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Minimum Wages: Mandatory Socialism by Sven R. Larson

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Minimum Wages: Mandatory Socialism

On June 7th, Euractiv reported that the European Union has a new ‘agreement’ in place on minimum wages. The EU Parliament, the member states and the European Commission have created a new directive

defining a framework for adequate statutory minimum wages where they exist and pushing member states to strengthen collective bargaining.

The Commission has been working on the minimum-wage issue for a long time, although the original ambition was to create a universal ‘equitable’ wage. In the charter on workers’ rights in 1989, the Commission established that 

workers shall be assured of an equitable wage, i.e., a wage sufficient to enable them to have a decent standard of living.

The ‘equitable wage’ concept, which was further enshrined in a progress report from 1997, is closely related to the ‘living wage’ idea that has become popular in North America in recent years. Its meaning is simple: every worker should get paid based on his living expenses, not the value he adds to his employer.

Normally, the welfare state would be responsible for guaranteeing a person’s minimum standard of living. With a ‘living wage’ regulation, government outsources the responsibility for that guarantee directly to the private sector. Depending on how radically the ‘living wage’ advocates define the costs of living that define that wage, mandatory entry-level wages can become quite high. 

In what seems like an attempt to soothe the waves of resistance, the European Commission has moved away from the 1990s ‘equitable wage’ idea. Today, they prefer the narrower, more basic ‘minimum wage’ idea. The idea is the same—government sets the price floor of labor—but since the goal is a ‘minimum’ wage, the practical implications are more limited than if businesses would be forced to pay for an ‘equitable’ standard of living. 

A controversial idea

Although this new minimum-wage agreement is not legally binding, it will in all likelihood be treated as such by the EU institutions. As an indication of this, Dennis Radtke, one of the lead negotiators from the EU Parliament, explained that the agreement is “a very clear recommendation” to the members of the European Union. 

If the states decide to comply, they have to maintain a minimum wage at 60% of their national median wage (or salary, depending on what source one looks at) or 50% of the average wage. In other words, the price floor on labor will be frequently updated and rise with market wages, regardless of whether businesses with large shares of minimum-wage earners are able to carry the cost.

Bluntly: if there is a good year for high-end professionals like engineers, computer programmers, accountants and architects, and the median wage rises as a result, then the minimum wage will rise solely because demand for higher-earning workers has increased.

Expectedly, the business community is no friend of this agreement. Last year, Ceemet, the European federation for tech-industry employers, pointed out that there was no legal ground for the EU to impose a minimum wage on the member states. The parties to the current agreement circumvent this objection by making it non-binding. 

It remains to be seen just how non-binding member states will consider it to be.

They have not been able to escape other critical points as easily. A year earlier, BusinessEurope referred to the minimum wage idea as “a recipe for disaster.” Markus Beyrer, the director general of the BusinessEurope, made clear that he and his group preferred “fair wages set by national social partners” as opposed to “politically manipulated minimum wages.” 

Along similar lines, a report from Institut der Deutschen Wirtschaft (IW), explained that a unionwide minimum-wage standard fails to take into account member-state differences in taxes and welfare-state benefits. There is, e.g., a sizable difference between a progressive income-tax system which levies comparatively low taxes on low incomes, and a system that takes a more proportionate approach to income taxes. In the former case, the minimum-wage worker can find his tax burden rise substantially if his employer is forced to raise his wage; in the latter case, there is little to no tax penalty when the wage increases. 

By the same token, some countries have selective social-benefits programs that concentrate entitlements to those who are in most need of it, as opposed to a more proportionate—and often universal—approach. Here, again, the difference between the two systems can have a significant impact on the income earner; the combination of higher taxes and lost benefits can actually leave the low-wage earner worse off after the increase in the minimum wage. 

Higher unemployment

In addition to complicating the dynamics between work-based income and welfare-state benefits, the new minimum-wage agreement puts gainful employment itself in jeopardy. A price floor on labor increases the cost of hiring some workers while their productivity remains the same. All that has happened is that the employer is forced to pay more for low-end workers. The inevitable consequence is a reduction in labor demand, which means lost hours or even lost employment altogether.

The impact should be most painful for young workers. It is highly noteworthy that this point is not mentioned anywhere in the appreciative comments on the minimum-wage agreement. The fact that proponents avoid it is odd, given that youth unemployment in the EU was 15.6% in 2019—a good year for the economy. 

It is even odder given how careful the parties to the minimum-wage agreement are to defend it with ideological references. As a case in point, consider Nicolas Schmit, EU Commissioner for Jobs and Social Rights. He praised the agreement as a helping hand to “households across the EU [who] are worried about making ends meet,” adding that

it is essential that all Member States have in place adequate minimum wage protection. The framework that has been agreed by the European Parliament and the Council will help make sure that minimum wage earners can afford a dignified life. This is a good day for a strong social Europe that protects.

