00:00:01 Intro
00:00:37 Mary McCaughey
Hello everyone, and welcome to this edition of Eurofound Talks. Today, Eurofound talks minimum wage. As the EU economy advanced in its recovery following the pandemic, the high rate of inflation throughout 2022 and 2023, due to the other external factors such as Russia’s aggression in Ukraine, meant that the wage-setting actors made their decisions largely under a cloud of uncertainty and insecurity. So while nominal increases in minimum wages did reach an all-time high, the impacts of these policies on the pockets of workers – and the general public on the streets throughout Europe have been very much more complicated. At the same time, the EU sought to improve the situation of low-wage earners through its Directive on adequate minimum wages. And this is what we’re going to talk about today, trying to look at the impact of minimum wages at this time in our development in society and with all the different drivers at play, but also looking at compliance with the minimum wage and how that’s playing out. We are very fortunate to have with us experts in this area where Eurofound has done an awful lot of research over many years. One of them is Christine Aumayr-Pintar. Welcome, Christine. And Carlos Vacas-Soriano, who is also an expert in this area. So welcome to you both.
00:02:05 Christine Aumayr-Pintar
Thank you.
00:02:06 Carlos Vacas-Soriano
Thank you so much.
00:02:07 Mary McCaughey
So today we’re going to start, Christine, like we usually do, really just setting the scene and getting a broad picture of what we’re talking about. So if we’re looking at minimum-wage coverage in Europe, how many Member States are actually covered by a national minimum wage? And what proportion of the working population in Europe earns in and around that minimum wage?
00:02:30 Christine Aumayr-Pintar
Thank you, Mary. So this year, for the first time, we can say that 22 out of 27 Member States are covered by a national minimum wage, because as of 1 January 2023, Cyprus has joined the club of having introduced a universally covering statutory minimum wage. And if you ask about what percentage of the workforce is covered, I think we could do a whole day filling a technical podcast about that with Carlos, explaining why it is so difficult to measure that. But according to the latest data that we have, which is based on 2019 incomes, we estimate that around 4% of the working population in the EU earns around the minimum wage.
00:03:16 Mary McCaughey
OK. And just to be clear on that, that means that 22 of 27 are covered; 5 are not covered. What about them?
00:03:16 Christine Aumayr-Pintar
So they are not covered by a national universal wage, but in those remaining Member States, we have collectively agreed minimums at sectoral level. So that’s Austria, Sweden, Italy, Denmark and Finland, and they continue to have the minimum pay for workers set in very widely covering sector-related collective agreements.
00:03:51 Mary McCaughey
And having some kind of minimum wage requirement is a requirement.
00:03:54 Christine Aumayr-Pintar
Exactly.
00:03:55 Mary McCaughey
And in terms of what I talked about earlier – the minimum wages and how they changed in 2023 – what were the main driving forces behind this?
00:04:06 Christine Aumayr-Pintar
So we have two main drivers, I would say. The first one you already mentioned in your introduction: it’s clearly the high level of inflation that we saw. Consumer prices went up, and also in many countries last year, minimum-wage setters did take this into account – albeit not everywhere to the extent that workers really saw the value – the purchasing power – of their minimum wages preserved.
The second main driver for larger increases was certainly the Minimum Wage Directive. This has a pull factor on minimum wages, and it will increase further as we go along. When I say that, I’m now referring and looking back to what happened until 1 January 2023, because this is as far back as our latest report covers. And when we gathered the data at around this time last year, we found that quite often, the increases that we saw were not really large enough to keep pace with inflation. So we had about a third of Member States where workers lost purchasing power – the real value of their wages – because the increases were not keeping up with inflation. We had another third of countries that kept it stable, and we had a third of countries where there was a positive increase.
And now, as we’re sitting here at this time of the year, in December, it’s another very exciting moment, because this is really the time when most Member States have already set their national rates for the next year, although some are still in the process of negotiating. And we will see the outcome very soon. But we already have data now for 2024, and what we can see is that the tides seem to be turning again, which I would say is relatively good news.
00:06:02 Mary McCaughey
What does that mean in practice then, Christine?
