations is the lowering of the existing entry-level wages, which in Sweden are regulated by collective agreements. Opponents argue that more low-wage jobs and/or lower entry-level wages would risk widening the income gap.

A government reshuffle in early 2016 put the Minister for Enterprise and Innovation, Mikael Damberg, in charge of creating so-called simple jobs. After many months of debate, Damberg put forward the government’s proposal for a new form of employment called ‘matching employment’. Companies will be able to hire workers, mainly the long-term unemployed, through temporary work agencies for a trial period. Agencies are interested in this because they would be given employment subsidies for their role in the matching process – directly employing the workers, ensuring skills training and offering practical and social support. They would also keep all revenues generated from hiring out the workers. For companies, the risk of hiring someone who has been out of work for some time is reduced. While it is not yet clear how much workers in this new type of employment would be paid, the minister has said that wages will be in line with sectoral collective agreements.

In Norway, one of the most controversial proposals put forward was launched at a meeting of the supervisory committee of the Liberal Party on 12 January 2016. A proposal to support suspension of minimum wage requirements (PDF) in collective agreements to increase the employment of refugees did not get enough support at the party’s annual congress the following week to be adopted as policy, but did trigger a debate that was covered widely in the Norwegian press. The proposal stated that employers should be able to hire refugees on wages below the collectively agreed minimum for the first two years of regular employment. This would also be possible in sectors in which extension of collective agreements currently entails a legally binding minimum wage.

Although Norway has no national statutory minimum wage, the collectively agreed minimum wage generally acts as a norm that is usually adhered to. In 2004, low-wage competition and social dumping as a result of the arrival of migrants from newly joined EU countries had already challenged this facet of the Norwegian model and in some industries the minimum wage clauses of collective agreements were made generally applicable. As a result, minimum wage clauses have been common in collective agreements for some years and have been made generally applicable by law. They set a legal minimum wage in companies not otherwise bound by the collective agreement.

Low-wage jobs as a tool to combat unemployment

The ‘public works’ programme in Hungary

In Hungary, the overall economic goal of recent governments has been to create employment through the development of public works schemes.

Public work schemes were first launched in the early 1990s to provide work for the large numbers of unskilled workers who had lost their jobs during the transition to the market economy. In recent years, the number of workers engaged in these schemes has significantly increased. Their wages fall short not only of the average wage but also the national minimum wage. The current government has recently launched several public works programmes aimed at helping the unemployed move from these programmes to the regular labour market.

A programme, From Public Works to Competitive Sector, was launched on 1 February 2016, with a focus on the long-term unemployed. It is meant to motivate workers to leave the scheme and take a job in the labour market which, although likely to be low paid, will still be better paid than public works posts.

In July 2016, the government introduced a new initiative, the Pilot Public Works Programme. It is aimed at those disadvantaged people unable to find a job in either the primary labour market or in public works programmes due to their mental, social or health problems. Following the amendment of the relevant government regulation that covers this special programme, workers receive HUF 41,556 (approximately €135) a month if they work six hours a day, and those with a higher qualification are paid HUF 53,277 (approximately €173).

Low-wage jobs as a tool to protect employment

Spain: Crisis and salary reduction possibilities

In Spain, where the labour market was affected by severe salary devaluation after the economic crisis, flexibility measures were introduced. The 2012 Labour Market Reform (introduced by the Spanish government without the agreement of social partners) set out a framework for efficient management of labour relations, employment creation and employment stability at a time when unemployment had risen dramatically.

To increase companies’ internal flexibility, the reform made it possible for employers to change working conditions without seeking agreement, exceeding the minimum requirements of the relevant collective agreement. It also made temporary modifications to pay possible.

Romania: Minimum wage

There has been considerable debate in Romania about recent minimum wage increases and how they will affect unemployment and informal work. The minimum monthly wage in Romania in 2016 was RON 1,050 (around €233) and increased to RON 1,250 (approximately €277) in early May 2016. The government proposes to increase the monthly minimum wage to RON 1,450 (around €322) at the beginning of 2017, and impose an annual increase of RON 200 (€45) until 2020. There has also been much discussion about the introduction of a minimum wage adjustment mechanism, which would be linked to productivity or economic growth.

