The impact of minimum wage and collective bargaining on inequality
The ILO participated in a conference on strengthening fairness and solidarity in the EU social market economy, organized by the European Commission.
A conference on “Strengthening fairness and solidarity in the EU social market economy” discussed the European Commission’s 10th annual report on Employment and Social Developments in Europe. Daniel Vaughan-Whitehead, Labour policies specialist at the ILO, participated in the session on “Fairness: perceptions, facts and drivers” and gave input on the policies and instruments that can strengthen fairness in the EU.
“The Commission’s report rightly points to the need to further develop redistributive tools, and in particular social protection and tax policies. However, this is not enough,” he said. It is important to distinguish between the inequalities in the disposable income, once tax and social protection have played their role, and the inequalities in the labour market.
The ILO has found that inequalities in the labour market are much greater, and they have widened in recent years. In a majority of countries in which inequality has increased, the increase was due predominantly to rising inequality in market incomes. This was the case in Germany, Italy and Spain for example.
Distributional policies do not always succeed to compensate for the growing inequalities in the labour market, mainly because of an unequal primary distribution of income from the market. On the one hand, Belgium, Finland, Slovenia and France cut market inequality almost in half through taxes and transfers. On the other hand, in Turkey for instance, taxes and transfers reduced the market inequality by less than 10%.
To bring about fairness, it is important to reduce inequalities in the labour market, especially since the COVID-19 crisis has further exacerbated these sources of inequality, which are linked to the type of work contract, the level of wages (often related to the contractual status), the level of social protection embedded in the job, and health and safety conditions at the workplace.
There is a growing wage inequality, and a marked shift away from standard employment to more diversified contractual arrangements (including temporary employment, part-time work, temporary agency work and dependent self-employment, including digital labour platforms).
At the same time, this is not enough. To ensure sustainable wage practices, we need collective bargaining on wages and workers’ involvement in wage-fixing mechanisms. There is a positive correlation between the level of collective bargaining coverage and inequalities.
The need for more social dialogue and collective bargaining – which should take a more predominant role in the COVID-19 recovery – takes place in a context of sharp decline in both collective bargaining coverage and trade union membership over the last 20 years. Both have dropped by 15-20% on average in the EU.
“This certainly should represent a priority if we want institutions to play their role against inequalities,” he concluded.
“The Commission’s report rightly points to the need to further develop redistributive tools, and in particular social protection and tax policies. However, this is not enough,” he said. It is important to distinguish between the inequalities in the disposable income, once tax and social protection have played their role, and the inequalities in the labour market.
The ILO has found that inequalities in the labour market are much greater, and they have widened in recent years. In a majority of countries in which inequality has increased, the increase was due predominantly to rising inequality in market incomes. This was the case in Germany, Italy and Spain for example.
Distributional policies do not always succeed to compensate for the growing inequalities in the labour market, mainly because of an unequal primary distribution of income from the market. On the one hand, Belgium, Finland, Slovenia and France cut market inequality almost in half through taxes and transfers. On the other hand, in Turkey for instance, taxes and transfers reduced the market inequality by less than 10%.
To bring about fairness, it is important to reduce inequalities in the labour market, especially since the COVID-19 crisis has further exacerbated these sources of inequality, which are linked to the type of work contract, the level of wages (often related to the contractual status), the level of social protection embedded in the job, and health and safety conditions at the workplace.
There is a growing wage inequality, and a marked shift away from standard employment to more diversified contractual arrangements (including temporary employment, part-time work, temporary agency work and dependent self-employment, including digital labour platforms).
Impact of minimum wages on income inequality
The ILO has found that increasing the effectiveness and the level of the minimum wage has the potential to reduce income inequality. “Our research indicates the need to adopt effective minimum wage systems, with broad legal coverage and measures to promote compliance, and to set adequate minimum wage levels that take into account both the needs of workers and their families, and the economic factors prevailing in the country,” said Mr Vaughan-Whitehead.At the same time, this is not enough. To ensure sustainable wage practices, we need collective bargaining on wages and workers’ involvement in wage-fixing mechanisms. There is a positive correlation between the level of collective bargaining coverage and inequalities.
The need for more social dialogue and collective bargaining – which should take a more predominant role in the COVID-19 recovery – takes place in a context of sharp decline in both collective bargaining coverage and trade union membership over the last 20 years. Both have dropped by 15-20% on average in the EU.
“This certainly should represent a priority if we want institutions to play their role against inequalities,” he concluded.