This reference to “social Europe” hints that a higher and more conforming minimum wage is not the end goal of this agreement. It is, rather, a stop on the way to the equitable wage. The distinguished Commissioner believes that it is the role of government to guarantee its citizens a material standard of living called “dignified life.” 

He also appears to believe that government should outsource the provision of this standard of living to Europe’s employers. 

In doing so, the employers become the unwilling enablers of socialist public policy. It is, namely, a core socialist principle that individual citizens should not differ in terms of their standard of living. This idea, which harks back all the way to Marxist economics, has served as the platform for the construction of almost every welfare state in Europe, although in the absence of a minimum-wage law, socialist policy is implemented by government itself through taxes and welfare-state spending. 

Outsourcing socialism

With this outsourcing of socialism—albeit non-binding for member states—this regulatory mechanism will undoubtedly play the role of a permanent, ideological policy instrument. As if to reinforce this point, at the press conference announcing the agreement, German MEP Dennis Radtke (who represents nominally conservative German CDU), motivated the minimum-wage agreement with reference to the constitution of the European Union, a.k.a., the Lisbon Treaty. Radtke made clear that the EU must take seriously “what Article III of the Lisbon Treaty says” about the so-called social market economy.

In section 3 of Article III, it is explained that the EU shall (emphasis added) 

work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress.

The term “competitive social market economy” is a textbook case of an oxymoron: either an economy is competitive and distributes income on market terms, or it is “social” and its distribution follows a socialist, ideological pattern. The problem is that social-economy proponents tend to believe that they can implement the “social” parts

a) without disturbing the prowess of the market economy, or

b) without regard for the prowess of the market economy.

Those who take refuge behind the first alternative tend to believe that the economy is not affected by elaborate schemes of economic redistribution. They believe that higher marginal taxes, together with benefits that discourage workforce participation, do not actually slow down economic growth. 

Proponents of minimum or living wages tend to put a similar distance between themselves and the actual economy. 

Given the close analytical connection between the arguments in favor of a European minimum wage and the arguments for both ‘living wages’ and the socialist welfare state in general, it is fair to conclude that this minimum-wage initiative is only the beginning of a broader, more assertive effort to advance socialist policies in general at the EU level. Once the new agreement has sunk in and become mainstream in the public discourse, the next step will be an explicit conversation about the ‘equitable’ or ‘living’ wage. 

That conversation is already alive and well in North America. In Canada, the movement has gained so much influence that private businesses are beginning to voluntarily implement the ‘living wage’ concept. According to CTV News, a restaurant in Ottawa, the Canadian capital, has decided to shift all its full-time workers from performance-based compensation, including tips, to fixed wages. The restaurant prides itself of being a ‘living wage employer’ that pays its employees 

an hourly rate that enables them to meet their basic needs and expenses relative to economic trends within their community.

One can only hope that the restaurant patrons believe that the food is good enough to pay what the employees need in order to “meet their basic needs and expenses.” 

A march is planned for Washington, DC, on June 18th by a group called The Poor People’s Campaign. One of their goals is to convince Congress to raise the federal minimum wage to $15/hour. This is only one of their plethora of demands, but it is currently the most outspoken representation of the ‘living wage’ idea in America. 

Advice for conservatives

This is where Europe is heading, and the talking points for that journey are already being produced. The living-wage concept is by no means alien to the European continent, with the EU agency Eurofound making its own contribution. It is also firmly planted in the high-profile Conference on the Future of Europe. The living-wage campaign is also well underway outside the EU. 

Therefore, to summarize, wage regulation would be well advised to consider three implications of this minimum-wage agreement:

1. In order to address the critique of the kind we heard from the German institute IW, the proponents of the minimum/living wage will likely begin a conversation about harmonization of welfare-state entitlement programs. The arguments will say, in one form or another, that it is unreasonable that people in some countries lose social benefits when the minimum wage rises, while others get to keep them. The remedy will be to “harmonize” entitlements, i.e., centralize jurisdiction over social benefits across the European Union.

2. Once the social benefits fall under EU jurisdiction, there will be calls to harmonize taxation as well, and partly for similar reasons. There will also be calls for tax conformity to neutralize the deficits that some countries will experience as a result of unionwide standards for social benefits.

3. With a higher minimum wage and a centralized welfare state, the European economy is bound for perennial stagnation and higher unemployment. As a result, more people will be involuntarily kept out of the workforce, especially minimum-wage jobs. The response from the socialist side of the political spectrum will be to point to a universal-income reform as the solution. 

None of this is inevitable, but in order to reverse course and prevent both a centralization and further expansion of the European welfare state, conservatives need to formulate a coherent, concerted and confident alternative. The path to a conservative, prosperous Europe is open.

Sven R. Larson is a political economist and author. He received a Ph.D. in Economics from Roskilde University, Denmark. Originally from Sweden, he lives in America where for the past 16 years he has worked in politics and public policy. He has written several books, including Democracy or Socialism: The Fateful Question for America in 2024.

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