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Adequate minimum wages - background guide

28 October 2020
by eub2 -- last modified 28 October 2020

The European Commission proposes on 28 October an EU Directive to ensure that the workers in the Union are protected by adequate minimum wages allowing for a decent living wherever they work.


Why does the EU need a framework Directive on adequate minimum wages?

Ensuring that EU workers earn adequate wages is essential for improving their living and working conditions and for building fair and resilient economies and societies. Yet, in recent decades, low wages have not kept up with other wages, and in-work poverty has increased. Affected by minimum wages and other economic factors, in-work poverty increased from 8.3% in 2007 to 9.4% in 2018 in the EU.

Wage inequality has also been rising largely due to an increasing polarisation in the labour market (decline of employment in medium-paid (or medium-skilled) occupations and a simultaneous increase of low- and high-paid (or skilled) occupations), and to the decline in collective bargaining. Collective bargaining refers to negotiations between social partners to determine working conditions and terms of employment.

When set at adequate levels, minimum wages ensure a decent living for workers, help sustain domestic demand, strengthen incentives to work, and reduce in-work poverty and wage inequality. Since more women than men earn the minimum wage, minimum wages also help reduce the gender pay gap. This proposal brings benefits to companies that pay decent wages to their workers, by ensuring fair competition.

Is an economic crisis the right moment to act on minimum wages?

In recent decades, low wages have not kept up with other wages. This has contributed to increasing in-work poverty and limited the capacity of low-wage earners to cope with economic and social distress. The fact the current crisis has particularly hit sectors with a higher share of low-wage workers such as retail and tourism, and that it is likely to have a stronger impact on vulnerable workers, makes it even more important to protect low-wage earners. Ensuring a decent living for workers is not only important during the crisis but also essential for a sustainable and inclusive economic recovery from the crisis. Adequate minimum wage protection has the potential to boost productivity and competitiveness. It may also contribute to sustaining domestic demand, potentially further increasing the revenue of companies and offsetting higher labour costs.

What is the objective of the Directive?

In the majority of Member States, workers are affected by low adequacy and/or gaps in the coverage of minimum wage protection.

In light of this, the proposed Directive creates a framework to improve the adequacy of minimum wages and  the access of workers to minimum wage protection in the EU. The proposed Directive is designed to achieve these objectives while taking into account and fully respecting the specificities of national systems, national competencies, social partners' autonomy and contractual freedom. It is also designed in such a way to safeguard access to employment and take into account the effects on job creation and competitiveness, including for SMEs.

In order to reach these objectives, the proposed Directive aims to promote collective bargaining on wages in all Member States. Collective bargaining plays a key role for adequate minimum wage protection. The countries with high collective bargaining coverage tend to have a lower share of low-wage workers, higher minimum wages relative to the median wage, display lower wage inequality and higher wages than the others. Member States with statutory minimum wages are required to put in place the conditions for adequate statutory minimum wages, including setting clear and stable criteria, providing for regular and timely updates, and an effective involvement of the social partners.

It will also contribute to ensuring a level playing field in the Single Market by helping to address large differences in the coverage and adequacy of minimum wages that are not justified by underlying economic conditions.

How can the proposal secure better wage and working conditions in the EU?

The proposal will contribute to better living and working conditions in the Union, by intervening along three axes:

  1. improved adequacy of statutory minimum wages (where they exist),
  2. the promotion of collective bargaining in all Member States,
  3. better enforcement and monitoring for all Member States.

Through the proposal, Member States with statutory minimum wages are required to put in place the conditions for adequate statutory minimum wages. This includes setting clear and stable criteria, providing for regular and timely updates, and an effective involvement of the social partners. The proposal also aims to improve adequacy by limiting the use of variations of statutory minimum wages for specific groups and deductions from the remuneration.

Collective bargaining plays a key role for adequate minimum wage protection both in Member States where minimum wage protection is ensured exclusively by collective agreements and in those with statutory minimum wages. The proposal therefore aims to promote collective bargaining on wages in all Member States, in particular those where collective bargaining coverage is less than 70% of the workers.

