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László Andor

Commissioner for Employment, Social Affairs and Inclusion

"Finding a way forward for responsible wage policies in Europe"

Expert conference on Wage Trends in Europe

Brussels, 15 September 2010

Ladies and gentlemen,

Today's conference has helped to highlight the multi-dimensional nature of wage policies and has shown us that many different perspectives and opinions exist. There is, however, an agreement here about the importance of considering the social consequences of wage trends, as they have a profound impact on people's lives.

The first panel stressed that wage developments in relation to labour productivity matter for both internal and external imbalances. And in several countries, tackling sectoral imbalances is particularly important.

However, wage moderation should not be pursued as an end in itself – it should be used only where necessary and in a way that contributes to a job-rich recovery. And it must go hand in hand with appropriate policies to ensure that Europeans retain an adequate and decent income to live and to work.

It is not self-evident, for example, that wage policies of strongly export-driven economies should be replicated in other economies. And it is also not self-evident that wage policies in the most export-oriented countries of the monetary union should remain as focused on moderation as they are now.

We need to consider what wage policies of in individual euro zone members mean for the monetary union – as well as what the dynamics of the monetary union mean for wage developments, economic performance and social situation of its individual members.

In any case, however, wages are only part of the equation. What matters more for competitiveness in the long-term is unit labour costs, which are influenced by productivity, and not only by wages.

Productivity should be stimulated by investments in skills and education. Productivity also requires innovation, and well-motivated employees are one of the crucial drivers of innovation. Active labour market policies and life-long learning systems are also important for productivity.

Finally, we should not overlook the fact that competitiveness is also influenced by issues like R&D intensity, distribution costs and of course the Euro exchange rate.

Ladies and gentlemen,

Turning to the second panel:

A falling wage share is potentially a problem, both from a socio-economic and fiscal point of view.

Firstly, the decrease of the labour income share has been spread unevenly between skill levels. Higher skilled people have actually been able to increase their share, while it fell considerably for lower skilled ones.

This is mainly driven by the fact that the labour undertaken by lower skilled workforce, especially in routine jobs, is more easily substituted by technology. In other words, they lose income share as a result of technological progress.

Another factor is globalization and weakening competitiveness. Partly this can be counteracted by stronger investment in skills, enabling lower-skilled workers to benefit from technological progress. Active labour market policies and decreasing the tax wedge for lower-income people can also help, as the Commission has recommended for a number of countries.

A second cause for concern is that falling wage shares across Europe did not make room for more productive investment. We need to find better ways to use profitability to boost investment so that productivity as well as employment increase.

Here I would like to stress the importance of policies that stimulate innovation. The EU also needs to undertake significant investments in order to become an energy efficient and low-carbon economy, and we need to do our utmost to exploit the job creation potential associated with this process.

Thirdly, given the fiscal outlook, we must also remain aware of the impact of a decreasing wage share on fiscal revenues.

Since taxation on employed labour represents the most prominent source of tax revenue (the share of labour taxes in total tax revenues for the EU27 was 52.1% in 2009), a decreasing tax base adds to the existing fiscal pressure.

Given the consequences of the falling wage share, it is clear that we need to better understand the factors explaining this trend and act upon them.

Ladies and gentlemen,

Panel three recognised wage and income inequality as a growing challenge.

It is clear that our policy responses to the crisis will not be sustainable if the burden of efforts is not fairly distributed. A vital question is what governments can do to combat the increasing trend of wage and income inequality.

Tax and benefit policies are of course the most direct and powerful instrument for undertaking necessary redistribution. Government transfers, both in cash and in kind, have an important role to play in supporting low-income households.

Moreover, as regards top level incomes, we must look at whether existing tax provisions are optimal in light of equity considerations and fiscal consolidation needs.

Interestingly, proposals have recently been made to introduce more fairness in tax systems and ease the fiscal strain by higher taxation of higher incomes or wealth. These proposals should be paid attention.