Costs beyond wages

On the other hand, some national governments have taken action on employment costs beyond wages, currently a key focus of discussion across Europe (Eurofound, forthcoming).

In Hungary, in order to reduce labour costs, the government introduced a flat rate taxation system between 2010 and 2013 and then, in January 2016, reduced personal income tax by 1% (PDF) (from 16% to 15%). These measures have increased net pay for all workers even if their wages have remained low or increased only slightly.

The Spanish Ministry of Employment offers social security bonuses and reductions (PDF) to companies that hire certain categories of workers. The list of available measures in Spain (basically subsidised employment contracts) is very extensive, and the amount and duration of reductions in social security contributions offered as a means to reduce unemployment vary depending on the type of employee recruited.

In Romania, Law 76/2002 (on the unemployment insurance system and stimulation of employment) included measures designed to enhance the creation of new jobs. The law introduced employment subsidies as an incentive to employers, and especially small and medium-sized enterprises (SMEs), to generate jobs. Measures approved include subsidising employer social security contributions for companies who hire workers who have been unemployed for at least six months, and a programme called Supporting Disadvantaged Groups into Jobs which includes subsidies for both younger and older workers.

The Romanian government also decided to cut employers’ social security contributions by five percentage points in 2014. At present, a proposal to cut social security contributions by 2% for employers and by 3% for employees is being discussed.

A well-known precedent: German labour market reforms in the 2000s

The low wages issue in Germany focuses particularly on the introduction of flexibility measures affecting the whole labour market through the Schroeder administration reforms introduced in 2003. Apart from transforming the unemployment and social welfare system and deregulating temporary agency work, the Schroeder administration also eased marginal employment options with the introduction of the concept of mini-jobs.

Mini-jobbers could earn a maximum of €400 per month and be exempt from contributions to statutory unemployment, health and long-term care insurance, while their employers paid social contributions at a reduced rate. Mini-jobbers earning between €400.01 and €800 per month paid social security contributions on a sliding scale in line with income. Since 2003, the rules have been changed several times; for example, the earnings threshold for mini-jobbers in 2016 was €450 per month.

Objective and discussion

At the beginning of the 2000s, former Social Democrat chancellor Gerhard Schroeder believed that low-wage jobs could reduce unemployment by creating additional jobs, mostly for less advantaged labour market groups. The reforms introduced under his leadership freed the German labour market from some of its rigid regulation.

The current Federal Labour Minister (Andrea Nahles, Social Democratic Party, who took office in 2013) made it a priority to introduce a minimum wage to avoid ‘irresponsibly low wages’; in 2015 a national minimum wage of €8.50 an hour was introduced. The minister said that ’low-wage jobs needed to be contained’ and that all workers should enjoy some benefit from economic growth and receive fair pay for their work.

Outcomes of the German experience

Several studies have analysed the German reforms and identified various positive outcomes.

Labour data show that, since the introduction of the Schroeder reforms, unemployment has been falling (PDF). Apart from a comparatively small increase in the crisis year of 2009, unemployment figures dropped sharply after 2005. By 2013, unemployment had fallen to just over 2.9 million, while in 2015 only around 2.7 million people were registered as unemployed. But according to a 2014 report (PDF) from the Cologne Institute for Economic Research, the share of employees of working age in standard employment has not changed greatly over the years, being 43% in 1998, 41% in 2004 and 45% in 2012, while the proportion of non-standard employment (such as low-wage jobs) rose from 10% in 1998 to 11% in 2004 and up to 15% in 2012. However, the share of the inactive population decreased significantly between 2004 (36%) and 2012 (27%). A 2011 report from the same institute points out that non-standard employment has not replaced standard employment, but has created additional jobs.

Moreover, using data from the Socio-Economic-Panel (SOEP) the Cologne Institute for Economic Research-has been able to show that status changes (from employment to unemployment) for dependent employees are relatively uncommon (PDF). Taking the years 2005 to 2012, some 91.4% of employees were still in employment in the following year; only 3.2% became unemployed within one year. However, only 53.9% of the unemployed were still registered as unemployed one year later: when unemployed persons changed their status, they mostly did so by entering dependent employment (28.8%). A low-wage job was the means of entry to the labour market for 57.5% of the long-term unemployed and 50.1% of all other unemployed. Most interestingly, 43.4% of the long-term unemployed and over 60% of all other unemployed took up full-time employment. While these figures clearly demonstrate that particularly the long-term unemployed are not so easily reintegrated into the regular labour market, low-wage and non-standard forms of employment do provide a pathway towards it for them.

