EUROPEAN COMMISSION Brussels, 28.10.2020 SWD(2020) 245 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT

Accompanying the document Proposal for a Directive of the European Parliament and of the Council on adequate minimum wages in the European Union {COM(2020) 682 final} - {SEC(2020) 362 final} - {SWD(2020) 246 final}



Table of contents 1Introduction: Political and legal context 2Problem definition 2.1What is the problem? 2.1.1 Insufficient adequacy 2.1.2 Gaps in coverage 2.1.3 Which groups, sectors and regions are most affected by the problem? 2.2External drivers 2.3Internal drivers 2.4Internal drivers in Member States where minimum wage protection is provided by collective agreements 2.4.1 Declining trend in collective bargaining 2.4.2 Issues in compliance, enforcement and monitoring 2.5Internal drivers in Member States with a statutory national minimum wage 2.5.1 Declining trend in collective bargaining 2.5.2 Insufficiently clear frameworks to set statutory minimum wages 2.5.3 Insufficient involvement of social partners in statutory minimum wage setting …………………………………………………………………………………………………………………. 2.5.4 Variations, deductions, and exemptions 2.5.5 Issues in compliance, enforcement and monitoring 2.6Why is this a problem? What are the consequences?

2.6.1 For workers 2.6.2 For businesses, economy and society 2.7How will the problem evolve? 3Why should the EU act? 3.1Legal basis 3.2Subsidiarity: Necessity and added value of EU action 4Objectives: What is to be achieved? 4.1General objective 4.2Specific objectives 5What are the possible policy measures? 5.1The baseline scenario 5.2Description of the policy measures 5.3Measures affecting Member States relying exclusively on collective bargaining 5.3.1 Collective bargaining in wage setting 5.3.2 Enforcement and monitoring 5.4Measures affecting only Member States with statutory minimum wages 5.4.1 Collective bargaining in wage setting 5.4.2 National frameworks to set and update statutory minimum wages 5.4.3 Involvement of social partners in statutory minimum wage setting 5.4.4 Variations, deductions, and exemptions

5.4.5 Enforcement and monitoring 5.5Measures discarded at an early stage 5.6Description of alternative policy packages 5.6.1 Member States where minimum wage protection is provided by collective agreements 5.6.2 Member States with statutory minimum wages 6What are the expected impacts of the various policy packages? 6.1Social impacts 6.1.1 Impacts of all packages on Member States where minimum wage protection is provided by collective agreements 6.1.2 Impacts of all packages on Member States with a statutory national minimum wage 6.1.3 Impacts of the individual packages on Member States where minimum wage protection is provided by collective agreements 6.1.4 Impacts of the individual packages on Member States with statutory minimum wages 6.2Economic impacts 6.2.1 Impacts of all packages on Member States where minimum wage protection is provided by collective agreements 6.2.2 Impacts of all packages on Member States with a statutory national minimum wage 6.2.3 Impacts of the individual packages on Member States where minimum wage protection is provided by collective agreements 6.2.4 Impacts of the individual packages on Member States with statutory minimum wages 6.3Impacts on fundamental rights 6.3.1 Impacts of all packages 6.3.2 Impacts of the individual packages 6.4Comparing the policy packages

6.4.1 Effectiveness 6.4.2 Efficiency 6.4.3 Coherence 6.4.4 Impacts on stakeholders 6.4.5 Impacts on national industrial relations systems 7The preferred package 8The choice of legal instrument 8.1Legal options 8.2Preferred option 9How will actual impacts be monitored and evaluated? Annex 1 Procedural information A1.1. Lead DG, Decide Planning/CWP references A1.2. Organisation and timing A1.3. Consultation of the RSB A1.4. Evidence, sources, quality and external expertise Annex 2 Stakeholder consultation A2.1. Results of the first phase Social Partners consultation A2.2. Results of the second phase Social Partners consultation A2.3. Results of targeted consultations with Member States A2.4. Other consultations

A2.5. Public consultations Annex 3 Who is affected and how? A3.1. Practical implications of the initiative Annex 4 Analytical methods A4.1. Summary of studies prepared for this Impact Assessment A4.2. Identification of minimum (and low) wage earners A4.3. Simulations with the Euromod model: Methodological notes A4.4. Estimation of possible employment effects: Methodology A4.5. The OECD Tax-Benefit model: Methodological notes A4.6. Collective bargaining coverage: data issues A4.7. Average and median wages: statistical issues A4.8. Dissemination of statistical data for the UK Annex 5 Visualisation of the problem tree and the intervention logic Annex 6 Minimum wage setting systems in the EU A6.1. Minimum wage protection provided by collective agreements A6.2. Minimum wages set through legislative provisions Annex 7 The profile of minimum wage earners A7.1. Who are the minimum wage earners? A7.2. Where do minimum wage earners live and work? Annex 8 Problem definition: Additional information

A8.1. Adequate minimum wages protect low-wage earners A8.2. Adequacy of minimum wages: Additional indicators and analysis Annex 9 Internal drivers: Additional information A9.1. Declining trend in collective bargaining A9.2. Insufficiently clear frameworks to set statutory minimum wages A9.3. Involvement of social partners in statutory minimum wage setting A9.4. Variations and exemptions A9.5. Lack of compliance with minimum wage provisions Annex 10 Recent reforms in Member States: An overview Annex 11 Policy options: Additional information A11.1. Options related to collective bargaining A11.2. Options related to adequacy indicators A11.3. Composition of policy packages: Overview Annex 12 Impacts of policy measures and policy packages: Additional information A12.1. Statutory minimum wages, wages, and the share of workers affected A12.2. Wage inequality, in-work poverty, gender pay gap A12.3. Work incentives: Simulation results A12.4. Impacts on employment A12.5. Impacts on consumption and prices A12.6. Introduction of the statutory minimum wage in Ireland and Germany

A12.7. Youth minimum wages and youth employment: A survey A12.8. Impacts on public budgets: Results from Euromod simulations A12.9. The choice between possible indicative reference values A12.10. Capacity building actions A12.11. Coherence A12.12. Costs for firms and SMEs A12.13. The SME Test – Summary of results A12.14. Implication of the packages on Member States Annex 13 Monitoring and Evaluation Abbreviations Acronym Meaning or definition CJEU Court of Justice of the European Union CSR Country Specific Recommendation DG ECFIN Directorate-General for Economic and Financial Affairs, European Commission DG EMPL Directorate-General for Employment, Social Affairs and Inclusion, European Commission ECB European Central Bank EMCO Employment Committee EPC Economic Policy Committee ESDE "Employment and Social Developments in Europe", Annual Report of the European Commission Eurofound European Foundation for the Improvement of Living and Working Conditions EWCS European Working Conditions Survey IA Impact Assessment ILO International Labour Organization JRC Joint Research Centre, European Commission LFS Labour Force Survey LMWD Labour Market and Wage Developments in Europe”, Annual Review of the European Commission MS Member States OECD Organisation for Economic Co-operation and Development REFIT European Commission's Regulatory Fitness and Performance programme RSB Regulatory Scrutiny Board SES European Union Structure of Earnings Survey SMEs Small and medium-sized enterprises SPC Social Protection Committee SWD Staff Working Document TFEU Treaty on the Functioning of the European Union



Country and region codes: EU European Union EA Euro area AT Austria BE Belgium BG Bulgaria CY Cyprus CZ Czechia DE Germany DK Denmark EE Estonia EL Greece ES Spain FI Finland FR France HR Croatia HU Hungary IE Ireland IT Italy LT Lithuania LU Luxembourg LV Latvia MT Malta NL The Netherlands PL Poland PT Portugal RO Romania SE Sweden SI Slovenia SK Slovakia UK United Kingdom



1Introduction: Political and legal context In recent decades, low wages have not kept up with other wages in many Member States, thus affecting in-work poverty, wage inequality, and the capacity of low-wage earners to cope with economic distress. Ensuring that all EU workers earn adequate wages is essential for their wellbeing and for supporting sustainable and inclusive growth. Minimum wages play an important role in this context.