00:06:05 Christine Aumayr-Pintar
So in practice, we see that for 14 out of the 22 with a national minimum wage, there was a real increase again in minimum wages, not only compared to the last year, but also if you look at the time when inflation started to grow. And this again, I would relate to both factors. On the one hand, trying to compensate workers for the loss of purchasing power due to inflation, and on the other hand, as an early effect of the Directive, because it has not been transposed yet; Member States have another year to do that. Next year, we will see the further impact, but I think we can already see a pull effect coming from the Directive as well.
00:06:52 Mary McCaughey
So that’s positive news in terms of how that’s playing out across these countries. But just to go back to what we talked about – these other five countries where there is a ‘collectively agreed minimum wage’, if you like – does that apply to them in the same way?
00:07:06 Christine Aumayr-Pintar
The requirement is there that Member States should make sure that workers are protected by adequate wage floors. But the countries with collectively agreed minima have a different set of articles in the Directive that will apply to them. So they are not bound by the same set of criteria as the countries with statutory minimum wages have.
0:07:29 Mary McCaughey
And are we seeing the same turning of the tide for those countries as we are for the others?
00:07:33 Christine Aumayr-Pintar
I cannot say that yet, because we have not started to look into all these collective agreements. It is a very tedious job to gather this information. It’s much easier to go for that one rate that exists in the country. But we will do so in the forthcoming report, for sure.
00:07:52 Mary McCaughey
OK, because that is interesting in itself.
00:07:55 Christine Aumayr-Pintar
Yes. But what I can say about these countries is that we did a similar exercise last year. We looked at about 10 low-pay agreements from each of these countries, which we are following over time. We saw that at the time, they did have a lower increase and were slower to react to the changing environment with inflation. This is natural, because if many actors are negotiating, it takes them longer to come to an agreement then if there is one actor setting the statutory minimum.
00:08:30 Mary McCaughey
So bottom-up is slower than top-down in this case.
00:08:33 Christine Aumayr-Pintar
Exactly. Or a fragmented process based on many actors is also slower, but this doesn’t mean that it is not a normative finding. It’s just the way it is with overall collective bargaining, which can then also …
00:08:46 Mary McCaughey
No, absolutely. No judgement. It’s just a question of the situation as it stands. But in terms of what you were talking about there – those who lost purchasing power, those who are stable, and of course some who have seen an increase. But are the workers actually benefiting from that minimum-wage increase?
00:09:06 Christine Aumayr-Pintar
Well, if you look at the larger increases that will be given over the next year, I’m sure this is good news for them, and it is certainly better than nothing. But we will obviously always have to look at what it means for the workers in net terms. And when I say net terms, we are looking at the development of the gross minimum wage. What you take home depends on taxation …
00:09:35 Mary McCaughey
… any other benefits that are available, etc.
00:09:37 Christine Aumayr-Pintar
Exactly. Several countries have opted not to tax minimum-wage workers too strongly. But the question in an inflationary environment is also to what extent these tax or social security thresholds shift when you have a nominal increase in your minimum wage. What also came up as a topic in several countries was that in the context of inflation, countries realise that they also have to increase the tax threshold under which you do not have to pay such contributions. So again, you know that the increase in the gross wage is also felt in people’s pockets.
00:10:14 Mary McCaughey
And have we done work on that, Christine – related to how that threshold changes?
00:10:20 Christine Aumayr-Pintar
Not systematically, I would say, but we do have examples of such policies, both in the minimum wage report and in EU PolicyWatch on our website.
00:10:29 Mary McCaughey
In the database, yes. The PolicyWatch database was created during the COVID-19 pandemic to look at the kind of initiatives and measures that were put in place by social partners and governments to offset the worst effects of the pandemic. Of course, it has now been extended to take on other issues, such as the cost-of-living crisis and the impact of the war in Ukraine.
But just to come back to this on how effective the minimum wages are. We see that they’re likely – at least or you’re seeing some sign – that they are beginning to have an effect on how workers are able to offset the cost-of-living issues. But in terms of reducing income inequality, is it too big an ask to think that by raising the minimum wage, we will actually go some way to addressing that?
00:11:16 Christine Aumayr-Pintar
I think this is a very big question, because obviously wages are just one part of people’s income, and you need to look at other components of income as well if you want to answer this question. So we have to ask ourselves to what extent minimum-wage changes reduce wage inequality, and then to what extent wage inequality reduces income inequality.