Finally, the proposal provides for improved enforcement and monitoring in all Member States. Compliance and effective enforcement is essential for workers to benefit from access to minimum wage protection, and for businesses to be protected against unfair competition. Member States will need to update the Commission each year with their national minimum wage protection data via annual reporting and structured dialogue.

Why do you want to increase collective bargaining in all Member States?

Well-functioning collective bargaining is important to ensure that workers are protected by adequate minimum wages.

Member States with high collective bargaining coverage tend to have a low share of low-wage workers, low wage inequality and high minimum wages.

  • In Member States with statutory minimum wages, collective bargaining supports general wage developments and thus contributes to more adequate minimum wages.
  • In Member States where wages are set exclusively in collective agreements, the level of minimum wages as well as the share of protected workers are directly determined by the collective bargaining system.

In a context of declining collective bargaining coverage, it is therefore important that Member States promote collective bargaining on wages.

What does the Directive ask Member States to do? Are the requirements the same for all Member States?

The Directive proposes a combination of policy measures to improve minimum wage adequacy and increase access to minimum wage protection. Some measures apply only to those countries with statutory minimum wage setting systems and others to all Member States.

All Member States will be asked to:

  • Take measures to (further) increase the coverage of collective bargaining, notably by supporting the capacity of social partners and encouraging negotiations on wages among social partners. If collective bargaining coverage is below 70%, Member States will also have to provide for a framework of enabling conditions for collective bargaining, either by law or through an agreement with the social partners, and establish an action plan to promote collective bargaining.
  • Enhance enforcement and monitoring, by:
  • taking measures to ensure that in public procurement or concession contracts, economic operators comply with the wages set by relevant collective agreements or with statutory minimum wages where they exist;
  • developing effective data collection tools on minimum wage coverage and adequacy, with annual reporting to the Commission.
  • ensuring access for workers to effective and impartial dispute resolution and a right to redress, including to adequate compensation, without prejudice to specific forms of redress and dispute resolution provided for in collective agreements.
  • providing for effective, proportionate and dissuasive penalties, for breaches of national provisions on minimum wage protection.

Member States with statutory minimum wages will be additionally asked to:

  • Put in place the following governance elements: stable and clear criteria for minimum wage setting and adjustments, regular and timely updates, indicative reference values to guide the assessment of adequacy, and the establishment of consultative bodies.
  • Limit the use of variations and deductionsof statutory minimum wage for specific groups of workers.
  • Ensure the effective involvement of social partners in statutory minimum wage setting, in particular as concerns: the definition of the criteria for statutory minimum wages setting and updating, variations and deductions, participation in consultative bodies, and contribution to data collection.
  • Ensure the effective access of workers to statutory minimum wage protection, by strengthening controls and field inspections, developing guidance for enforcement authorities, ensuring that information on statutory minimum wages is publicly available.

Is the Commission requesting Member States to increase their minimum wages to reach 60% of the gross median wage?

No. The Directive asks Member States with statutory minimum wages to define clear and stable criteria to assess the adequacy of minimum wages. The national criteria should include at least the purchasing power of minimum wages, the general level of gross wages and their distribution, the growth rate of gross wages, and labour productivity developments.

The Directive asks Member States to use indicative reference values to guide their assessment of adequacy in relation to the general level of gross wages but it does not prescribe a specific indicator. The use of indicators commonly used at international level, such as 60% of the gross median wage and 50% of the gross average wage, can help guide the assessment of minimum wage adequacy in relation to the gross level of wages. Those indicators will help Member States to assess whether a minimum wage is fair compared to the wages of other workers in the same country, and informs about the effect of minimum wages on wage inequality.

Why do countries with less than 70% of collective wage bargaining coverage have to do more?

Member States with a high collective bargaining coverage (above 70%) tend to have a low share of low-wage workers and high minimum wages. Similarly, the majority of the Member States with high levels of minimum wages relative to the median wage have a collective bargaining coverage above 70%. Therefore, while all Member States are encouraged to take action to promote collective bargaining, those that do not reach a collective bargaining coverage of at least 70%, are required to make extra efforts, in consultation with the social partners

What will be the impact of the Directive?

