Poring over the effects of a minimum wage hike earlier in the year, accountancy firm KPMG suggested that raising the UK national minimum from £6.70 per hour to the ‘living wage’ of around £7.85 per hour would hand the country a much-needed pick-me-up. By facilitating a basic standard of living, the new minimum would assist the six million individuals in the UK on less than the recommended allowance, and add only £11.1bn (or 1.3 percent) to the national wage bill. Though contested on the grounds that it would fall to small businesses and consumers to cough up the extras, the newly appointed Conservative government partially sided with KPMG months later when, in July, it recommended a rise to £7.20 by next year and £9 by 2020.

The idea of a pan-European minimum wage, while commendable in ethical terms, falls down on practical grounds

Introduced to soften the blow of in-work benefit cuts, the move has received very limited support on the employer side, and investigations by The Independent in March showed that not a single high street retail chain had guaranteed employees the specified amount. What’s more, the national living wage is not enough for those living in the capital, and the announcement is not a guarantee, but guidance for the country’s Low Pay Commission. Introduced more than anything else as a populist policy to quiet critics of inadequate pay, it appears that the government has succeeded in appeasing not a single side of the debate.

On the plus side, the Living Wage Foundation said it was “delighted” with the decision, calling it “a massive victory for Citizens UK and those communities, workers and business leaders who have campaigned for a living wage since 2001”. The organisation went on to add: “We agree with the Chancellor that work should be the surest way out of poverty.” However, a couple of issues were also raised: that the true living wage is in fact higher than the amount stipulated (particularly due to changes to tax credits), and also that the amount is insufficient for Londoners and unavailable for under-25s.

“Minimum wages in most countries set a wage floor to overcome perceived monopsony power of employers, and are set such that they minimise any potential disemployment effects and take into consideration employers’ ability to pay. The living wage is a very different concept. It is the wage necessary such that an individual working full-time can achieve some adequate standard of living, as defined by some pre-determined basket of goods”, observed Ryan Bourne, Head of Public Policy at the Institute of Economic Affairs.

Clearly, almost all are agreed that the package is far from ideal, yet the living wage remains a key talking point on both political and economic forums, with one side believing it to be justified mostly on moral grounds and the other unconvinced by its financial viability. In the UK, promises of productivity and higher tax revenues have partially won the day, although the case for the rest of Europe is more complicated, particularly when it comes to the radical and somewhat misguided proposition of a pan-European minimum wage.

Continental policy
Data collated by EuroStat this year showed Europe’s minimum-wage workers to be a split bunch, and the differences between EU members are stark. In Luxembourg, any person earning a minimum wage can expect to bring home €1,923 a month, whereas the same worker in Bulgaria would pocket only €184 – although the disparity, when adjusted for differences in purchasing power, sits at one to four rather than one to 10.

Of the 22 EU nations subscribed to a statutory minimum, 10 pay less than €500 a month, five between €500 and €1,000, and the remaining seven above €1,000. Austria, Sweden, Italy, Finland, Cyprus and Denmark have all opted not to specify a universal wage floor. These dramatic and often fundamental differences in pay highlight the great and growing challenges associated with a pan-European minimum wage, yet much has been said about the benefits of such a system and its merits in sparking the continent’s lacklustre economy into action. Addressing the European Parliament in July, the European Commission President Jean-Claude Juncker spoke of the moral impetus for such a system: “All countries within the European Union, we set in place a minimum social wage, a minimum income, a guaranteed minimum income.”

This idea of a pan-European minimum wage, while commendable in ethical terms, falls down on practical grounds, taking into account the insurmountable differences in quality of life and productivity. The fallout from a such a system would wreak havoc on any party forced to bear the cost – for example in Poland, where pay would be triple what it is currently to match neighbouring Germany’s €8.50 wage floor.

“A decision to introduce a pan-European minimum wage would either be trivial or wrong”, claimed Bourne. “Trivial, if it was set at a level such that it didn’t cause any disemployment effects – because it would be so low given the low productivity levels in, for example, Romania that it would barely be worth having in the developed western European countries at all. Wrong, in that if it was set according to some sort of averaging, it would result in extraordinarily high rates of unemployment, particularly for the most vulnerable workers in areas of Europe with low levels of productivity.”

Certainly, each and every working citizen is entitled to an acceptable standard of living, and the minimum wage has an important part to play in alleviating poverty and in keeping a lid on irresponsible business practices. However, the issue of inadequate pay is best handled on a national, not continental, scale. A one-size-fits-all approach could serve to destabilise an already-fragile economy.

A game of specifics
Going further, scaling down the idea even more so that it’s not just a national issue, but one dictated by industry groups, is an alternative idea that deserves more attention. Policymakers need only look to Nordic trade unions for an example of how this might play out.

The bargaining power of trade unions has been greatly reduced throughout much of Europe recently, and many are without the requisite influence to participate in high-level discussions concerning minimum wage. Looking to Norway, as well as – to a lesser extent – Denmark and Sweden, however, it’s clear that there are advantages to the collective bargaining approach, in that specific trades and occupations can arrive at appropriate and industry-specific pay floors.

Rather than attempt to right the issue of inadequate pay with one umbrella solution, as is the case with a European minimum wage, it is more important to listen to the voices of social partners in informing decisions on minimum wage. As can be seen in the case of the UK, populist policies designed to curry favour with the masses do little to appease affected individuals and businesses. However, by granting low earners and employers a greater say in the debate, policymakers can ensure that any changes are more closely tied to the circumstances in question.