For the first question, we know that minimum wages can indeed reduce wage inequality, but usually only up to a certain amount of the wage distribution. It typically reduces inequality in the bottom half of the wage distribution – that’s what you’ll find throughout several empirical studies. But then if you look at the overall wage distribution, obviously the question also depends on what happens to higher wages. So if higher wages outpace the growth of minimum wages, you will again see increasing wage inequality, and the minimum-wage changes will not have a big impact on how the highest wages develop.
In terms of income inequality, I think this is also something where Carlos has done quite a bit of research and looked into that question in depth. So the question is: is income inequality actually driven by wage inequality, or do other factors also influence income inequality? And Carlos has showed that after the Great Recession, income inequality was actually driven to a much greater extent by changes in unemployment. Income inequality increased simply because many people were losing their jobs. And many people were losing jobs.
00:13:06 Mary McCaughey
Do you want to add to that, Carlos, in terms of the inequality?
00:13:10 Carlos Vacas-Soriano
Yes. Because for example, in this minimum-wage debate, when we think about people that may be getting the minimum wage, minimum-wage earners, I think it is a good thing that if you improve the wage of a minimum-wage earner, then the economic situation of their household will improve a lot. But the reality in Europe, as Christine said, is that people earning the minimum wage in many cases don’t belong to a household that is considered poor for example. The main reason why a household is considered poor – at least in Europe, it may be a little bit different in the United States, for example – is not low wages, but the fact that many members of the household are out of employment. So the link between improving the minimum wage and expecting to reduce poverty as a result, is much weaker than what people may think.
00:14:12 Mary McCaughey
But that situation would be improved greatly by full employment of the kind that we have across Europe at the moment.
00:14:22 Carlos Vacas-Soriano
Yes. You would expect of course, as Christine said, that improving employment levels will have a very strong effect in reducing income inequality, probably much more than wage improvements.
00:14:36 Mary McCaughey
So it’s seeing these two elements going hand in hand in fact as we move forward. This brings me nicely onto the next question. It’s one thing to have a minimum wage in place and that to have these requirements, whether it’s collectively agreed or a national implementation, but what about compliance? Is there a compliance rate? And if there is, how does that feed into the decision-making around minimum wages?
00:15:11 Carlos Vacas-Soriano
This is the topic of non-compliance. The first thing to say is that there is not a lot of data available on this issue. We have just completed a report at Eurofound in which we tried to calculate it. The important thing to bear in mind is that we are not provided with data on non-compliance directly from national institutions that deal with enforcement of minimum-wage regulations, which is typically the labour inspectorates. It’s hardly the case that countries gather this data and make it public.
00:15:44 Mary McCaughey
You mean they gather the data but they keep it?
00:15:46 Carlos Vacas-Soriano
Most countries don’t even gather it. This is because in most cases, they cover this issue of minimum-wage regulation together with a lot of labour law violations. So it’s not so easy to get direct data on non-compliance with minimum-wage rules. We estimate non-compliance indirectly. We use survey data, but the people interviewed in these surveys don’t get asked whether they are receiving a wage that is below the minimum. So we have to use statistical analysis to indirectly try to estimate it. What we do know is the minimum wage level in a certain country. Then thanks to these surveys, we know more or less what wage a certain person is earning per month. We can then compare both magnitudes. Then we see whether an employee’s wage is below, above, or close to this minimum wage level. This way, we can estimate whether somebody is below the minimum wage level in a certain country, and how far below. And we can estimate the rate of non-compliance.
00:17:19 Mary McCaughey
But Carlos, there’s a directive on adequate minimum wages in place. And this is being implemented across at least 22 of them in that way, and then otherwise in the other 5. How is it possible that there isn’t a requirement in parallel to have these kind of compliance figures available?
00:17:39 Carlos Vacas-Soriano
I think that’s in the Directive. In fact, that’s one of the areas where I think the Directive is making the effort to put out the message to European countries that there has to be an effort to monitor compliance. So it’s true that it’s a topic that perhaps has not received so much attention in the past. But with this Minimum Wage Directive, that’s perhaps starting to change, and it’s getting impetus from the European Commission to place more importance on this policy area.