The current crisis has bolstered the demand for EU action to ensure that minimum wages allow for a decent living. The EU has been hit hard by the Covid-19 outbreak, with a significant loss of human lives and negative effects on Member States’ economies, businesses, and the income of workers and their families. The crisis has particularly hit sectors with a higher share of low-wage workers such as retail and tourism, and it is likely to have a stronger impact on vulnerable workers. Ensuring a decent living for all workers is critical for supporting a sustainable and inclusive recovery. Therefore, minimum wages are key to ensure an inclusive recovery from the current crisis, as well as to make our economies fairer and more resilient. The right of workers to fair and just working conditions is outlined in several EU political and strategic documents. The Charter of Fundamental Rights of the European Union (Article 31: 'Fair and just working conditions') recognises the right of all workers to working conditions which respect their health, safety and dignity. The European Pillar of Social Rights , proclaimed in November 2017 by the Council of the EU, the European Parliament and the Commission, as well as social partners, in its Principle 6 on ‘Wages’, calls for adequate minimum wages, and transparent and predictable wage setting. These objectives are reflected in the call for a fair and social Europe in the Strategic Agenda for 2019-2024 , agreed at the European Council in June 2019. In the Political Guidelines for the new Commission (2019-2024), President Ursula von der Leyen stated: “I will propose a legal instrument to ensure that every worker in our Union has a fair minimum wage. This should allow for a decent living wherever they work. Minimum wages should be set according to national traditions, through collective agreements or legal provisions.” In line with Article 154 TFEU, the Commission has carried out a two-stage consultation of social partners on possible EU action in the area of minimum wages. During the first-stage consultation, between 14 January and 25 February 2020, social partners were consulted on the need and possible direction of EU action. This was followed by a second phase between 3 June and 4 September 2020. The social partners decided not to launch the negotiations foreseen in Article 155 TFEU. This initiative aims at improving working conditions by ensuring that workers in the Union have access to adequate statutory minimum wages, where they exist, or wages set by collective agreements, thus allowing for a decent living wherever they work. Therefore, the specific objectives of the initiative are to improve the adequacy and to increase the coverage of minimum wages. Thus it forms part of the European Commission’s social policy and is coherent with and supports other actions implemented in this field over the last years. In her Political Guidelines, President Ursula von der Leyen has also committed to fully implement the European Pillar of Social Rights. To this end, in January 2020, the Commission presented a Communication on building a strong social Europe for just transitions, which set out the road towards an Action Plan to implement the Social Pillar including the initiative on minimum wages among the key actions to be pursued. The minimum wage initiative is consistent with other actions foreseen within this framework, notably with the measure to introduce a European Gender Equality Strategy to advance in closing the gender pay gap, including through binding pay transparency measures. 2Problem definition Minimum wage protection can be provided by collective agreements or by statutory minimum wages set by legislation. There are six Member States where minimum wage protection is provided by collective agreements: Austria, Cyprus, Denmark, Finland, Italy and Sweden. Of these Member States, Cyprus has also statutory minimum wages covering some low-wage occupations. The other 21 Member States have statutory national minimum wages, that is, statutory minimum wages that apply universally in the country (as opposed to applying only to some occupations as in Cyprus). In all Member States with statutory national minimum wages, collective agreements set wages above the statutory minimum wages in a number of sectors. Annex 6 provides more detail of minimum wage setting institutions by Member State. During the social partners’ and the targeted consultation process, there was a general agreement amongst stakeholders on the importance of protecting workers with adequate minimum wages. However, many workers are currently not protected by adequate minimum wages in the EU. In some cases, the level of minimum wages cannot be considered as adequate. In others, there are workers who do not have access to the protection of minimum wages. The rest of this section lays out various aspects of this problem (Section 2.1), discusses its drivers (Section 2.2 to 2.5), its consequences (Section 2.6) as well as how the problem may evolve (Section 2.5). The stakeholders generally showed support for most of the objectives of the initiative. Specifically, the workers’ organisations considered that statutory minimum wages are not always adequate while several employers’ organisations agreed with the importance of adequate minimum wages. Along the same lines, there was a general agreement among Member States’ representatives that ensuring adequate minimum wage levels and coverage for all forms of work can contribute to the achievement of upward social convergence and to the fight against poverty, including in-work poverty (see Annex 2 for more details). However, views on the need of EU action differed and employer organisations and Nordic unions did not agree that an EU action in this area would be needed. What is the problem? Insufficient adequacy Minimum wages can be considered adequate when they are fair vis-à-vis the wages of other workers and when they provide a decent standard of living, taking into account general economic conditions in the country. While the first aspect of adequacy is formulated in a “relative” way, i.e. including an element of comparison, and the other in an “absolute” way, both are closely related. This is because even the concept of a “decent standard of living” is usually defined in a relative way. This section (and Annex A8.2) present indicators operationalising both aspects of adequacy to allow for a complex assessment of adequacy of minimum wages. First, the aspect of fairness in comparison to other wages is operationalised by the ratio of the gross minimum wage to the gross median wage as well as to the gross average wage. Second, adequacy as providing a decent living standard is operationalised by the ratio of the net income of minimum wage earners to the poverty (AROP) threshold as well as to the net average wage. All these adequacy indicators compare minimum wages to other people’s wages or incomes. Both aspects of minimum wage adequacy, and all indicators listed, are relevant independently of the wage distribution or the general level of wages. All are used in this section to assess problems of adequacy of statutory minimum wages . While the adequacy of statutory minimum wages has improved in several countries in recent years, it is still low in a number of Member States, based on all main indicators. In almost all Member States, the statutory minimum wage is below 60% of the median wage and 50% of the average wage ( Graph 1 ). In 2019, only the statutory minimum wage of Portugal reached both values, while that of Bulgaria reached 60% of the median. Further, in the same year, the statutory minimum wage was below 50% of the median wage in nine EU countries (Estonia, Malta, Ireland, Czechia, Latvia, Germany, the Netherlands, Croatia and Greece). In three of these countries (Estonia, Malta and Ireland), it was even below 45%. Moreover, seven countries (Estonia, Malta, Ireland, Czechia, Latvia, Hungary and Romania) had minimum wages below 40% of the average wage. In Member States where minimum wage protection is provided by collective agreements (with the exception of Italy), wages set in collective agreements for low-paid occupations are generally high when compared to statutory minimum wages in other countries. Graph 1: Minimum wages, expressed as a percentage of the gross median and average wage of full-time workers, 2019 Notes: * For AT, DK, FI, IT and SE, information on collective agreements covering low-paying job categories (average of 3 lowest rates; for CY information on occupational statutory minimum wages) was taken from Eurofound (2020): Minimum wages in 2020 - Annual review, while information on median and average wages was provided by Eurostat. Source: Commission calculations based on Eurostat data. In nine Member States, the statutory minimum wage did not protect minimum wage earners against the risk of poverty in 2018 ( Graph 2 ). Countries where the minimum wage was not sufficient to help a single worker avoid the risk of poverty are Bulgaria, Czechia, Estonia, Germany, Hungary, Latvia, Luxembourg, Malta and Slovenia. In ten Member States, statutory minimum wages also fell short of the standard of adequacy defined by the Council of Europe.

