Minimum Wages for the Low-paid and for Balanced Economic Development

By Maarten van Klaveren, University of Amsterdam/AIAS, WageIndicator researcher

Well-designed Minimum Wages (MWs), set by law or by tripartite agreement, can serve as an effective shield for the low-paid, also in the economic crisis. They redistribute earnings to the lower paid and add to wage equality. But their potential to boost private demand and combat gender-based pay discrimination should not be underestimated either. Such Minimum Wages support balanced wage- or demand-led economic development, contrasting with the export-led strategies of leading countries that ultimately lead to a ‘race to the bottom’.

These are major conclusions from Minimum Wages, Collective Bargaining and Economic Development in Asia and Europe. A Labor Perspective. The book was only recently published by Palgrave Macmillan, and edited by Maarten van Klaveren, Denis Gregory and Thorsten Schulten. The book is an outcome of the Asian-European Labor Forum (AELF), a network of labor-oriented research institutes and researchers. It includes two comparative chapters on Asia and Europe, eight on Asian countries and eight on European (groups of) countries.  Contributors partly overlap with the WageIndicator team, like the authors of the Indian, German and Dutch national chapters. Also, data for the book have been derived from the Minimum Wage pages of the WageIndicator, thanks to their careful documentation of MW-levels and legislation. The following paragraphs are largely based on this book.

Minimum Wage Regimes

About 90% of 151 countries in the world have MWs in place. In nearly half of them, MWs are set on a universal national base; the remaining countries have systems with multiple rates, varying by industry, region or occupation. Countries like India, Indonesia, and South Africa are notorious for their massive amount of MW rates.  Here, arithmetic complexity has added to the existing problems of ignorance among workers and non-compliance by employers. Notably in these countries the dissemination of MW information through the WageIndicator machinery has contributed to better compliance, as high-ranked ILO researchers publicly acknowledged during the large and latest ILO Regulating for Decent Work Research Conference (July 8-10).

In Europe, a limited number of countries, mainly the Scandinavian countries, Italy and Austria, do not have a statutory minimum wage (SMW), but have a relatively strong union presence instead. Whereas these countries in 2013 had an average trade union density of 59 per cent, the 22 SMW countries showed an average of 21 per cent. Similarly, in the first group 77 per cent of the employed were covered by a collective agreement, against 45 per cent collective bargaining coverage in the group with SMWs. In most countries by far, in particular in Asia, where unions are weak and collective bargaining is often in its infancy, SMWs remain very important.

Minimum Wage Levels

Across countries, the levels of (S)MWs show considerable variation. As a percentage of the national average wage (the so-called Kaitz index), they -  according to the ILO – hovered worldwide recently at about 40 per cent, in developed and developing countries alike. Yet, in many countries this percentage is much lower; such ‘poverty wages’ have sometimes even fallen below the subsistence minimum (like currently in Russia). Though it is difficult to generalize, it may be taken for granted that for developed and emerging countries a Kaitz value of less than about 40 per cent does not stimulate the setting of decent and (for economic development) effective wages. Thus, it is worrisome that throughout Europe two-thirds of SMWs remain below this relatively low level, as also the SMW levels of Japan, South Korea and the USA do. SMWs of over 60 per cent of the average wage, by contrast, may have negative effects, not the least of which undermining the bargaining power of the unions. On this issue in for example Indonesia a vivid debate is going on.

Rules of Guidance

Finding an optimal MW-level will always remain a balancing act. Yet, ILO Convention No. 131 (1970) provides basic rules of guidance here. First, according to this Convention countries should take into account both the needs of workers and their families as well as economic factors. The national levels of MWs should set a wage floor guaranteeing a decent life. Second, the ILO requires that decisions on MWs should involve social partners. Trade unions and employers' organizations should play important roles. This precondition is however still neglected in quite a few countries, including the Netherlands.

Finally, once MWs are in place, the roles of social partners have not ended. The unions may refer to the WageIndicator MW-pages and stimulate their membership to report underpayment. Moreover, as the ILO notes, both unions and employers’ organizations can apply pressure on underpaying employers. Those employers that take up corporate social responsibility (CSR) should discourage such abusive practices of competitors, and avoid a race to the bottom in wages and conditions of work.