00:18:19 Mary McCaughey
Because it also would provide an indicator of the success or otherwise of this rollout.
00:18:23 Carlos Vacas-Soriano
Yes.
00:18:24 Mary McCaughey
But in terms of what you know and what you’ve seen from the data that you’ve been able to source and calculate, what are we talking about in terms of an overall rate of non-compliance?
00:18:36 Carlos Vacas-Soriano
To give you the numbers straight away, we have two main sources of data. According to one of them, when we take the European Union as a whole, less than 7% of employees are in that situation of non-compliance. According to the second source that we have, it is much less, under 2%. So I think with this data, we can say that it doesn’t seem to be a widespread phenomenon, but doesn’t mean it’s not relevant, especially when we look at certain countries, sectors or population groups.
00:19:19 Mary McCaughey
And, of course, it’s relevant to those who are not receiving it.
00:19:21 Carlos Vacas-Soriano
Exactly. So for example, if we look at country-level data, there are some countries that have above-average rates of non-compliance in both data sources that we have. These include Hungary, Cyprus, Germany and Spain. Then there are other countries with below-average levels of non-compliance, such as Belgium, Finland and Slovakia. The rest of the countries may show a bit higher in one source and a bit lower in the other. I think it’s important to emphasise that, as I told you, we have two main data sources for these calculations, and both have some limitations in the data and the way we can build these wage variables. We should take these numbers not like a precise estimation of non-compliance, but rather as an approximation, where it may flag in some cases that there is a higher risk of non-compliance. So it should be taken more as an approximation.
00:20:29 Mary McCaughey
And when you see those figures, and particularly if you’re looking at those that have a higher than average rate of non-compliance – Spain, or Italy, I think was another one that you mentioned there – are we seeing far beyond the average, or are we still in a relatively good place?
00:20:48 Carlos Vacas-Soriano
I don’t recall the exact numbers, but for example, for the EU as a whole, according to one of the sources, it’s 7%. So in some countries, it may be around 10%, 11% or 12% at most, and for those below the average, it may be like around 4%. In the other data set, as I told you, the below-average rate may range from around 2% up to 6%, below 1% in others.
00:21:16 Mary McCaughey
And in terms of what we’re seeing as a particular issue that’s prevalent in these countries that have higher rates of non-compliance, or indeed lower rates of it – what are we seeing? Is it because of the kind of sectors that these people are working in? Is it that they’re more service-oriented countries? What are we seeing that could tell us a story so that we could look to address the issue?
00:21:44 Carlos Vacas-Soriano
I don’t think there’s a single factor that can explain it. The one thing we do see is greater non-compliance in countries with a lot of people who are not necessarily below the minimum wage, but relatively clustered around the minimum wage. In countries where a relatively significant part of the population is receiving low wages, because a lot of people are at the bottom of the wage distribution, you tend to see a higher rate of non-compliance. This is because in many cases, a lot of employees are at the bottom of the wage distribution, and even if their monthly wage complies with the legislation, they sometimes work longer hours than stipulated in their contract. They may then end up being in a situation of non-compliance because, although the employer is paying the right amount in terms of the monthly instalment that they are due, if they end up working too many hours and are not properly compensated for them, you have a case of non-compliance even though it doesn’t look like it.
00:23:17 Mary McCaughey
That makes sense. Is it too simple to say that what we’re looking at is the services sector in terms of tourism, Horeca (hotels, restaurants, accommodation) and care services? Are these the places where we’re going to see non-compliance most often?
00:23:36 Carlos Vacas-Soriano
Yes. In terms of the groups most affected by non-compliance in both data sources we have, the picture is consistent and clear. So, as you say, which types of employees are we looking at when we talk about non-compliance? They tend to be younger people, and they are more likely to be female than male. They strongly tend to have lower levels of educational attainment. And in terms of work arrangements, they tend to be more on temporary contracts and are very often in part-time work. They tend to work for smaller companies, and in terms of sectors, they will tend to be working in agriculture, construction and some service sectors, such as those that you mentioned, like hospitality or retail. So in the analysis, you can see the sectors and types of workers that are clearly over-represented among those that potentially suffer more in the event of non-compliance with minimum-wage regulations.