Graph 2: Net income of single minimum wage earners working full-time, relative to the at-risk-of poverty threshold, 2018 Notes: An individual is at the risk of poverty if he or she lives in a household with an income below 60% of net median household income, adjusted for household composition, in the same country. This is the standard definition of monetary poverty in EU social statistics. The single childless persons considered in this graph are not entitled to social assistance and housing benefits. Source: European Commission calculations based on OECD TaxBen model. Comparable wages set in collective agreements in Member States without statutory minimum wages (marked by *) were taken from Eurofound (2020): Minimum wages in 2020 – Annual Report. The at-risk-of poverty threshold is based on Eurostat flash estimates for BE, DE, ES, FR, IE, LT, LU, MT, PT, SK, UK, CY and IT. For all other countries, official Eurostat data have been used. Taken together, 14 Member States had a statutory minimum wage below either 50% of the median wage or not sufficient to reach the poverty line for a single individual. While there are differences across various indicators of minimum wage adequacy, their conclusions are consistent in the case of a number of Member States. In particular, the adequacy of the statutory minimum wage in some Member States ranks consistently among the lowest (e.g. Estonia, Czechia, Lithuania and Malta), or among the highest (e.g. France and Portugal) across the variety of indicators analysed. The assessment of minimum wage adequacy is more complex in countries where minimum wage protection is provided by collective agreements. This is because comprehensive data on wages set in collective agreements are not available. Representative samples of collective agreements for low-paid occupations have been collected in the past. The available information suggests that there are issues with the adequacy of some minimum wages in Cyprus and Italy (see Graphs 1 and 2 above), although the assessment of adequacy is sensitive to the methodology of collecting representative collective agreements. Insufficient adequacy affects a large number of workers. About one in six workers are low-wage earners in the EU according to the definition of Eurostat, earning less than two thirds of the median wage, and their share has increased from 16.7% in 2006 to 17.2% in 2014. Their share is lowest in Sweden, Belgium and Finland, while it is highest in Latvia, Romania and Lithuania. In addition, a significant share of workers earns less than 60%, 50% or 40% of the median wage ( Graph A8.2 in Annex 8.1). General wages, as well as minimum wages, have been growing faster in low-wage countries (especially in Central and Eastern European Member States) than in high-wage countries. Despite this trend towards convergence in the last two decades, a large gap remains between the lowest and the highest nominal minimum wages in the EU. In 2019, statutory minimum wages in the EU ranged from EUR 286 in Bulgaria to EUR 2071 in Luxembourg. Taking into account the differences in price levels between Member States (a comparison in “Purchasing Power Standard”), the difference between the lowest and highest statutory minimum wages is about one to three ( Graph A8.8 in Annex A8.1), broadly reflecting differences in wage and productivity levels. Gaps in coverage In Member States with a statutory national minimum wage, gaps in coverage arise from specific provisions in the minimum wage legislation which allow for exemptions or variations for specific groups of workers. The extent of these gaps appears small based on the regulations that exist in Member States, but exact data are not available. Compliance issues contribute to gaps in coverage (see Section 2.5.5). In Member States without a statutory national minimum wage, gaps arise because specific groups of workers are not covered by collective agreements. There are substantial differences: The share of workers not covered is around 2% in Austria, 10% in Finland and Sweden, 20% in Denmark and Italy, and around 55% in Cyprus (see also Section 2.5.1 on collective bargaining). Given data issues (see Annex A4.6A4.4), precise information on the wage levels of those not covered by collective agreements is however limited. The share of low-wage workers is significantly higher among the non-covered in Cyprus, similar to those covered in Austria, Denmark and Finland, while information is not available for Italy and Sweden. Also for these countries, compliance issues play a role (see Section 2.4.2). Which groups, sectors and regions are most affected by the problem? Women, young and low-skilled workers, single parents, as well as workers with non-standard contracts are more likely to be affected by the problem than other groups. The share of minimum wage earners in the EU is estimated at levels that vary from below 5% (e.g. in Belgium and Malta) to around 20% (in Portugal and Romania). Women have a higher (almost double) probability to earn the minimum wage than men, but the gender differential varies among Member States. In Czechia, Germany, Malta, the Netherlands, and Slovakia women represent over 70% of minimum wage earners. Young people, single parents, low-skilled workers and those with temporary or part-time contracts are more likely to earn minimum wages than other groups. They do not, however, represent the majority of minimum wage earners due to their generally small shares in the workforce. See Annex A7.1 for more detail on the profile of minimum wage earners. Workers in less densely populated areas have a somewhat higher chance of being minimum wage earners but the differences between types of regions are small overall. On average across all Member States for which data are available, 14% of the employees living in thinly populated areas earn the minimum wage, while there is a lower share of minimum wage earners in intermediate (13%) and densely populated areas (11%). This is linked, among other things, to regional differences in the characteristics of workers as well as the location of various economic sectors (for instance, agriculture in rural areas and finance in dense ones). In virtually all countries, the majority of minimum wage earners works in the services sectors. The food and accommodation (or hospitality) sector, a sector particularly affected by the Covid-19 pandemic, has a high share of minimum wage earners. Industry and agriculture sectors employ a relatively small share of minimum wage earners in most countries, but this share is higher in some Central and Eastern European Member States. Industry accounts for a low share of minimum wage earners in some Member States (less than 10% in Belgium and Luxembourg), while its weight exceeds 30% in some Central and Eastern European Member States (such as Bulgaria, Czechia, Croatia, Slovakia, Poland, and Romania). The share of minimum wage earners in agriculture is less than 10% in all Member States. Micro and small enterprises employ a majority of minimum wage earners but there is a variety of patterns across the EU. Firms with less than 50 workers employ more than 80% of minimum wage earners in Bulgaria, Estonia, Greece, Latvia, Slovakia and Spain (as well as in Cyprus, Finland and Italy, in the case of low-wage earners) while their weight is below 60% in Germany, the Netherlands and Slovenia. External drivers The situation of low-wage workers and the level of minimum wages are also influenced by factors beyond the scope of this initiative. They include megatrends (e.g. globalisation and technological and demographic changes) and policy areas other than minimum wage setting (e.g. taxes and benefits). The proportion of low-wage workers is affected by changes in the structure of the economy and demographic factors related to skills. Globalization and technological change are increasing productivity and living standards on average, but some workers may be left behind. Increased automation, digitisation, and robotisation have significantly contributed to job polarisation in the EU: a decline of employment in medium-paid (or medium-skilled) occupations and a simultaneous increase of low- and high-paid (or skilled) occupations. This has contributed to wage inequality.

The share of non-standard workers, who are much more likely to receive the minimum wage, has increased. The proportion of permanent full-time employment (also called “standard” employment) has declined from 62% to 59% in the EU-28 over the period 2002-2016. It has been estimated that the remuneration of employees on open-ended contracts is (on average) at least 13% higher as compared to similar workers on temporary contracts. The gap is even larger for low-wage earners. Taxes and benefits affect the living standards of minimum wage earners. Personal income taxes and social security contributions can significantly reduce the take-home pay of minimum wage earners (see Graph A8.5 in Annex 8.2). Internal drivers Internal drivers refer to the root causes of insufficient minimum wages and gaps in coverage that will be tackled by the initiative. This section discusses five main internal drivers: (1) Negative trend in collective bargaining coverage, affecting adequacy and coverage; (2) Insufficiently clear framework for setting statutory minimum wages (including criteria for adequacy, frequency and regularity of updates); (3) Insufficient involvement of social partners in MW setting; (4) Exemptions for some groups in statutory systems; lower minima (variations) for other groups; (5) Imperfect compliance. A summary of these drivers is presented in this section; Annex 9 provides more detail and background and Table A9.5 presents a summary of the internal drivers per Member State, including observations on their potential impact on adequacy and coverage. Internal drivers affect both aspects of the problem (coverage and adequacy of minimum wages) differently according to whether minimum wages are set via collective bargaining or legal provisions. A detailed visualisation of how they affect both aspects of the problem in each system is provided by Graph 3. As panel (a) of Graph 3 shows, the adequacy and coverage of minimum wages in countries solely with collective bargaining systems are affected by declining collective bargaining coverage and imperfect compliance. In countries where statutory national minimum wages also exist (panel b), adequacy and coverage of minimum wages are not only affected by those two factors but also by specific features of the systems such as the way minimum wages are updated or the existence of exemptions or variations. Internal drivers affect adequacy or coverage differently across both systems. For instance, collective bargaining is an indirect driver of the adequacy of minimum wages in statutory systems, but it directly drives both adequacy and coverage in systems relying on collective bargaining. Furthermore, while exemptions from statutory minimum wages affect coverage, variations and deductions affect adequacy. For this reason, they are depicted separately in Graph 3 even if discussed in the same internal driver (4). Graph 3: Links between internal drivers and aspects of the problem, by minimum wage setting system (a)Systems where minimum wage protection is provided by collective agreements (b)Systems with a statutory national minimum wage Internal drivers in Member States where minimum wage protection is provided by collective agreements Declining trend in collective bargaining Well-functioning collective bargaining ensures that workers are protected by wages set in collective agreements and leads to higher wage levels. This is in particular the case in Member States where minimum wage protection is provided by collective agreements since, in these countries, collective bargaining directly determines both the coverage and the adequacy of minimum wages. Member States with this type of system display some of the highest wages (see Graph 1 and Graph 2 above) as well as lower wage inequality. Collective bargaining coverage shows a decreasing trend in many countries in recent years. While this trend was most pronounced in countries with statutory minimum wages, a significant decrease can also be seen in Cyprus where it has fallen from around 65% to around 45% in the last two decades, while small declines can also be seen in Denmark and Sweden. Some of the countries where coverage has significantly declined have chosen to introduce a statutory minimum wage. This includes Germany in 2015 (where collective bargaining coverage had decreased from 68% in 2000 to 58% in 2014) and Ireland in 2000. In these two Member States, trends in collective bargaining coverage were not significantly affected by the newly introduced statutory minimum wage. Issues in compliance, enforcement and monitoring Studies based on survey data have found that non-compliance appears to be a significant phenomenon in many countries, including those countries where minimum wage protection is provided by collective agreements. Nevertheless, data issues limit the possibility of precise estimations. Evidence also suggests that higher wages set in collective agreements may lead to a higher risk of non-compliance, including undeclared work. Systems relying on collective bargaining differ in terms of the extent to which wages set in collective agreements are enforceable. This appears to be a problem in particular in Cyprus, where collectively agreed wages, including indicative minimum starting salaries by occupation, are not legally enforceable because collective bargaining agreements are not legally binding. In 2019, Cyprus made legally binding, for the first time, collectively agreed wages in the tourism sector applying to selected low-skilled occupations.

