A European system of minimum wages for equality-led development

By Ozlem Onaran

A European system of minimum wages can help bring people out of poverty as well as contribute to equality, higher productivity and healthier public sector budgets.

Establishing a sufficiently high statutory minimum wage is one of the most effective policy tools to tackle the worrisome growth of in-work poverty. Evidence shows that robust minimum wages can substantially reduce inequality. the International Labour Organisation (ILO), among others has been vocal on this. Our recent Foundation for European Progressive Studies- Greenwich Political Economy Research Centre (FEPS-GPERC) research shows that minimum wages are also very effective in increasing the share of wages as a proportion of national income and this effect is relevant for workers of all skill groups and across service and manufacturing sectors alike. It is also a key policy to decrease the high gender pay gaps.
A rise in minimum wages not only reduces people’s reliance on benefits or debt but also improve demand and growth in a wage-led economy such as Europe. Low-income earners would spend a higher proportion of their income and this would lead to positive effects on growth and investment in each European country, in particular where policies to increase wages are coordinated as shown in our recent FEPS-GPERC-TASC-ECLM research. These policies include improving trade union legislation, collective bargaining coverage, equal pay legislation, public spending in social infrastructure as well as increasing minimum wages to give a boost to the wage share in each EU Member State.
At the EU level, minimum wages can also be used as a tool for convergence, with nation-specific minimum rates defined in relation to the median wage of each country, in a fashion similar to the one elaborated by Schulten and Watt already in 2007. Such a policy should be further embedded within a broader wage coordination policy in order to achieve an upward convergence in wages to support socio-economic cohesion.

Living wage strategy needed
Over the medium term we need a strategy to make the statutory minimum wage a living wage through gradual increases in minimum wages. After each increase, the employment effects can be assessed before proceeding with further increases. Once the living wage level has been attained, increases beyond this could then be tied both to inflation and average labour productivity, as described by Pollin. In the transition period of gradual adjustments leading to the statutory minimum wage, living wage rates should be used within public sector organisations and should be imposed on private firms working as contractors or suppliers to the public sector. Even after the convergence of the national minimum wage to a living wage, local authorities should then be able to set their own living wage norms at levels higher than the national statutory minimum wage given that local costs of living differ.

Positive effects of minimum wages
Studies on the effects of minimum wages show that there no significant evidence of a negative association between minimum wages and employment. For the UK case, minimum wages reduced inequality without any significant negative effects on employment. In Germany, the introduction of a minimum wage of €8.50 in January 2015 (now increased to €8.84), actually translated into a contraction of unemployment and youth unemployment. The myth about the negative effects of minimum wages on youth employment was also discredited by a research on the fast food industry, a major employer of young workers, where minimum wages indeed led to more and not less youth employment in the US. In fact, raising the minimum wage can also increase labour force participation rates, as better-paid employment becomes attractive.
The positive effects of minimum wages however, are not to be found only on the quantity of work, but crucially, on its quality. Higher minimum wage reduces turnover among workers and creates employment stability for low-wage workers, which in turn helps firms to increase their productivity. Furthermore, they are found to enhance employees’ general wellbeing at work and work-life balance, and to contribute to improvements in workplace atmosphere. It is not by chance that a survey carried out by the Greater London Authority finds that 80% of employers believe that the living wage has enhanced the quality of work.
To sum up, a coordinated policy of European minimum wages is a win-win case for achieving equitable development, convergence, higher productivity and healthy public sector budgets.

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