00:24:49 Mary McCaughey
It’s particularly interesting what you say about the high representation of younger women. But I suppose that’s down to their part-time occupation, is it? Their desire to find a part-time job on many occasions for childcare and other reasons?
00:25:05 Carlos Vacas-Soriano
Yes. Not exclusively, but of course that’s going to be a big factor because, as I said, we clearly see that people in part-time employment are much more likely to be in this group of non-compliance with the minimum-wage regulations. And one of the factors why that might happen, as I told you, is because they may be receiving a wage that in theory is the one they should be getting, that complies with the regulations. But if, for example, your contract states that you have to work 20 hours per week, and then you end up working 25 and you are not compensated for those extra 5 hours, then your wage is not compliant with minimum-wage regulations.
00:25:55 Mary McCaughey
And Carlos, have we done any work on whether there is a disproportionate number of migrant workers in this bracket?
00:26:04 Carlos Vacas-Soriano
Concretely, not in this analysis, but we know, based on the on the literature on the topic, that migrant workers are also a group that will be vulnerable here. In particular, sectors like agriculture and constructions are at higher risk. We know that those are sectors where there is a big influx of migrant workers.
00:26:34 Mary McCaughey
I don’t mean to deviate or go down a particular rabbit hole on this, but in regard to the new forms of work, such as platform work, do we have any information on where they fit into this?
00:26:44 Carlos Vacas-Soriano
We don’t have concrete data in this study, because it’s hard to really capture it with the datasets that we have available. It’s hard to really capture what can be defined as platform work concretely with the data we have. But, as I told you, we know that people on short working schemes may be more affected, such as those working part-time or under a temporary contract. And we know that platform workers may end up in those systems. So we could assume that this will be the case, even though I cannot guarantee with the data we have.
00:27:24 Mary McCaughey
But in terms of what we’ve heard, then there is an issue. It depends what country you are in, and you might not consider it to be excessive, but we do need to address this, and we need to ensure that there is better compliance with minimum-wage regulations. What can we do to ensure this at both national level and European level? Is there something more that should be put in place?
00:27:47 Carlos Vacas-Soriano
I think the first thing is that there has not been a lot of policy emphasis on this. The first step is to push into this area, because the situation now is that the main institution dealing with enforcement is the labour inspectorate. That’s the case in most European Union countries. And you often find that labour inspectorates dealing with minimum-wage regulations don’t have a specific department or a specific team of people dealing exclusively with the topic of minimum-wage regulations. It’s covered together with a wide range of other potential violations of labour law. So as a result of that, it perhaps doesn’t receive a lot of attention. So that means that we don’t have very good data, and most countries don’t even collect this data about infringement. So I think a push into this policy area will help to improve that.
The first thing to do would be to improve the capacity of labour inspectorates to cover this issue. So that would mean making sure you have the resources, in terms of personnel and money, to conduct all the activities that are necessary to improve compliance with minimum-wage regulations. When we talk about the activities that are necessary for this task, we can distinguish between two types of measures. Once type is deterrence measures, which is mainly inspections and penalties. The other type is preventive measures. This can mean training employees, employers or social partners, or running awareness-raising campaigns, for example. All of that needs resources, so that would be the first main point. Another thing we can mention is this lack of data I told you about, since very few countries have conducted evaluations of past interventions in this area. So it would also be good to have information about country-level evaluations of interventions that have been successful in the area of monitoring and ensuring compliance.
00:30:16 Mary McCaughey
So ensuring the availability of best practices.
00:30:18 Carlos Vacas-Soriano
Yes, exactly. And that they have data on what’s going on – that would be good as well. And then you asked me about the role of Europe. Something we can say about this is that this topic of non-compliance is closely related to other topics that you mentioned, such as working conditions, for example bogus self-employment or non-recorded overtime. Some of these topics are related to the issue of non-compliance. The European Union has taken action on this in the past, for example in the case of abusive subcontracting. There was a European Union Regulation that tried to limit the extent to which you are allowed to subcontract, because excessive subcontracting is one way in which non-compliance can emerge, as businesses are trying to save costs along the chain, and that of course brings a risk that some employers may try to cut corners by reducing the cost of the workforce; so non-compliance could emerge. So the European Union has taken action on this in the past.