Internal drivers in Member States with a statutory national minimum wage Declining trend in collective bargaining Collective bargaining coverage has been on a downward trend in many Member States in recent years. It fell from an estimated EU average of about 66% in 2000 to about 56% in 2018 with particularly strong declines in Central and Eastern Europe. Moreover, in several EU countries, collective bargaining shifted from national, inter-sectoral or industry levels to individual firms. One of the drivers of falling collective bargaining was a sharp decline in trade union membership. This decrease has been particularly sharp in Central and Eastern European countries. The increase of atypical and non-standard work has contributed to union density decline. This partly results from the practical difficulties in organising these workers that are inherent to their status. The shift of economic activity from manufacturing to private sector services is also harming unionisation. The decline in collective bargaining has created a downward pressure on wages and thereby on minimum wages. In particular, low and decreasing collective bargaining coverage has led to a high share of low-wage earners in a number of countries including Czechia, Estonia, and Latvia, putting pressure on statutory minimum wages. It has also contributed to increasing wage inequality overall, leading to a lagging median wage as compared to the average wage in countries such as Bulgaria, Hungary and Romania. This may also have put pressure on minimum wages. Collective bargaining coverage affects statutory minimum wages indirectly through its effect on general wage developments: ·The first step of this relationship is that high collective bargaining coverage is associated with higher wages and a lower share of low-wage workers, i.e., a higher share of income going to labour (see Graph A9.2 in Annex 9.1) and a lower share of low-wage workers. All Member States with a share of low-wage earners below 10% have a collective bargaining coverage rate above 70% (see Graph A9.1 in Annex 9.1). While a number of these Member States rely on collective bargaining to set minimum wages, this group also includes countries with statutory minimum wages, such as Belgium and France. Decreases in collective bargaining coverage have been found to have a negative, although transitory, effect on wage growth. ·The second step is that general wage developments are important determinants of decisions setting statutory minimum wages. Wage setting through collective bargaining has an institutionalised impact on statutory minimum wage updates (i.e., linked to the dynamics of wages set in collective agreements) in countries such as Germany and the Netherlands. Accordingly, wage moderation in collective bargaining has been a driver of modest minimum wage increases at various times in these countries. In addition, general wage developments automatically affect minimum wage adjustments in Belgium, France, Luxembourg, and Slovenia, through automatic indexation formulas. In other Member States with statutory minimum wages, minimum wage setting is informed, by law or by custom, by general wage developments. Moreover, the decline in collective bargaining on wage setting therefore leads to increased wage inequality. By strengthening the bargaining power of low-wage workers, collective bargaining supports higher wages at the bottom end of the wage scale and thus contributes to limiting wage inequality. Insufficiently clear frameworks to set statutory minimum wages The lack of a clear framework for setting and updating statutory minimum wages may harm minimum wage adequacy. A low frequency of updates and an unclear framework (e.g. the lack of criteria to guide the updates of statutory minimum wages) may result in periods of non-adjustment alternating with large increases in the minimum wage. As a result, statutory minimum wages may not keep pace with developments in prices, wages or productivity for several years and thus does not reach a sufficient level of purchasing power to ensure a decent living. Consequently, clear and stable frameworks for updating minimum wage are associated with more adequate minimum wages. In many Member States, statutory minimum wage setting is not based on clear and stable criteria. Member States where criteria for minimum wage setting are not defined by law (Bulgaria, Estonia, and Romania) often lack an adequate level of minimum wages (in particular Estonia and Romania). Moreover, in several Member States, the minimum wage legislation only makes a general reference to the need for minimum wage setting to take into account broad economic conditions, or a list of variables or factors (including among others exchange rates, hours worked, tax burden, household expenditure) is defined but without guidance on the use of these variables or on their interaction. Among these countries, the majority do not provide for adequate minimum wage levels (Germany, Ireland, Greece, Croatia, Latvia, Hungary, Poland, and Slovakia). The regularity and timeliness of statutory minimum wage updates are not always defined by law. In many Member States, an established practice of annual updates exists even though not legislated, while in some Member States the regularity and timeliness of the updates are neither defined in legislation nor established through a regular practice (see Table A9.2 in Annex 9.2). This is the case e.g. for Romania, where the regularity and timeliness of statutory minimum wage updates are not specified and the adequacy of minimum wages remains low. Furthermore, in three Member States (Czechia, Estonia, and Ireland), the annual updates are not defined by law but implemented through an established practice. All three Member States are among the countries with the lowest adequacy of the statutory minimum wages. Clear targets for minimum wage levels can contribute to ensuring adequacy. However, if targets are set too low (e.g. at 40% of average wage) there is a higher risk that they do not provide for sufficient adequacy. Four Member States (Czechia, Estonia, Lithuania, and Poland) have set targets for minimum wage levels, which range from 40% to 50% of the gross average wage. Particularly in Czechia and in Estonia, where the target is set at 40% of the average wage, the adequacy of minimum wage remains among the lowest in the EU. Insufficient involvement of social partners in statutory minimum wage setting The involvement of social partners in setting and updating statutory minimum wages makes the minimum wage setting more informed and inclusive. Social partner consultation can enhance the capacity of minimum wage setting systems to ensure adequacy while preserving employment and competitiveness. It can also reduce uncertainty for employees and firms. However, the involvement of social partners in statutory minimum wage setting is limited. In several Member States and considerable differences exist in their role in the decision-making process of statutory minimum wages across the Member States. In a number of Member States (Bulgaria, Spain, Croatia, Latvia, Hungary, Portugal, and Romania), although an institutionalised bilateral/tripartite consultation process is defined by law, this consultation is non-binding and governments can change the minimum wage levels unilaterally. The majority of these countries (Croatia, Latvia, Hungary and Romania) does not provide for adequate minimum wage levels. The adequacy of minimum wages is also very low in Member States where an institutionalised tripartite or bipartite setting exists, but is not defined by law (Estonia, Lithuania, Poland, and Slovakia). In some Member States, social partners often play only an advisory role in systems where the minimum wage setting is led by expert bodies. This is the case for Greece and Ireland, where the issued non-binding recommendations do not help to achieve adequate minimum wage levels, as the adequacy of minimum wages in both countries remains low. The role of social partners in the decision making process is also variable in Member States with automatic indexation. In Malta, for instance, the automatic indexation is complemented by a formal obligation to consult social partners, which leads to non-binding recommendations, and the adequacy of minimum wages in the country is among the lowest in the Union. In other Member States, the involvement of social partners is not institutionalised at all. Particularly in Czechia, where the adequacy of minimum wages is among the lowest in the EU, this could be a contributing factor. In a number of Member States, there are challenges related to the involvement of social partners in the policy process in general. Variations, deductions, and exemptions Reduced rates of statutory minimum wages, so-called variations, applying to specific groups reduce the adequacy of statutory minimum wages. They can exacerbate existing inequalities for vulnerable groups of workers in some cases, e.g. if lower minimum wages are applied across the board to young workers, in specific sectors in which for instance women or migrant workers are over-represented, or if they are not limited in time leading to systemic underpayment of work. At the same time, they may be beneficial for facilitating access to the labour market of vulnerable groups if they are non-discriminatory, proportionate and limited in time. They can have a positive effect on employment if they aim at integrating young workers in the labour market, providing training to apprentices or promoting the employment of workers with lower productivity. Variations in statutory minimum wages exist in many Member States. In several Member States, there are purely age-based variations while in some others they are either education and/or experience-based. The available data suggest that the share of workers affected by youth variations is very small, except in the Netherlands and, to a lesser extent, Luxembourg. In particular, about 8% of workers earn less than 95% of the regular minimum wage in the Netherlands; about two-thirds of them are younger than 20 years old and almost all younger than 30. About 2% of workers earn less than 95% of the regular minimum wage in Luxembourg; 60% is younger than 30. A number of other kinds of variations exist such as for seasonal and domestic workers and for workers with disabilities. In some cases, the effect of minimum wage regulation can be weakened by allowing deductions from the minimum wage. For instance, deducting the value of the equipment needed to perform the work from the minimum wage, or the cost of travel, board or lodging and accommodation, reduces the actual financial remuneration of workers. Deductions from wages exist in all the Member States with statutory minimum wages. In many cases deductions are provided by law (e.g. in the case of taxes and social security contributions). In other cases they can result from advance payments, guarantees, over-payments, participation in strikes, or in case food is provided, while they can also be agreed with the employee (e.g., to deduct loan instalment payments). In some other cases, deductions can be made to compensate, among others, for damages, missed working hours, gross misconduct or fines. In some Member States (Estonia, France, Latvia, Lithuania, the Netherlands and Poland), specific provisions exist which protect minimum wage earners. For example, in Estonia, there is a provision that no deductions can be made for minimum wage earners (with some very few exceptions defined by law where 20% can be deducted), while in the Netherlands, the paid salary cannot fall below the minimum wage, except in the case of reductions due to advance payments. In Lithuania, in the case of a minimum wage workers, deductions can be made up to 20% of wages for the compensation of damage (in some cases 50%) and in Poland, 75% of the salary is free from deductions (or 90% after reductions due to penalties). In France, the amount that can be deducted increases progressively with increased salary, and in the lowest tranche, a maximum of one twentieth of the salary can be deducted. In Latvia, in any case of compensation for damages, the resulting salary cannot fall below the minimum wage plus the state social security benefit for each dependent minor child. More information on deductions per Member State is available in Table A9.4 in Annex 9. Besides variations and deductions, several Member States with statutory minimum wages have exemptions in their scope of application. In most cases, these are related either to up- or re-skilling (e.g. for trainees) or to labour market integration. In other cases, specific groups of workers are covered by separate provisions (e.g. public service). Their use leads to gaps in minimum wage coverage.