All in all, research shows that low-wage jobs are created in addition to standard employment and serve as a stepping stone either to the regular labour market or to higher-wage jobs (PDF). Moreover, analysis using SOEP data for 1994–2009 shows that low-wage jobs reduce the risk of poverty; 57% of those threatened by poverty before entering a low-wage job no longer belonged to this category after entering the low-wage sector. Only 6.4% of those who were above the poverty line before entering a low-wage job fell below the line after taking up such a job.

Ongoing discussions

The Institute for Employment Research (IAB) has studied the effects of the newly introduced statutory minimum wage (PDF) in Germany. The research indicates that due to the flourishing economy, companies have for the most part not resorted to dismissing workers. However, in response to the minimum wage and the ensuing higher labour costs, more than 25% of companies plan to or have already increased their service or product prices. Nearly 16% have or will put restraints on hiring new employees and over 22% may shorten working hours or increase work intensity.

Overall, employers and workers’ representatives disagree in their assessments of the German labour reforms.

Trade unions criticise Schroeder’s reforms and continue to question the quality of the jobs they created. They fear low-wage employment is gradually replacing standard employment, driving workers into precarious jobs and heightening their risk of falling into poverty. The German Confederation of Trade Unions (DGB) insists that workers in low-wage employment need to be protected and has launched several campaigns: one calls for decent work; another for equal pay not only for women but also for temporary agency workers; and a third for the implementation of a statutory minimum wage.

Employers, however, argue that low-wage jobs and other flexible employment options are needed to improve employment opportunities for the less fortunate. As companies can only afford to pay wages in line with labour productivity, low-wage employment and flexible working contracts can help such groups enter the labour market.

Outcomes of low-wage job measures

Norway and Sweden

In both Norway and Sweden, no initiatives to promote low-wage jobs among refugees have been implemented and so outcomes cannot be discussed. Despite intense debate, the idea of low wages has gained little traction, probably because of the strong resistance of the social partners to State involvement in the traditional wage setting model.

The Norwegian Liberal Party’s proposal to allow employers to hire refugees on wages below the collectively agreed minimum for their first two years of regular employment sparked considerable debate within and outside the party. Trade unions, especially the Norwegian Confederation of Trade Unions (LO), fiercely criticised the idea. Interestingly, LO’s position was fully supported by the largest employer organisation, the Confederation of Norwegian Enterprise (NHO). NHO Director Stein Oppegaard said the proposal would ‘undermine the wage setting system and create large unintended consequences for the economy’.

In Sweden, current proposals from the Social Democrat–Green Party coalition are unlikely to result in wages below those stipulated in collective agreements, despite the many advocates of such a solution – mainly employers, employer organisations and liberal political parties. However, the debate in Sweden continues and is likely to remain a key issue for a long time.

Spain: 2012 Labour Reform and wage flexibility

In Spain, several studies and research have tried to evaluate the impact of the 2012 Labour Reform. The reform has increased flexibility in salary and work organisation, leaving more room for negotiation at company level and avoiding dismissals. At the same time, either salary or working hours have tended to deteriorate, particularly for workers who have had to change jobs.

A report published by the Savings Bank Foundation (FUNCAS) analysed salary changes between 2008 and 2013, comparing the data of the ‘stayers’ (those who stayed in the same job during that time) and the ‘movers’ (those who changed jobs). Data show that salaries decreased much more among the movers (a 17% reduction) than among the stayers (1.6%). However, stayers’ income dropped rapidly from 2012 onwards, with a 5% reduction in only two years. This suggests that the Labour Reform has also made salary flexibility possible within workplaces.

Hungary: Mixed results from public works schemes

There are some contradictory aspects of public works schemes in Hungary.

Public works programmes could be considered useful. According to the Central Statistics Office (KSH), almost 192,000 people worked in public works programmes on average in 2015 and this contributed to some reduction in unemployment.