Or, also related to migrant workers, as you mentioned before, the European Commission took action on working conditions among posted workers, making sure that when a European Union worker is sent from their country to perform a service in a different country, it is done in compliance with the working conditions in that country. So even if not directly related to non-compliance, all these topics have been dealt with by the European Commission in the past.
00:32:18 Mary McCaughey
So there are a lot of really related areas that are perhaps not immediately visible to the eye as being related to this, but should be taken on board. And as you were talking, I was thinking about essential workers. We talked so much about them during the pandemic, about how critical they were to maintaining our societies and functioning. And we talked a lot about what needed to be done there, but it was also very much related to ensuring quality jobs. Pay is just one aspect of that, of course, but it’s a fundamental aspect. But there are also the related aspects of work intensity, autonomy, etc. within those jobs. So I assume that focusing on this job-quality aspect is also an important factor at European level.
00:33:06 Carlos Vacas-Soriano
Yes. In practice, I think we tend to realise that all the different aspects of working conditions are related to each other. So it’s never only a matter of pay. Typically when you improve pay, you tend to also improve the other working conditions; so you cannot look into this in isolation. They are related to each other to an extent.
00:33:26 Mary McCaughey
And also related are the issues of gender equality, which we’ve talked about before. We could go on, as Christine said earlier, for probably most of the day. There are so many dimensions to this particular topic. But if you had a few moments in a lift with a policymaker ¬– we usually end up our podcasts asking you to ‘talk to me in three’. This is to allow you to highlight main points that you think should be addressed as a priority to contribute to resolving the issues in this particular area, which is minimum wage.
00:34:12 Christine Aumayr-Pintar
First, I think we need to obtain a better understanding of who minimum-wage workers are, and to what extent they come from low-income households. Who among them are then really vulnerable minimum-wage workers? And to what extent can we help them – with minimum-wage raises only, or is it more an issue of raising working hours, or improving other social policies or benefits? That’s looking from the workers’ perspective.
But I think there’s also a research gap where we should not lose sight of the companies, especially those that employ a large proportion of minimum-wage workers. We should certainly look at how these substantial raises that we are see now impact the companies – how the companies cope with and react to the increases. Some companies provide more benefits to workers than others, and research is available in several Member States, but I think we are clearly missing an EU-wide picture of this issue.
00:35:27 Mary McCaughey
OK. Carlos?
00:35:29 Carlos Vacas-Soriano
On the topic of non-compliance, perhaps more concretely, I think, as I said before, that we need to give more policy importance to this area. Then very concretely, we need to ensure that countries have effective enforcement systems. This means that they have reliable monitoring and they have controls and field inspections to detect potential violations of minimum-wage regulations. And the other area perhaps related to that is that if an employee makes a complaint about an employer that is not complying with the legislation, it’s important to make sure that they are properly protected against adverse treatment. Because in some European Union countries, that seems to be a bit of an issue. So to make sure that they have the right of redress and that they are helped in this dispute resolution with the employer.
00:36:42 Mary McCaughey
So basically, we need to know who they are and who these minimum-wage workers represent. We also need to think about the companies and the impact that this rise in minimum wages has on them. And we need to focus more on this area of compliance, but also the enforcement issues ¬– the ‘carrot and stick’ you talked about earlier. And I think that that’s important. And to protect those who raise questions or queries, and to support the whistle-blower, if that’s what we need to call them. So I think we’ve gone some way to addressing some of the issues here today.
Thank you both for joining us; it’s really been a fascinating discussion. And as you’ve both said, this is an issue that touches on so many other areas that Eurofound is also doing work on. And I would call on our listeners to draw down from our website on these issues such as gender equality, sustainable work, job quality, essential workers, and indeed on European companies, but so much more that we’ve talked about today. And of course, please do read our most recent publications, Minimum wages in 2023: Annual review and Minimum wages: Non-compliance and enforcement across EU Member States, which are available to download on the Eurofound website. So thank you again to my guests and also, of course, thank you to our listeners. And until next time, when Eurofound talks to you.
00:38:05 Outro