Issues in compliance, enforcement and monitoring Gaps in coverage and insufficient adequacy may also emerge if existing rules are not complied with. Studies based on survey data have found that non-compliance appears to be a significant phenomenon in almost all countries, although data issues limit the possibility of precise estimations. In Member States with statutory minimum wages, some of the evidence is provided by the institutions in charge of enforcing minimum wage rules, such as labour inspectorates or customs offices. Compliance may also be an issue in some of the Member States where minimum wage protection is provided by collective agreements. For instance, it has been estimated that, in Italy, more than 10% of workers are paid below the wage set by their reference collective agreement with an average shortfall of 20-23% (see Annex A9.5 5) Evidence also suggests that young workers, women and agricultural workers are more likely to be paid less than the minimum wage floor in some Member States. Increasing minimum wage levels may lead to a higher risk of non-compliance, including undeclared work. The lack of compliance can lead to unfair competition, as the reduced labour costs of non-compliant businesses can distort competition. This risk exists also in the context of public procurement procedures where non-compliant bidders could benefit from lower wage costs. Workers’ organisations have expressed their concerns that public contracts may be awarded to companies that do not comply with the applicable collective agreements and legal frameworks. The lack of reliable monitoring and data collection mechanisms affects the evaluation of trends in the adequacy and coverage of minimum wages. In Member States with statutory minimum wages, data are not always available on the share of non-covered workers or the share of workers affected by specific variations in or deductions from minimum wages. In the Member States where minimum wage protection is provided by collective agreements, the incomplete information on collective bargaining coverage (see Annex A4.6) and the level of wages set in collective agreements makes it difficult to appropriately monitor the situation of low-wage workers. Moreover, data is scarce on the level and adequacy of wages for workers not protected collective agreements. Why is this a problem? What are the consequences? 2.1.1For workers Adequate minimum wages improve the socio-economic situation of the families of low-wage earners, and contribute to reducing wage inequality and in-work poverty. Gaps in adequacy and coverage of minimum wages hamper upward convergence in working and social conditions between EU Member States. Driven by a number of economic factors, but also affected by minimum wages, in-work poverty increased from 8.3% in 2007 to 9.4% in 2018 in the EU. At the Member State level, in-work poverty has been on the rise in all but seven EU Member States (i.e. Croatia, Finland, Greece, Ireland, Latvia, Poland, and Romania) showing that, increasingly, work does not always protect against poverty. Inadequate minimum wages may contribute to the gender pay gap. Given their over-representation among minimum wage workers, women are more affected by inadequate minimum wage policies than men. Moreover, since national minimum wage policies tend to compress the bottom of the wage distribution, where women are over-represented, inadequate minimum wage policy could also lead to a higher gender pay gap. Major gaps in minimum wage adequacy or coverage may lead to labour market segmentation. Labour market segmentation is a concern especially if low-wage workers are not able to move quickly to higher-paying jobs (i.e. if earnings mobility is low) or if the incidence of informal employment, including due to the lack of enforcement of regulations, is high. In addition, a low adequacy of minimum wages means that work does not pay, as compared to being unemployed or inactive. In this case, people out of work will not have sufficient incentives to take up work at the minimum wage. Work incentives are also determined by the tax-benefit system, which in some countries reduces incentives to work for low-wage earners and second earners. In particular, adequate minimum wages and tax incentives for low-wage earners are complementary policies to maintain high employment and support the income of low-wage workers. For businesses, economy and society Inadequate minimum wages may contribute to unfair competition in the labour market, which is a key concern for SMEs. In addition, inadequate minimum wages may make recruitment more difficult. They reduce the pool of workers for recruitment due to reduced work incentives. They increase the turnover of staff and reduce staff engagement. These impacts may affect SMEs more as they employ a majority of workers at the minimum wage level. Unpredictable minimum wage developments can have negative consequences for firms, especially SMEs, and for the economy as a whole. Under systems characterised by an insufficient involvement of social partners and an insufficiently clear framework to set statutory minimum wages, minimum wage setting is not based on a full set of information, reflecting all relevant economic and sectoral conditions, nor sufficiently articulated with collective bargaining processes. This results in less frequent but larger increases in the minimum wage with more significant effects on the decisions of firms. Evidence suggests that in such systems, minimum wage increases are also more correlated to the political cycle. Such developments may have a negative effect on the business environment for firms and thus, in the long run, for investment, productivity, and growth. Low wages may trigger labour mobility flows between Member States, which raise concerns for sending and receiving countries. The free movement of workers is one of the founding principles of the EU. Labour mobility can be instrumental in promoting labour market adjustment and support the deepening of the single market. Large wage differentials (between regions and between countries) can trigger outward mobility from poorer regions, particularly among low paid workers and the young, exacerbating ongoing demographic trends of ageing and population decline, in certain regions. Minimum wages can counteract these trends by supporting the wages of young workers in low-income regions. At the same time, outward labour mobility may tighten local labour markets, increase the bargaining power of local workers and raise average wages in the short term. But such re-equilibration is less effective among low-wage earners. How will the problem evolve? It is expected that more workers will need the protection of adequate minimum wages in the future. In particular, the situation of low-wage workers may continue deteriorating, and in-work poverty can be expected to continue increasing. This is because the main external drivers of these developments (including technological change leading to job polarisation, global low wage competition, shifts in the economy towards services putting pressure on collective bargaining, and increasing the weight of non-standard work) are secular trends, which are expected to continue. Without policy action, these trends may also be exacerbated by the strong impact of the Covid-19 crisis. Social distancing has strongly hit sectors where low-pay workers are disproportionally represented. The most affected sectors are services including transports, tourism and hospitality. In the second quarter of 2020, there were 6 million less employed in the EU compared to the last quarter of 2019; about half of this was due to job destruction in wholesale and retail trade, transport, accommodation and food services. Activity in these sectors is likely to stay on hold for a while, as people adopt voluntary social distancing to minimise the risks of infections or new waves of contagion lead public authorities to introduce selective restrictive measures. These changes have redistributive effects as not all workers are equally adaptable or exposed to them. Workers that were in a weak position before the pandemic hold occupations that are vulnerable to social distancing. Real-time survey data show that those in the top earnings quartile were on average 50% more likely to work from home in April than those in the bottom quartile. This leads to downward pressure on wages, notably for low wage earners, and may put further pressure on collective bargaining. At the same time, the crisis has brought to the fore the category of ‘essential workers’, in sectors such as cleaning, retail, distribution, logistics, and delivery, health and long-term care and residential care. In these sectors, the share of low-wage workers is high. There is an increasing public recognition of the role of such workers, while their remuneration levels continue to stagnate. Workers in health and social services are more likely to earn the minimum wage than other workers in the public sector. Moreover, evidence suggests that lower-skilled health and social care assistants earn considerably less than the national average wage in their country. With unemployment expected to increase, the bargaining power of low-paid workers is likely to decrease in the near future. Given the sizeable and increasing share of low-wage workers, protection by adequate minimum wages becomes even more important. While reforms in minimum wage setting systems implemented by Member States go in the right direction, progress has been uneven. As a result, many workers in the EU are still not adequately protected by minimum wages. It is likely that the reform momentum in the minimum wage setting systems will not continue, notably in the context of the expected deterioration of labour market conditions caused by the Covid-19 pandemic. This reinforces the case for EU intervention at the present point in time 3Why should the EU act?