However, it is clear that redistribution strategies alone are not sufficient. We also need to mobilise employment policies. We need to reduce segmentation and the excessive use of temporary contracts in many countries and sectors.

Second, adequate and well targeted income-support policies are needed at the lower end of the income dispersion in order to avoid in-work poverty, which is a growing problem. Minimum wages also play an important role here.

And third, we need to invest in inclusion and employability of vulnerable and underrepresented groups in order to help them access jobs and escape poverty.

We do not have a silver bullet, but we need to find an optimal combination of the different options available.

Ladies and gentlemen,

Turning finally to panel four, I would like to say a few words on the issue of wage setting mechanisms.

Collectively agreed wage setting mechanisms provide clarity and stability in employer-employee relations. They encourage and protect productivity-enhancing, job-specific investments by both employers and employees. They help avoid costly negotiations and potential industrial unrest.

Clearly, certain wage flexibility is needed in response to changes in economic conditions. But, it is always better if a crisis response is based not on wage adjustment or dismissals, but other, counter-cyclical instruments.

Wage setting institutions vary widely between Member States, and they reflect a variable balance between stability and flexibility.

As such, all wage setting systems need to be evaluated on their own merits - there is no superior wage setting model, and what works in one Member State will not necessarily work in another.

At the same time, it is clear that whatever the model, if it is not designed carefully in can create rigidities and prevent wages from evolving in line with productivity.

Naturally, the role and autonomy of the social partners must be respected. Nevertheless, they have an important responsibility to ensure that the results of bargaining work towards an efficient allocation of resources and inclusive labour markets. And that wage setting mechanisms do not reduce the chances of those currently out of job to access employment.

This leads me to a question: besides respecting the diversity and independence of national industrial relations systems, what scope is there for European-level coordination of wage setting?

This is certainly a question of increasing relevance for European social partners. In addition to the commitments already made by the Member States during the European Semester, there is a need in the current economic climate for a more effective and more cooperative social dialogue, and the Commission also has a role to play in this regard.

What particularly merits consideration by the social partners – as well as by the Commission – is whether coordinated and complementary wage strategies should be envisaged in the context of European economic governance, helping reduce or increase wages in more than one country or sector, based on an economic analysis which takes the European dimension into account.

If wage adjustment is to improve competitiveness without at the same time undercutting aggregate demand, there might be need for a coordinated approach. Developing a mechanism for this at the European level could also help improve the transparency and accountability of wage adjustments. This is again of particular relevance for the euro zone, and it would be interesting to consider whether, for example, the employment ministers of euro zone countries should not play a greater role here.

Ladies and gentlemen,

The Commission intends to follow-up and closely monitor the issues we have discussed today. Much of the follow-up will take place in the framework of European economic governance. The analysis presented today will certainly help us in the coming months.

First, the 2012 Annual Growth Survey and Joint Employment Report will provide an EU-wide assessment of the implementation of the country-specific recommendations and an updated analysis of the economic challenges.

Second, the Euro Plus Pact commitments will be subject to regular surveillance, with a strong role for the Commission.

Third, wages will be a key element of the policy debates this autumn in the Employment Committee (EMCO) and the Employment and Social Affairs Council (EPSCO).

This conference will provide important input for a thematic report that will be prepared by the Employment Committee (EMCO), which will discuss, among other issues, wage setting institutions and the role of wages in competitiveness. This will in turn feed into discussions at the Employment and Social Affairs Council (EPSCO) in December.

In addition, the conclusions of today's conference will also feed into the annual convention on poverty in October, as well as the conference on inequalities which the Commission is organizing on 5-6 December.

Fourth, the Commission will also encourage discussing wage trends within the Macro Economic Dialogue meetings. This would provide an opportunity to discuss the issue in a structured manner at European level, with regular involvement of the social partners.

Ladies and gentlemen,

We have a busy year ahead of us – and I count on your support to make it as productive as possible.

Thank you for your contributions today and for your attention.

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