Minimum Wage Trends during the Crisis: Wage Contours and Falling Real Wages

Until the recent financial crisis, analyses of the distributive effects of statutory minimum wages demonstrated their progressive impact in improving the position of the lowest paid in labour markets in a range of countries. There are good political economy reasons for wage-setting interventions of this sort (Kaufman 2010; Prasch 2005) and plenty of evidence across an array of diverse countries of their positive effect in reducing the incidence of low-wage jobs, narrowing the gender pay gap and compressing the overall wage structure (Koeniger et al.2007; Lucifora et al.2005; Grimshaw/Rubery 2013). However, the crisis has changed matters. In many European countries a combination of falling real wages and diminished trade union influence over wage settlements has meant statutory minimum wage rules have played an increasingly important role not only in setting the wage floor but also, in many sectors and low-to-medium skill jobs, in shaping norms about the acceptable wage for the job. There is a growing risk, therefore, that in many low-wage segments minimum wages become the primary external influence over wage setting, creating ‘minimum wage job contours’ (Levin-Waldman 2002; Rodgers et al.2004). These wage contours (Dunlop 1957) may be especially pronounced during a period characterised by weak company performance, falling real pay and constrained public sector pay. As a consequence, it is likely that wage structures in certain countries are becoming increasingly skewed with the modal wage at or only a little above the national minimum wage for key workforce groups, especially for low educated women, part-time workers and young workers.

This paper argues that consideration of trends in real average wages and the wider industrial relations context is essential for understanding the pay equity effects of minimum wages during the economic crisis. Raising the relative value of the minimum wage during a period when average wages are falling in real terms may meet the policy goal of lifting the wage floor and preventing exploitative pay but may inadvertently weaken the wage bargaining position of workers and unions seeking more extensive wage rises. Much depends on the coordination of minimum wage policy with collective bargaining. In countries where unions have retained an active role in minimum wage policy and collective bargaining coverage is relatively strong, minimum wage rises may be complemented by the defence of pay differentials (by age, skill, etc.) so as to maximise positive ripple effects for workers paid above the minimum wage. However, in countries where there is a disconnect between unions’ pay strategy and minimum wage policy and/or there is only weak collective bargaining coverage, then falling average wages are likely to generate a significant spike in the wage distribution at the minimum wage as employers compensate the rising cost of the minimum with real wage cuts in jobs traditionally paid above the minimum. This paper draws on an analysis of international minimum wage policy trends, wage distribution data and case-study analysis from a sample of European countries and makes policy recommendations for countries facing the need to address low pay during the economic crisis.