Legal basis Article 153 is the appropriate legal basis for an EU initiative on fair minimum wages. Insofar as wages, including minimum wages, are a key component of working conditions, the initiative could be based on Article 153 (1) (b) TFEU on ‘working conditions’. Article 153(5) TFEU contains limitations to the EU competence. This paragraph establishes that ‘the provisions of this Article shall not apply to pay’. Article 153(5) has been interpreted by the Court of Justice of the European Union (CJEU) in such a way that the exclusion on ‘pay’ “must be construed as covering measures - such as the equivalence of all or some of the constituent parts of pay and/or the level of pay in the Member States, or the setting of a minimum guaranteed wage - that amount to direct interference by EU law in the determination of pay within the European Union”. “It cannot, however, be extended to any question involving any sort of link with pay; otherwise some of the areas referred to in Article 153(1) TFEU would be deprived of much of their substance.” In line with this interpretation, recent initiatives using Article 153 TFEU as legal basis (e.g. the 2019 Directive on work-life balance for parents and carers and the 2019 Directive on transparent and predictable working conditions) already touch indirectly on different aspects of pay, whereby remuneration is regarded as part of working conditions, as referred to in Article 153 (1) (b). It follows that in view of Article 153(5) TFEU and constant case law of the ECJ any EU action in the field of minimum wages shall not seek to harmonise the level of minimum wages across the EU, nor would it seek to establish a uniform mechanism for setting minimum wages. Action at EU level could thus be to set up a framework to ensure that national minimum wage setting systems allow workers to access adequate minimum wage protection, either in the form of a statutory minimum wage or of wages set in collective agreements. This approach would not interfere with Member States’ and social partners’ competence to determine the detailed modalities of their minimum wage setting frameworks, and in particular the level of their minimum wages, in line with the Treaty. Therefore, the diversity of minimum wage setting systems in Europe would be preserved. Minimum wages would continue to be set either through collective agreements or through legal provisions, in full respect of national competencies and social partners’ contractual freedom. The initiative would allow Member States to implement the measures, notably those related to collective bargaining and national frameworks for statutory minimum wages, taking into account their national economic circumstances and the specificities of their minimum wage setting systems. Limits to the legal possibilities of EU action also imply that EU action would not make it binding for Member States that rely on collective bargaining to introduce statutory minimum wages. In light of the limitations presented above, EU action would thus not go beyond what is necessary to achieve the policy objectives, so that the principle of proportionality is respected considering the size and nature of the identified problems. Subsidiarity: Necessity and added value of EU action The majority of Member States are affected by the problem of insufficient adequacy and/or coverage of minimum wages. These challenges affect both types of minimum wage setting systems (see sections 2.1.1 and 2.1.2): ·In Member States where minimum wage protection is provided by collective agreements, more than 10% of workers are excluded from the protection of wages set in collective agreements in four countries (Italy, Denmark, Sweden, Finland), reaching 55% in the case of Cyprus, although there is limited information about how many of these workers are earning low wages. Moreover, wages set in collective agreements in Cyprus and Italy do not seem to be sufficiently adequate. ·In Member States with a statutory national minimum wage, some workers are not protected by minimum wages due to exemptions in twelve Member States (Belgium, Czechia, Germany, Estonia, Ireland, Spain, France, Croatia, Latvia, Lithuania, the Netherlands, and Poland). Furthermore, statutory minimum wages are too low vis-à-vis other wages and/or to provide a decent living in fourteen Member States (Bulgaria, Czechia, Estonia, Greece, Germany, Croatia, Hungary, Ireland, Latvia, Luxembourg, Malta, the Netherlands, Romania, Slovenia). Action at national level has proven insufficient to address the problem. While over the last years, several Member States have taken steps towards improving their minimum wage systems, national action has not been sufficient to address the identified problem. Reforms at national level have not been comprehensive enough and implementation has often lagged. Existing EU instruments, most notably the European Semester, have not been sufficient to address the existing shortcomings in national minimum wage setting systems. Minimum wage policies have been subject to multilateral surveillance within the European Semester, and the EU has issued policy guidance to selected Member States. In the last decade, thirteen Member States have received country-specific recommendations (CSRs) on wages, and ten of them specifically on minimum wages (see Annex A12.11). For instance, Bulgaria and Romania have repeatedly received CSRs during the period 2014-19 calling for more transparent minimum wage setting mechanisms based on objective criteria for updating minimum wages (such as job creation and competitiveness). However, minimum wage setting frameworks in both countries remain insufficiently clear and social partners are not sufficiently involved. As a result, recent increases in minimum wages in these countries seem to have negatively affected the business environment in these countries. Continuing to approach the problem only in a country specific manner is not proportionate to the extent of the problems identified in the majority of Member States. Without policy action at EU level, more countries are likely to be affected by the problem, which would endanger the level playing field in the Single Market. While the effect of most internal drivers is expected to remain steady, the secular decline of collective bargaining is likely to reinforce the magnitude of the identified problem. In countries where minimum wage protection is provided by collective agreements, both the adequacy of wages set in collective agreements and the share of protected workers will be affected. In Member States with statutory minimum wages, minimum wage adequacy will also be impacted given the strong effect that collective bargaining has on it, as explained above (see section 2.5.1). Without concerted action at EU level, individual countries may be little inclined to improve their minimum wage settings because of the perception that this could negatively affect their external cost competitiveness. This creates challenges for maintaining a level playing field in the Single Market as competition risks being more based on lowering social standards, rather than on innovation and productivity. An EU initiative would be more effective in strengthening minimum wage setting systems than other instruments. An EU framework would set clearer expectations, ensure that progress is not partial or uneven, and reinforce trust among Member States and social partners by increasing transparency. This would help provide the necessary momentum for reinforcing collective bargaining and for national reforms of minimum wage setting mechanisms. EU action can provide increased transparency, providing comparative data on the coverage and adequacy of minimum wages and the underlying developments of wages and collective bargaining in the Member States. This could support the development of national collective bargaining frameworks, strengthening the social dimension of the Single Market. EU action would also ensure a level playing field in the Single Market by helping to address large differences in the coverage and adequacy of minimum wages that are not justified by underlying economic conditions. EU action on fair minimum wages would improve the fairness of the EU labour market, promote economic and social progress and cohesion, help reduce the gender pay gap, and contribute to upward social convergence. These objectives are clearly set out in the EU Treaties and reflected in the European Pillar of Social Rights. By supporting the process of upward convergence in the field of minimum wages, and taking into account economic conditions, EU action on minimum wages would contribute to paving the way for better working conditions in the Union. Such a framework would send a clear signal to citizens about the role played by the EU for protecting their working conditions and living standards, against the background of current and future challenges, while demonstrating awareness of the firms’ needs, notably those of SMEs. EU action would be in line with international instruments, notably ILO conventions and the European Social Charter. The value added of the EU action could be to build on those standards and to make them more operational and more targeted to EU labour markets. It can thus reinforce the credibility of Union action to protect labour standards in external relations, notably in bilateral trade agreements. 4Objectives: What is to be achieved? General objective The initiative aims at improving working conditions by ensuring that all workers in the Union have access to adequate minimum wage protection either in the form of statutory minimum wages or wages set in collective agreements, allowing for a decent living wherever they work, as laid down by principle 6 of the European Pillar of Social Rights and the Treaty. This objective is to be achieved while safeguarding access to employment and taking into account the effects on job creation and competitiveness, including for SMEs. The initiative fully respects national competencies and social partners’ contractual freedom. Specific objectives

In order to reach this general objective, the specific objectives of the EU initiative would be to improve the adequacy and to increase the coverage of minimum wages. These objectives are relevant to both types of wage setting systems. As a result of this initiative, it would be considered a success if: ·Member States with statutory minimum wages would ensure that the minimum wage is set and maintained at an adequate level (as guided by reference values commonly used at the international level). ·In all Member States the collective bargaining coverage rate would be at a level of at least 70%. The initiative is addressed to all Member States. It applies to all workers in all sectors provided that they have an employment contract or employment relationship as defined by the law, collective agreements or practice in force in each Member State, with consideration to the criteria established by the Court of Justice of the European Union. 5What are the possible policy measures? The baseline scenario Under the baseline scenario, external drivers like globalisation and technological developments are expected to persist and will continue to rapidly change the structure of economies and labour markets. While taking into account the changes in the recent past (see also Annex 10) no further changes by Member States are expected to improve the adequacy of their minimum wages or to improve the framework setting them (for the status quo, see Annex A6.2 and Annex 9). Member States that ratified international labour standards, namely the ILO’s Minimum Wage Fixing Convention (C. 131) and the Collective Bargaining Convention (C.154) are bound by them, while no new ratifications are expected. All Member States are expected to report on minimum wages to the Council of Europe. At the EU level, minimum wage policies will be subject to multilateral surveillance within the European Semester and monitoring through a benchmarking framework. The European Semester, the regular cycle of economic policy coordination in the EU, may ultimately lead to the adoption of Country-Specific Recommendations (CSR) with suggestions and guidance for national minimum wage setting in selected countries. Member States already have to make information on minimum wages publicly available on a single national website under the Enforcement Directive concerning the posting of workers. Information on the collective agreements in force is also available on these websites. The single national official websites of all Member States are accessible from the Your Europe website. The baseline scenario assumes stability of institutions and policies in Member States regarding the coverage of minimum wages. In Member States with statutory minimum wages, no changes are expected to exemptions or enforcement. In turn, while collective bargaining coverage followed a downward trend on average in the EU in the last decades, this trend was not observed in Member States without a statutory minimum wage (see Annex 9.1). The assumption of continued stability of collective bargaining coverage in these countries is therefore reasonable. Description of the policy measures The specific objectives can be achieved by a combination of measures aimed at addressing the internal drivers identified in section 2.3. In this regard, the following five areas of intervention were identified: (1)Collective bargaining on wage setting: A well-functioning system can ensure that all workers, particularly the most vulnerable ones, are protected by adequate wages, both in the systems where minimum wages are only determined by collective agreements and in those where they are set by law. Well-functioning collective bargaining implies that all types of employers and employees are duly represented and ensures that wage conditions are consistent with workers’ and employers’ needs and are responsive to changing economic circumstances. By shaping general wage developments, collective bargaining also influences developments in statutory minimum wages. The structure and functioning of collective bargaining thus play a key role for achieving fair minimum wages, whether it is the sole wage setting system existing in the country or whether it is combined with statutory national minimum wage. (2)Clear national frameworks to set and update statutory minimum wages: The use of clear and stable criteria referring to adequacy goals and reflecting socioeconomic conditions in a country as well as guiding the adjustment of minimum wages at regular intervals allows workers to rely steadily on an adequate income from work. A clear and stable framework to set statutory minimum wages also contributes to a stable economic environment, which in turn is conducive to good working conditions. At the same time, minimum wage setting systems must provide sufficient flexibility to account for changing socio-economic conditions and adjustment needs. (3)Involvement of social partners in statutory minimum wage setting systems: A timely and effective involvement of the social partners in statutory minimum wage setting and updating is key to allow minimum wage developments to achieve adequacy goals, keep up with price, wage and productivity developments and account for socio-economic developments. Taking into account their views, guided by the above-mentioned criteria, can have positive effects on the rights and entitlements of employees, and on the investment decisions of firms. An effective involvement of social partners in minimum wage setting also allows for an informed and inclusive decision-making process. (4)Variations, exemptions and deductions from statutory minimum wages: In many Member States, reduced minimum wage rates apply to specific groups of workers, e.g. in the case of sub-minimum wages for youth. Moreover, there is a large variety of deductions applied to wages that can reduce the remuneration paid to workers to a level below the statutory minimum wage. Variations and deductions are clear limitations to minimum wage adequacy. Finally, statutory minimum wages have exemptions in their scope of application that exclude some groups of workers from the protection of minimum wages, although in most cases they are either related to up- or re-skilling or to labour market integration. (5)Enforcement and monitoring: Well-established procedures to ensure proper implementation of minimum wage rules and frameworks are key to ensuring an effective protection of concerned workers on the ground. This is an important component of the strengthening of minimum wage systems as, in some cases, increasing minimum wage levels may lead to a higher risk of non-compliance, including undeclared work. Reliable EU monitoring and data collection contributes to the transparency of the national systems. However, not all areas of intervention and the relevant policy measures thereof apply to both Member States where minimum wage protection is provided by collective agreements and those with statutory national minimum wages. This is because the way each system is affected by internal drivers differs across the two systems (see section 2.3). Moreover, differences also result from the Treaty limitations regarding the contractual freedom of social partners. In particular: ·In countries relying exclusively, or in most sectors, on collective bargaining to set wages, the specific objectives can be achieved through a combination of measures in two areas: (1) Collective bargaining on wage setting and (5) Enforcement and monitoring.