However, the Ministry of National Economy acknowledges that only between 11% and 13% of workers from these schemes were integrated into the primary labour market in recent years. There appears to be a risk that participants will be stuck in these schemes for years. Several experts have suggested that many could only be effectively integrated into the competitive labour market after appropriate training. Moreover, it has also been argued that, in practice, public work programmes are a sham measure that distorts employment figures.

While recent employment trends in Hungary have been undoubtedly positive, overall wage levels have remained relatively low. As a consequence, increasing numbers of workers have left the country to look for better paid work elsewhere and this has already led to serious labour shortage in some sectors. Several experts suggest that the increasing labour shortage is one of the barriers to economic growth in Hungary. Péter Vakhal of business research institute Kopint-Tárki has said that increased wages could prevent worker migration without damaging the labour market, but this would affect competitiveness.

Romania: Measures for reducing unemployment and minimum wages

The situation in Romania is complex. Employment-generation measures such as hiring subsidies have already been implemented and the National Institute for Labour and Social Protection has investigated their potential impact. An assessment of the period 2014–2015 showed that active labour market measures had a positive and durable impact, encouraging employment that had been maintained after the completion of the period required for an employer to qualify for a hiring subsidy.

A well-designed statutory minimum wage could help low-wage workers in Romania without a negative effect on employment, However, such legislation could increase labour costs for companies. Many workers, particularly those with low productivity such as the young and low-skilled, would face difficulty finding a formal job and would either become unemployed or resort to the informal labour market. A recent study has supported the hypothesis that a rise in the minimum wage will encourage people to leave the official sector and do undeclared work. Researchers say that, in Romania, a minimum wage can be regarded as a long-term supporting factor for the shadow economy and would mainly trap the vulnerable groups that the minimum wage is supposed to help (Davidescu and Schneider, 2016).

The mechanism for setting of the national minimum wage has also been criticised for being not wholly transparent – it seems to be based more on hidden electoral interests. Increases have had only slight connections with economic growth and labour market performance.

Social partners’ points of view

Contrasting views from unions and employers

Trade unions tend to be more critical of low-wage jobs, as they question the quality of the jobs created and whether they could lead to precarious employment and profound income inequality. In contrast, employers are more likely to be in favour of low-wage jobs, arguing that they create a pathway into work for disadvantaged groups that find it difficult to enter the labour market.

This is reflected in Sweden where the Confederation of Swedish Enterprise (Svenskt Näringsliv) says that, while there are efficient methods in place for finding positions for migrant with an academic education, it is harder for those with little or no education. Lower wages for certain groups and ‘simpler jobs’ would create stepping stones into the labour market for these groups. Yet a recent report from the Swedish union confederation LO showed that a high number of ‘simple jobs’ is negatively correlated with labour market participation and skills. LO primarily promotes education-focused efforts to improve the employability of vulnerable groups. However, the report and its conclusions have been criticised by several organisations, which argue that any job is better than no job.

Similarly, Hungarian trade unions campaign against in-work poverty and say that no worker should earn less than subsistence level. The Hungarian Trade Union Confederation (MaSZSZ) launched its Programme Against In-work Poverty in September 2014. MaSZSZ proposed a tripartite agreement between the government, national trade unions and employer organisations on the elimination of in-work poverty. The term of the agreement was to be from 2015 to 2018 and the ultimate goal was to raise the net level of the minimum wage by 47.7%. Although this proposal has been repeated every year in the framework of tripartite discussions, neither the government nor employer organisations have ever supported it.

Hungarian employers have expressed concerns about economic stability and competitiveness, and generally show interest in keeping wages low. Nevertheless, some employers argue that there is a need to increase pay. The National Association of Entrepreneurs and Employers (VOSZ) has said that, if employers want to keep their qualified workers, they should raise wages. VOSZ has asked the government to intervene by easing the tax burden on wages. The Confederation of Hungarian Employers and Industrialists (MGYOSZ) proposes raising real wages to reflect the income-generating ability of businesses through negotiation rather than legislation and based on employers’ decisions. MGYOSZ argues that there is an overall need to reduce taxes and other burdens levied on companies.

The positions of the social partners in Spain reflect a division along the same lines. Employers support the idea of promoting salary restraint to increase competitiveness; they consider that nowadays any deterioration in Spanish competitiveness could harm the country’s overall economic recovery. Also, employer representatives value highly the flexibility introduced by the 2012 Labour Reform (PDF). The trade unions are strongly critical of the reform which they say is damaging the Spanish labour market, increasing precarious work and worsening living conditions.