The Directive will help protect the wages of vulnerable workers, reduce in-work poverty and wage inequality, and strengthen incentives to work. By reducing uncertainty about future labour costs and improving wage-setting frameworks, the proposal will contribute to a better business environment and level playing field for firms. Finally, by inducing minimum wage increases and improving coverage, the initiative is expected to have a small but positive effect on public budgets, driven by increases in tax revenues and reductions in benefit expenditure. Labour costs are expected to increase but firms, in particular SMEs, would benefit from more gradual and predictable minimum-wage increases, which would improve the business environment.

What is the legal basis for action at EU level on minimum wages?

The proposal is based on Article 153(1) (b) of the Treaty on the Functioning of the European Union (TFEU), which prescribes the Union to support and complement the activities of Member States in the field of working conditions. Article 153(2) allows setting minimum requirements in this field, by means of directives. Insofar as wages, including minimum wages, are a key component of working conditions, Article 153 TFEU is the appropriate legal basis for EU action on minimum wages.

The proposal fully respects the principles of subsidiarity and proportionality (Article 5(3) and 5(4) TEU), and the limits imposed by Article 153(5) TFEU. According to the latter, and to the case law of the Court of Justice of the European Union (CJEU), the EU cannot intervene directly on the level of pay, so as not to interfere with the competence of Member States and autonomy of social partners in this field.

Is the EU harmonising the level of minimum wage across the EU?

The proposal does not seek to harmonise the level of minimum wages across the EU, nor to establish a uniform mechanism for setting minimum wages in the Member States. Minimum wage protection will continue to be provided through collective agreements or through legal provisions, according to national traditions and in full respect of national competences and social partners' autonomy. Member States that already have more favourable provisions than those put forward in the proposal will not have to change their minimum wage setting systems. Member States may also decide to go beyond the minimum standards set out in the proposed Directive.

Why did the European Commission choose a Directive and not a Recommendation?

Compared to a non-binding instrument such as a Recommendation, a Directive has the advantage of giving certainty about the minimum requirements and procedural obligations that Member States have to apply. At the same time, it leaves room for Member States to decide on the way to implement those minimum requirements, without impinging on their competence and on the autonomy of social partners. A Directive can ensure that progress is not partial or uneven across the EU, and reinforce trust among Member States and social partners, thus also contributing to a level playing field for companies.

Have social partners been consulted prior to the adoption of the Commission proposal?

In line with Article 154 TFEU, the EU social partners were consulted twice on the possible direction and content of this initiative. In the first stage, between 14 January and 25 February 2020, the Commission consulted social partners on the need for an initiative on minimum wages, and its possible direction. In the second stage, between 3 June and 4 September 2020, the Commission consulted social partners on the content and legal instrument of the envisaged proposal. There was no agreement among social partners to enter into negotiations to conclude an agreement at Union level, as foreseen in Article 155 TFEU. The views of social partners provided a valuable input and have been duly taken into account in the Commission's proposal.

What is the role of the social partners in the implementation of the Directive?

In countries with a statutory minimum wage, the social partners will have to contribute, in cooperation with national authorities, to ensuring an effective access of workers to statutory minimum wage protection. In these same countries, the social partners will have to be effectively involved in the whole process setting and updating minimum wages, including data collection and monitoring.

Moreover, in line with Article 153(3) TFEU, a Member State can entrust the social partners with the implementation of the Directive, at their joint request.

How will progress towards achieving the objectives of the initiative be monitored and evaluated?

Effective monitoring and data collection are key. To this end, Member States are required to develop data collection tools to monitor minimum wage coverage and adequacy, in line with their minimum wage protection system, and to regularly report to the Commission all relevant data. Based on the information provided by Member States, the Commission will report every year to the European Parliament and the Council about its assessment of developments in minimum wage adequacy and coverage. Moreover, based on these annual reports produced by the Commission, the Employment Committee (EMCO) will examine the situation in the Member States. In addition, progress will be monitored in the framework of economic and employment policy coordination cycle at EU level (European Semester).

What are next steps?

The Commission's proposal will now go to the European Parliament and the Council for approval. Once adopted, Member States will have two years have to transpose the Directive into national law and communicate the relevant texts to the Commission. The Commission will carry out an evaluation of the proposed Directive after 5 years.

Source: European Commission