The importance of Collective Bargaining- why the Free Market doesn't work. Part 2.

Respect And Promote Wages And Collective Bargaining

28/06/2013 by Ronald Janssen

Ronald Janssen

I regard the growth of collective bargaining as essential. I approve minimum wages and hours regulation. I was altogether on your side the other day, when you deprecated a policy of general wage reductions as useless (…).

These words were written 75 years ago. In today’s Europe, they are now even more valid as they were then. Just like the United States in 1938 was digesting its renewed fall in recession, the Euro Area economies are now expected to slowly emerge from their ‘double dip’. Just like the United States in 1938, the 2012/2013 recession of the Euro Area recession was triggered by an untimely and exaggerated policy of fiscal contraction.

Back in 1938, President Franklin D. Roosevelt took the message John Maynard Keynes had written to him in this letter of February 1938 by heart. A few months later, he signed a Fair Labour Standards Act based on the idea that goods that were not produced under “standards of decency” should not be allowed to “pollute the channels of interstate trade”. This Act outlawed child labour, guaranteed a minimum wage, limited the working week at 40 hours and introduced overtime pay. Some years later, at the end of the Second World War, a follow up act was proposed aiming to strengthen the practice of collective bargaining itself but  president Roosevelt passed away before this second act could be approved.

From the Great Depression in the US to the Great Recession in the Europe of today

Where do we in Europe stand on this? For the past half year, the different European Council formations have been discussing how to build a so called ‘genuine’ Economic and Monetary Union, a discussion that was supposed to include the social dimension and social dialogue as well.

One – optimistic – reading of this is to think that European leaders have realised that their double strategy of fiscal austerity and wage deregulation they are pursuing turns out to be disastrous and that it is their genuine intention to change course. If so, there is a not to be missed opportunity to draw up a list of demands on Social Europe.

Another – rather machiavellistic- interpretation is that European leaders have not really changed their mind but have become nervous because of the political backlash against ‘la pensée unique’ in some member states. In this case, European leaders actually remain convinced of the need to continue with internal wage devaluations by getting rid of all wage formation institutions that prevent wages from being cut. However, in an attempt to contain widespread resistance against such policies, an invitation is extended to trade unions to join the discussion table and actually assist in the implementation of these policies.

What are the facts saying? One fact is that the social dimension in the draft conclusions of this week’s European Council is minimal and limited to proposing “appropriate indicators” and “better coordination of employment and social policies”. This does not say very much.

Another fact is that the Council conclusions remain on the track of building even more new instruments of European economic governance, the idea being to force individual member states to undertake those types of reforms that weaken wage formation systems and allow employers to cut wages easily.

Meanwhile, the wage race to the bottom is ongoing. After wages have been squeezed in Greece, Spain and Portugal, it’s now France’s and Italy’s turn to put downwards pressure on wages .One – cynical-  illustration here is that financial markets, becoming aware of the fact that the Euro Area domino’s keep falling, have invented a new acronym. Markets are now referring to France, Italy, Slovenia, Holland as the FISH countries. And it will surely not end there: Sooner or later, with the export prospects of the remaining group of countries (Germany, Austria, Finland) under continuing pressure from the collapse in import demand in the rest of the Euro Area and with their relative unit wage costs increasing because of the wage cuts elsewhere, the view that the latter countries (the ‘GAF’s’?) have lost competitiveness and need to follow the example set by Spain or Greece, will gain traction. If so, GAF’s, FISH and GIP countries will then compete for the questionable title who is able to cut wages most.

A Genuine Social Dimension: Respect and promote collective bargaining on wages

If the social dimension of European Monetary Union is to be genuine, then one of its key priorities should be to ensure that currency devaluations are not being replaced by wage devaluations and that the wage race to the bottom is prevented from taking place.

As Keynes indicated in his quote above, the practice of collective bargaining is key to this. Robust collective bargaining systems with wide coverage and representative trade unions and employer organisations allow to arrive at balanced outcomes. This is in particular the case when collective bargaining is coordinated so that all bargaining parties can take the situation of the macro economy at national as well as the need to avoid counterproductive ‘beggar thy neighbour” policy at the Euro Area level into account. Moreover, one particular concern, often expressed by trade unions in CEE member states, is that a minimum wage floor without strong collective bargaining practice is not sufficient since 60% of a low average wage is still a low wage.

A first and urgent action to take is stop the ongoing attacks on collective bargaining systems, attacks that are systematically coming from the new system of European Economic Governance (‘six-pack’, competitiveness contracts, ex ante coordination, Troika programs).

This can be done by giving the social dimension side of monetary union the power to set clear limits on this system of European economic governance and its instruments to torture wages and collective bargaining systems. The almost unlimited power the masters of finance (EU finance ministers council, DG ECFIN) and money (ECB and IMF) have managed to obtain over national economic and social policy making needs to be constrained from the very beginning and from inside the system itself. One concrete example here is the wage safeguard clause in the regulation on excessive macroeconomic imbalances stating that the application of the regulation shall not infringe on the freedom to bargain and the right to take action and that national systems of wage formation are to be fully respected. Similar wage safeguard clauses should be developed and inserted into all the other regulations, contracts and programs that make up this system of economic governance.

A second line of action is to complement these wage and collective bargaining safeguards with a policy approach that supports and promotes the practice of collective bargaining.  This could take the form of introducing collective bargaining related clauses in public procurement or of explicitly imposing on employers when using posted workers to pay the collectively bargained wage (and not the lower minimum wage). In line of with the existing European Social Dialogue giving social partners the primacy over European social and labour market regulation, one could also propose to establish a platform of coordination at European level where social partners meet to discuss and take action in an autonomous way how to improve collective bargaining practice.

Finally, we insist on the fact that European Treaty does not need to be changed for the Commission and the Council to undertake the policy directions described above.  Indeed, the Treaty contains quite a number of principles that allow and even oblige European policy makers to respect and promote collective bargaining. There are the objectives to improve and harmonize living and working conditions (TFEU article 151). There’s the obligation of the Union to promote social justice (EU article 3). There’s the obligation of the Union to facilitate dialogue between social partners, while respecting their autonomy as well as the diversity of industrial relations systems. Finally, there’s the horizontal social clause forcing the Union to take, amongst others, the values of democracy and equality into account when defining and implementing its policies (article 9 TFEU). Collective bargaining has clear links with all of these objectives and values.