·In countries with national statutory minimum wages, the specific objectives can be achieved through a combination of measures in five areas: (1) Collective bargaining on wage setting, (2) Clear national frameworks to set and update minimum wages, (3) Involvement of social partners in statutory minimum wage setting systems, (4) Variations, exemptions and deductions from minimum wages and (5) Enforcement and monitoring. The following sections discuss the policy measures considered to address the root causes of the problem under each of these five areas of intervention. Table 1 presents a summary of the measures considered for this initiative per minimum wage setting system. Measures considered but not retained are discussed in Section 5.5. In Section 5.6 policy packages are built from the individual measures.

Member States relying on collective bargaining Member States with national statutory minimum wages Area 1: Collective bargaining on wage setting Measure 1.1 Capacity building for social partners and encouraging negotiations on wages. Capacity building for social partners and encouraging negotiations on wages. Measure 1.2 Administrative extensions of collective agreements, when agreed with social partners. Administrative extensions of collective agreements, when agreed with social partners. Measure 1.3 Member States with collective bargaining coverage below 70% to provide for a regulatory framework or enabling conditions and to establish an action plan to promote collective bargaining. Member States with collective bargaining coverage below 70% to provide for a regulatory framework or enabling conditions and to establish an action plan to promote collective bargaining. Area 2: Clear national frameworks to set and update statutory minimum wages Measure 2.1 N.A Clear and stable criteria to guide minimum wage setting and its regular updating, defined in national legislation, and establishment of consultative bodies to advice authorities. Measure 2.2 N.A Automatic indexation mechanisms for statutory minimum wage updates. Measure 2.3 N.A Indicators and reference values to guide the assessment of the adequacy of statutory minimum wages. Measure 2.4 N.A Statutory minimum wages to follow a national measure of decent living standards (reference income), developed in consultation with social partners. Area 3: Involvement of social partners in statutory minimum wage setting Measure 3.1 N.A Ensuring the timely and effective involvement of social partners in minimum wage setting and updating. Measure 3.2 N.A Setting up a bipartite or tripartite body for social partners’ consultation with decision-making power. Area 4: Variations, exemptions and deductions Measure 4.1 N.A Limited and justified use of variations in and deductions from statutory minimum wages. Measure 4.2 N.A Banning variations, exemptions and deductions from statutory minimum wages. Area 5: Enforcement and Monitoring Measure 5.1 Strengthening the enforcement of wage clauses in collective agreements. Strengthening the enforcement of statutory minimum wages and wage clauses in collective agreements. Measure 5.2 Ensuring compliance in public procurement with wages set by collective agreements. Ensuring compliance in public procurement with wages set by collective agreements and with statutory minimum wages. Measure 5.3 Enhancing monitoring and data collection mechanism for wages set in collective agreements. Enhancing monitoring and data collection mechanism on statutory minimum wages and on wages set in collective agreements. Measures affecting Member States relying exclusively on collective bargaining Collective bargaining in wage setting This section presents the measures considered for Member States countries where minimum wage protection is provided by collective agreements. Three measures were considered which are not mutually exclusive. The need to strengthen collective bargaining, especially at the sectoral and cross-sectoral level, was emphasised by the European workers’ organisations in their reply to the social partner consultations (see also Annex 2). They suggested several measures to promote collective bargaining (including capacity building activities and the introduction of extension mechanisms, when agreed with social partners) and proposed that Member States should take action to increase the collective bargaining coverage rate when it is below 70%. Some employers’ organisations stated that collective bargaining is a strong foundation for good wage setting while others proposed various measures (including capacity building activities and increased availability of funds) to encourage social dialogue and support social partners. However, objections were raised by some employers’ organisations regarding measures to extend coverage to all workers. At the same time, social partners from some Member States with well-functioning collective bargaining systems, and in particular Denmark and Sweden, expressed concerns about EU action on minimum wages as it could interfere with their labour market model based on collective bargaining. Both the workers’ and employers’ organisations stressed that any future initiative should not undermine existing well-functioning minimum wage systems, and must respect national competences and traditions, social partners’ autonomy and the freedom of collective bargaining. Measure 1.1: Capacity building for social partners and encouraging negotiations on wages Member States, in consultation with social partners, would take measures to promote the building and strengthening of the capacity of social partners to engage in collective bargaining on wage setting. In addition, Member States would encourage negotiations on wages among social partners. The choice of the specific actions would be left to the Member States. In the area of capacity building, these could include among others providing financial or technical support, mutual learning, exchange of good practices or qualified training and counselling. Measure 1.2: Administrative extensions of collective agreements, when agreed with social partners Member States could introduce extensions of collective agreements so that their terms apply also to workers or firms that are not represented by the signatory social partners. The conditions and situations for such extensions would be left to the Member States in agreement with social partners at the relevant level. Measure 1.3: Member States with collective bargaining coverage below 70% to provide for a regulatory framework or enabling conditions and to establish an action plan to promote collective bargaining In a context of declining collective bargaining coverage, it is key that the Member States put in place all the necessary measures to enhance workers’ access to wages set in collective agreements. Member States with a small share of low-wage earners have a collective bargaining coverage rate above 70%. Similarly, the majority of the Member States with high levels of minimum wages relative to the median wage have a collective bargaining coverage above 70%. Therefore, Member States should be encouraged to take action to promote collective bargaining so that the coverage of collective agreements reaches at least 70% of the workforce. In this regard, Member States would provide for a regulatory framework or create enabling conditions to promote collective bargaining, which could be either set in law or after consultation with social partners or in agreement with them. Among the measures that could be foreseen are: mediation, arbitration and peace clauses in collective agreements; representativeness criteria for social partner organisations; duration of collective agreements; retroactivity and ultra-activity clauses in collective agreements; and measures to improve the availability of collective bargaining to all groups of workers and employers at all levels (national, sectoral and firm level). In addition, Member States would agree with social partners an action plan to promote collective bargaining. The choice of the specific actions to be included would be left to the Member States. Enforcement and monitoring This section presents the measures related to enforcement and monitoring considered for Member States where minimum wage protection is provided by collective agreements. Three measures were considered which are not mutually exclusive. The need for strengthened application and enforcement mechanisms was also identified by both the European workers’ and employers’ organisations in their reply to the social partners’ consultation, however, some employers’ organisations stressed that this falls within the competence of national authorities, questioning as such the value of EU action in this area. Some employers’ organisations argued that cases of non-compliance and abuses should be addressed for both statutory minimum wages and for wages set in collective agreements, while a couple supported a mapping of the implementation of the social clause in the Public Procurement Directive 2014/24/EU.