The General Workers’ Union (UGT) said in 2015 that it believed the 2012 Labour Reform had led to the devaluation of salaries. It added that salary devaluation together with employment precariousness, reflected in higher rates of fixed-term and part-time employment, had reduced income and was causing significant inequalities and higher poverty rates. Moreover, a report on salary devaluation (PDF) published by the Trade Union Confederation of Workers’ Commissions (CCOO) said that families’ purchasing power must be increased to create increased demand and promote economic recovery.

Finally, in Romania, there is a debate between trade unions, the Ministry of Labour and employers’ representatives about increases in the minimum wage, particularly the proposal to increase it by RON 200 (€45) per year until 2020. Trade unions support the proposal. The National Trade Union Bloc considers that the minimum wage needs to pass the threshold of RON 1,250 (€288) for two key reasons: (1) at the current level, it does not cover the bare minimum of need (the value of the basket of essential items is somewhere around RON 1,480 net – €342); and (2) if a proposed new minimum inclusion income is approved and implemented from April 2018, the net value of the minimum wage will still be lower than this minimum. The result would be a disincentive to work. The National Council of Small and Medium Sized Private Enterprises, CNIPMMR), however, believes that it is important to have a correlation between labour productivity in the private sector, public sector salaries and the minimum wage. From its point of view, an increase in the minimum wage will increase the product and service prices and may increase unemployment levels as many employers will not be able to pay higher salaries.

Joint position defending social partners’ autonomy

The discussion on low-wage jobs goes beyond direct salary implications. In some countries such as Norway and Sweden, social partners are generally keen to avoid State involvement in a traditional wage setting model based on bipartite negotiation.

In Norway, the notion of suspending collective agreements to offer a lower entry wage for refugees proved highly unpopular, not only among trade unions but also among employer organisations. An influential government-appointed expert committee, made up of top representatives from the social partners (four representatives for both unions and employers) published a report on wage setting mechanisms (PDF) in September 2016. It concludes that lowering wages does not necessarily lead to better labour market integration, and can instead foster dependence on social benefit, lead to the exploitation of workers and increase economic inequality. Lowering wages for refugees would therefore be a breach of the Norwegian model that has in recent decades provided high employment and productivity. The committee argues for an increased use of measures that promote the employment of marginalised groups, including wage subsidies, work experience programmes and measures that combine education and work.

However, employer confederations NHO, Virke and Spekter argue that the refugee crisis has made a national statutory minimum wage more likely because it could secure decent pay for immigrants.

Commentary

Countries have discussed low-wage jobs for various reasons, underlining various key features and challenges currently at stake in European labour markets.

Particularly in Norway and Sweden, low-wage jobs have been proposed as a tool to smooth the integration of migrants and particularly refugees. The main objective is to create paths allowing the inclusion of migrants through work and employment. Here the main issue is to create opportunities for individuals to get to work so that they can share the values and benefits of the European social model which are mainly linked to the employment relationship. For employers, the objective is to reduce the labour costs of workers who, for one reason or another, are not likely to be fully productive at the start of their employment. The main criticisms have been the risk of creating an inferior class of work and workers, increased labour market segregation and the lack of support to help these workers transition into the primary labour market. The proposals were also strongly criticised for focusing on wages that had not been agreed through the autonomous collective bargaining setting process, inducing discussions on the respective roles of public authorities/government and social partners.

Low wages are a more general issue in other countries, mainly the newer EU Member States. They are presented as offering a competitive advantage in some central and eastern European countries, as ongoing discussions around the regulation of posted workers show. In these countries, the issue of unemployment (as in Hungary) is mixed with that of the minimum income/wage (as in Romania). While the creation of low-wage jobs could create more jobs, they exacerbate the issue of low pay and in-work poverty. The extension of wage flexibility, as in Spain, leads to mixed outcomes; it makes a start on reducing unemployment but also leaves some workers in poverty.

In Germany, the recent adoption of a statutory minimum wage has been presented as a tool to contain low-wage trends and avoid what the Labour Minister has described as ‘irresponsibly low wages’.

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