Minimum wages: how much is enough? International learning on national minimum wages and protecting low-paid workers

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17 Nov 2022

Dr Duncan Brown, Principal Associate

Follow @duncanbHR

The current state

I participated earlier this month on behalf of IES at a meeting of the Centre for Research on Employment and Work at University of Greenwich, led by the excellent Professor Sian Moore.

Just as the European Union’s new directive on the minimum wage is about to be implemented, we got the latest update on the UK’s soon-to-be-announced and confusingly-renamed ‘National Living Wage’ (NLW) level from next April by Tim Butcher, chief economist at the Low Pay Commission.

The current record low unemployment rate of 3.6 per cent confirms that the widespread fears of damaging effects on employment when the minimum wage was introduced in 1997 were misplaced.

The effects on pay however, have been more complex. Although almost five million employees are paid at, or close to, the NLW, earnings in the economy as a whole, are in real terms, still not back to their 2008 level, the worst period for pay for over 200 years.

This week’s average earnings figures from the ONS confirmed that although growth in average total pay was up to 6.0 per cent, pay fell in real terms (adjusted for inflation) by 2.6 per cent, among the largest falls in living standards ever recorded.

Christine Aumayr-Pintar from Eurofound, a research agency of the EU, provided an overview of the different methods for setting minimum wages in Europe. She highlighted the common challenge faced by all member states of rapidly-rising price inflation.

The impact of inflation

Inflation has driven the highest rate of annual wage increase ever made in many countries (the UK’s record National Living Wage increase in April of 6.6 per cent was in fact only at the EU’s average level). Germany increased its minimum by 15 per cent to 12 Euros per hour in October. It has also led to multiple increases in countries such as Belgium (four increases in 2022) and Luxembourg, produced by automatic indexation formulas.

Finally, Damian Grimshaw, a professor at King’s College London summarised international research on minimum wage methods. In Argentina, very high price inflation has driven eight upratings this year. The devolved model in America has seen the Federal minimum of $7.25 per hour unchanged. But 30 states set a higher minimum, and some cities even higher. In California and Washington DC, for example, the rate is $15 per hour.

So, just as the UK is poised to announce the new minimum wage level in Thursday’s fiscal statement, what can we learn from these international comparisons?

I would draw out four points.

Effective practice

1. The cost of living is growing in influence in setting minimum wage levels. Around half of the EU states have either automatic indexation, such as France and Belgium, or list it as an important factor to be taken into account, as in Spain and Portugal. The new EU directive specifies in Article 5.2. that countries must take account of inflation and the cost-of-living.
2. There is movement towards average earnings and ‘real’ living wage levels. In the UK for example, the original aim of the LPC was to ‘help as many low-paid workers as possible without damaging their employment prospects’. In 2016 the National Living Wage was introduced and the LPC was tasked with recommending a path to 60 per cent of median hourly earnings. In 2020 they achieved that, so a new target of 2/3 of median earnings by 2024 was established. EU states such as Ireland and the Netherlands are following a similar path. Reflecting a ‘real’ living wage and the purchasing power of wages for a basket of goods and services, is more controversial. In the UK it’s a voluntary standard which increased by its highest ever rate in September of 10.1 per cent. Romania and Malta are both passing legislation to make a living wage formula the main determinant of their minimum wage.
3. The most effective minimum wage setting mechanisms combine formulaic indexation, an expert technical group and involvement of social partners – trade unions, business and government. In the UK, the second and third of these are combined in the LPC. In France, a figure is derived by a formula, which an expert commission reviews and then recommends to government. The rate works alongside collective bargaining - in a number of sectors it’s higher.
4. Taking account of related factors such as working hours and particularly enforcement are key issues. The UK’s Living Wage Foundation has established a new ‘Living Hours’ standard to go alongside its living wage rate. But in Finland and Ireland, legislation has limited the use of zero hours contracts in support of minimum hours, a policy which the Labour Party supports. Enforcing the minimum wage has been a particular problem in parts of Western Europe, particularly Germany and the UK. The EU directive stipulates member states must ‘develop the capability of enforcement authorities to take action against non-compliant employers’. The UK continues to suffer from scandals of underpayment, for example at Boohoo in Leicester . France devotes far greater resources to enforcement and is regarded as the benchmark for such action.

From minimum wages to ‘decent living standards’

‘When people have to penny-pinch because of the energy crisis, this (EU) law is a message of hope. Minimum wages and collective wage-setting are powerful tools to ensure all workers earn salaries that allow for a decent standard-of-living.' Marian Jurečka, Minister of Labour, Czech Republic.

The new EU law aims to ‘promote the adequacy of statutory minimum wages and thus help to achieve decent working and living conditions for employees in Europe'. The huge rise in price inflation across Europe and the UK has exposed gaps in the existing approaches to wage setting and ensuring decent living standards for the lowest-paid workers.

While the UK has led the international drive towards making the minimum wage level a higher proportion of average earnings, the LPC in future is likely to have to take more account of real wages and introduce stronger mechanisms for enforcement.

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