If Europe’s economy is growing, why are workers not seeing the benefits?

Against the background of the ongoing economic recovery and expanding employment, many observers have been wondering why wages have not been growing accordingly. The ETUI’s Benchmarking Working Europe 2019 examined this conundrum.

This mystery of ‘wageless’ growth has received considerable attention recently from international institutions such as the European Commission and the OECD. Their analyses illustrate that the moderate wage growth of the past five years is much less mysterious than it seems at first sight. The European Commission, for instance, found that in the majority of countries subdued wage growth can largely be explained by so-called ‘economic fundamentals’ such as low inflation, low trend productivity growth and high unemployment.

Taking into account these ‘economic fundamentals’ there are only six countries left to which the mystery of ‘wageless’ growth applies, i.e. where wage growth was less dynamic than one would have expected in light of these factors. In descending order of the size of the absolute gap between actual and expected wage growth, these six countries are: Ireland, the UK, Portugal, the Netherlands, Cyprus and Croatia.

The debate on unemployment and wages

Additional explanations put forward include the existence of significant labour market reserves, which include people who have given up looking for workers who would like to work more hours. This essentially refers to the fact that official unemployment statistics systematically underestimate the extent of underemployment. Another factor that contributed to the recent moderate wage growth is the fact that many of the newly created jobs are precarious in nature, not well paid, and in sectors of the economy characterised by low union density and union bargaining power. According to the European Commission, however, institutional factors such as collective bargaining coverage and union density have little impact on wage growth. The Commission’s study claims that while changes in collective bargaining coverage and union density ‘have a short-term, transitory effect on wage growth’, the actual level of collective bargaining coverage and union density has no long-term effects on wage growth.

This finding is rather surprising in two respects. First, it contradicts the findings of the OECD that institutional characteristics such as the specific form of the collective bargaining system have an impact on a country’s economic and labour market performance. The OECD study contends that coordinated multi-employer bargaining systems based on broad-based collective bargaining parties tend to be associated with higher employment, lower unemployment, reduced wage inequality and higher wages for the workers covered.

Second, the Commission’s finding on this point contradicts the country-specific recommendations (CSRs) and memorandums of understanding which the Commission (co-)formulated during the crisis years. Thus, in times when the Commission’s key objective was to ensure a downward adjustment of wages in order to improve a country’s cost competitiveness, changes in the wage bargaining framework played a crucial role. It should be recalled that in the report ‘Labour Market Developments in Europe 2012’, the implementation of ‘employment-friendly’ reforms included the following elements: decrease statutory and contractual minimum wages, decrease bargaining coverage, decrease the (automatic) extension of collective agreements, reform the bargaining system to be less centralised (for instance by removing or limiting the favourability principle), and promote measures that result in an overall reduction in the wage-setting power of trade unions.

The puzzle of wage growth

It therefore seems puzzling that in a context where the aim is for more dynamic wage growth as a central element of achieving sustainable and inclusive growth and making a positive contribution to people’s lives, a reversal of the above-mentioned measures in the field of wages and collective bargaining is not on the agenda. If the reduction or freezing of minimum wages and the dismantling of multi-employer bargaining structures is supposed to have restricted wage growth, then the logic follows that a more expansive minimum wage growth and support for multiemployer bargaining structures should help to achieve the new objective of more dynamic wage growth.