Introduction
Pay-setting Systems in Europe: Ongoing Developments and Possible Reforms
The performance of the labour markets – as well as macroeconomic performance in general – is intimately associated with the functioning of pay setting.
Is very important k analyses different forms of organizing pay-setting systems in Europe and comments on their effects on employment and welfare. It has become commonplace to relate the rise in Western European unemployment in the 1970s and 1980s to aggregate real wage rigidities. The reduction in unemployment in many of the smaller EU countries throughout the 1990s was associated with real wage moderation. But in some countries a badly functioning pay-setting system has contributed to persistent unemployment: in Germany, for instance, a crucial problem has been the compression of pay differentials between Eastern and Western Germany. Another important aspect of pay setting relates to the use of pay as an incentive to promote effort and labour productivity. Increased international competition and new forms of work organisation have substantially increased the importance of this last aspect of pay setting.
A key feature of pay-setting arrangements that is common to most Western European countries is the high coverage of collective agreements, usually above 60 percent of employees. The main exception is the United Kingdom, where the overall coverage rate was estimated to be as low as 36 percent in 2001. In most Western European countries the main bargaining level is the sectoral one. But the general trend is toward enlarging the scope of local bargaining.
Somewhat paradoxically, in some countries this development has occurred simultaneously with social pacts between top-level labour market organisations, sometimes also involving governments that have set normsfor pay increases at the national level. In some EMU countries, such coordination efforts have been a means to restrain wage increases. The most far-reaching examples are Finland, Ireland and the Netherlands, but less ambitious schemes have also been adopted in Belgium, Greece and Spain.
Most of the new EU member states in Eastern and Central Europe find themselves in an entirely different situation from what prevails in the EU-15 states. In most of the new member countries collective bargaining is of much less importance than in Western Europe. When collective bargaining does take place, the main level is the enterprise one. Estonia, the Czech Republic, Hungary, Latvia, Lithuania and Poland are all characterised by decentralised pay bargaining at the level of the enterprise, low unionization and coverage of collective agreements.
The forces behind the decentralisation of pay bargaining in the past decades are likely to continue operating also in the future: one should expect further decentralisation of pay setting in Western Europe. There are three possible scenarios.
The first scenario is massive decentralisation, de-unionisation and reduction in the importance of collective bargaining, as has happened in the United Kingdom, New Zealand and Australia. In these countries, single employer bargaining has almost completely replaced multi-employer bargaining.
The Anglo-Saxon model of pay setting has its advantages. The combination of enterprise-level bargaining and low unionisation/coverage of collective agreements is likely to produce aggregate real wage restraint. At the same time, it promotes relative wage flexibility and the use of incentive pay. But the radical change in pay-setting practices in the United Kingdom, New Zealand and Australia have only occurred following fundamental changes in the legal system. Without sweeping legal reforms, a development in this direction in continental Western European countries is unlikely. The second scenario is a slow and disorganised process of decentralisation, leading to a reduction in the importance of collective bargaining in Western Europe. This has occurred in Eastern Germany, where many firms have left the employers’ associations or violated sectoral collective agreements in order to reduce wage levels. However, because of the inertia of wage-bargaining institutions, a process of spontaneous, disorganised decentralization is likely to be slow. In principle, decentralisation could promote real wage restraint, although the effects might not be large. It is also possible that a move to single-employer bargaining weakens the incentives for wage restraint. This risk is great if coverage of collective agreements and unionization remain high.
A third scenario is organised decentralisation, according to which higher-level union confederations and employers’ associations choose voluntarily to leave more scope for local bargaining. This could involve larger freedom at the enterprise level to determine the margin for wage increases and its distribution among individual employees. Which pay-setting system should the EU countries opt for? While there is no general answer to this question. First, it is pointed out that pay-setting systems are very slow to change: it takes a long time or extraordinary circumstances to achieve fundamental changes. Therefore, specific recommendations for individual countries would have to take into account the existing bargaining systems, which may differ considerably among countries for historical reasons.
Furthermore, there are good reasons for keeping existing bargaining systems in those current EU member states that have achieved wage restraint through formal or informal co-ordination of bargaining at the multi-sector level. Such arrangements have worked well especially among smaller countries.
But aggregate real wage moderation should be combined with relative wage flexibility. One way to achieve this could be to publicise a “corridor” for wage increases, rather than a single figure, when wage norms are formulated. Alternatively, a co-ordinated agreement on a “normal wage increase” could be reached with the understanding that “above-normal” wage raises should only be granted in areas with labour shortages.
In Germany, there is a strong need for diversity in wages between the western and the eastern regions, as well as for greater opportunities to set wages at the enterprise level that are lower than the norms agreed upon at the industry level. If the stagnation problem of Germany is to be solved, labour market reform must be extended to pay setting practices as well, which so far has not taken place.
Finally, the highlights that the acceding countries, with industrial relations of an Anglo-Saxon type, should keep their present systems. These countries are likely to face strong pressures from Western European trade unions, and possibly also from EU institutions, to change their industrial relations systems so as to conform better to “EU standards”. Such pressures should be resisted. The existing combination of enterprise-level bargaining and limited importance of collective agreements is likely to produce better macroeconomic outcomes than a move to industry-level bargaining of the Western European (German) type.
What will be the outcome of the present trend towards greater importance of local-level pay setting in Western European countries? For political and economic reasons, it may turn out to be impossible to combine aggregate real wage restraint with relative-wage flexibility within the current bargaining systems. If this is the case, one cannot, in the long run, rule out a development towards an Anglo-Saxon system in which a move to single employer collective bargaining is accompanied by massive de-unionization and a decline in the importance of collective bargaining in general. But such a development would probably occur only as a consequence of a long period of deep economic crisis, followed by radical reform of basic labour legislation. This point is underlined by the failure to include even modest changes of the pay-setting system in the recently adopted labour market reforms in Germany.