Measure 5.1: Strengthening the enforcement of wage clauses in collective agreements Member States would take measures to ensure that workers have access to dispute resolution mechanisms and a right to redress, including adequate compensation, in the case of non-respect of their rights relating to the minimum wage protection provided by collective agreements. Member States would also take measures to protect workers from any adverse treatment resulting from lodging a complaint for non-respect of their rights. The specific rules for enforcement would be left to Member States to ensure the respect of national practices regarding the enforcement of collective agreements. Measure 5.2: Ensuring compliance in public procurement with wages set by collective agreements Article 18(2) of the Public Procurement Directive 2014/24/EU provides that Member States shall take appropriate measures to ensure compliance with the applicable obligations established by labour law and the relevant collective agreements during the performance of public contracts. Building on such provision, under this measure Member States countries where minimum wage protection is provided by collective agreements would require that, in the performance of public or concession contracts, economic operators comply with the collectively agreed wages set in collective agreements. Measure 5.3: Enhancing monitoring and data collection mechanism on wages set in collective agreements Member States would develop effective data collection tools to monitor the coverage and adequacy of wages set in collective agreements. Moreover, they would also have to develop tools to monitor the level and adequacy of wages not covered by collective agreements. Measures affecting only Member States with statutory minimum wages Collective bargaining in wage setting This section presents the measures considered for Member States with statutory minimum wages in the area of collective bargaining. Three measures were considered which are not mutually exclusive. These are the same measures as those considered for the case of Member States where minimum wage protection is provided by collective agreements. National frameworks to set and update statutory minimum wages This section presents the measures considered for Member States with statutory minimum wages in the area of national frameworks to set and update statutory minimum wages. Four measures were considered. Among the measures, only measures 2.1 and 2.2 are mutually exclusive. Measures 2.3 and 2.4 could be combined with each other but also possibly together with either measure 2.1 or measure 2.2. Workers’ organisations underlined that statutory minimum wages should be increased to a level at which they ensure at least a decent standard of living and should be updated following a regular, clear and predictable procedure, which fully involves the social partners. In particular, they stated that statutory minimum wages “must not fall below a threshold of both 60% of the full-time gross national median wage and 50% of the full-time national gross average wage”. Additionally, statutory minimum wages are to be benchmarked against national reference values such as a basket of goods and services, established in consultation with the social partners. Some employers’ organisations stressed the importance of using clear and stable criteria to guide minimum wage setting, which would take into account social and economic developments, including productivity and employment trends and tax and benefits systems, with several stating that this falls within the competence of the national authorities and social partners. Some employers’ organisations also stated that they see the added value in developing reference benchmarks at EU level, however, with divergent views on whether the net or gross wages should be considered. Measure 2.1: Clear and stable criteria to guide statutory minimum wage setting, and its regular updating, defined in national legislation, and establishment of consultative bodies to advise authorities National statutory minimum wage legislation would include provisions on criteria to be taken into account when setting and updating minimum wages to ensure adequacy while reflecting socio-economic developments. Such criteria should include: the purchasing power of minimum wages, taking into account the cost of living, and the contribution of taxes and social benefits; the level and distribution of wages in a country; wage growth; and labour productivity developments. These criteria could be potentially used in addition to any existing criteria defined in national legislation. It would be left to Member States to decide how to apply them and whether existing criteria should be maintained. Member States would ensure that minimum wage updates occur regularly and timely, at such frequency as appropriate to safeguard their adequacy. In addition, Member States would be called upon to put in place or adjust existing consultation bodies to advise national authorities on issues related to statutory minimum wages. It would be for Member States to decide, in the light of national circumstances and traditions, the way in which these bodies could be set up or appointed. Such bodies are already in place in France, Germany, Greece, and Ireland, which would thus not need to take further action in this respect (see Annex A6.2). Measure 2.2: Automatic indexation mechanisms for statutory minimum wage updates Relevant provisions on minimum wage setting would establish an automatic indexation mechanism for updating minimum wages whereby minimum wage changes would be automatically linked to developments in economic fundamentals and updated on the basis of a formula. It would be up to the Member States to define the formula to be used but, in order to protect the purchasing power of minimum wages, increases in statutory minimum wages should at least keep up with increases in consumer prices under normal circumstances. Member States could also include a link to wage growth, which generally results in a faster pace of updates. Member States could define criteria under which the automatic indexation would be suspended under exceptional economic circumstances. It would also be possible to decide on increases on top of the ones suggested by the indexation formula. Automatic indexation rules are in use in a number of Member States (Belgium, France, Malta, Netherlands, Luxembourg and Slovenia), either based on the rate of change in consumer prices (inflation) or wages (aggregate or collectively agreed), or a combination of both. Measure 2.3: Indicators and reference values to guide the assessment of the adequacy of statutory minimum wages Member States would be called on to use indicative reference values to guide the assessment of adequacy of statutory minimum wages in relation to the general level of gross wages. A list of possible adequacy indicators and respective indicative reference values is provided in Annex A11.2. From this list, two indicators are retained for more detailed assessment: (i) the minimum wage as a ratio to the median wage and (ii) the minimum wage as a ratio to the average wage. Both indicators are commonly used at the international level to compare minimum wages across countries. Reference values help assess whether the minimum wage is set at an adequate level. Member States will have to compare their minimum wage level to the chosen reference value. Member States can use them in minimum wage setting while taking other considerations into account, notably possible impacts on employment and competitiveness. Common reference values used at the international level include 40%, 45%, and 50% of the average wage and 50%, 55%, and 60% of the median wage. Thus, these reference values are retained for more detailed assessment. These reference values can be combined: for instance, it is possible that Member States take into account the reference values of both 50% of the average wage and 60% of the median wage to guide the assessment of adequacy.

Measure 2.4: Statutory minimum wages to follow a national measure of decent living standards (reference income), developed in consultation with social partners Member States would be asked to assess the adequacy of the national minimum wages against a reference value based on a measure of decent living standards (reference income). This measure would be based on a basket of goods, defined at a national level. Minimum wage setting would need to balance this criterion with other considerations, such as possible impacts on employment. Involvement of social partners in statutory minimum wage setting This section presents the measures considered for Member States with statutory minimum wages in the area of involvement of social partners in statutory minimum wage setting. Two measures were considered which are mutually exclusive. Workers’ organisations called for full and genuine involvement of all social partners in minimum wage setting and updating procedures (see also Annex 2). The employers’ organisations welcomed the establishment of well-functioning, effective and timely consultation of social partners, at national and sectoral level, in minimum wage setting, with some stressing that this is essential to ensure that wage setting at national level takes into account the economic situation in the country, as well as in specific sectors, and the impact at company level. In this regard, they proposed to reinforce the involvement of social partners and to establish well-functioning consultation processes. Measure 3.1: Ensuring the timely and effective involvement of social partners in minimum wage setting and updating Member States would be called to take measures to ensure that the social partners are involved in an effective and timely manner in the setting and updating of statutory minimum wages. Consultations would guarantee that the views of social partners are taken into account in the decision-making process, in particular on: issues related to the selection and interpretation of objective criteria for setting and updating minimum wage levels, the regularity and timeliness of the updates, the establishment of variations and deductions, and the collection of data. In addition, the social partners would participate in in consultative bodies advising national authorities on statutory minimum wages where they exist. Measure 3.2: Setting up a bipartite or tripartite body for social partners’ consultation with decision-making power Member States would be called upon to set up a formal, dedicated body to allow for an effective and timely consultation of social partners on the setting and annual updating of statutory minimum wages. This body could be either bipartite or tripartite, depending on national traditions, and it would be the body responsible for all the decision-making regarding the statutory minimum wage, including the criteria to guide updates as well as variations and exemptions. When a decision is reached, it would be binding for all parties. Such structured tripartite bodies are in place in Lithuania, Poland and Slovakia. Variations, deductions, and exemptions This section presents the measures considered for Member States with statutory minimum wages in the area of variations, deductions and exemptions. Two measures were considered which are mutually exclusive. In their reply to the social partners’ consultation, European workers’ organisations called for eliminating, or at least keeping to a bare minimum, exemptions from statutory minimum wages, sub-minimum wages and deductions (see also Annex 2). The employers’ organisations stressed their opposition to eliminating or limiting exemptions and variations, stating that justified exemptions, decided by social partners and/or the national government, should be maintained. Measure 4.1: Limited and justified use of variations in and deductions from statutory minimum wages Member States would define variations for specific groups of workers. The variations should be non-discriminatory, proportionate, limited in time, if relevant, and objectively and reasonably justified by a legitimate aim, including employment policy, labour market and vocational training objectives. In addition, Member States would ensure that deductions from minimum wages are necessary, objectively justified and proportionate. Measure 4.2: Banning variations, exemptions and deductions from statutory minimum wages Member States would eliminate variations, deductions and exemptions from their statutory national minimum wages. Enforcement and monitoring This section presents the measures considered for Member States with statutory minimum wages in the area of enforcement and monitoring. Three measures were considered which are not mutually exclusive. These are measures that are very similar to those considered for the case of Member States where minimum wage protection is provided by collective agreements; however, in this case Member States would ensure the enforcement and monitoring of statutory minimum wages as well as of wages set by collective agreements. Measure 5.1: In the case of Member States with statutory minimum wage this measure implies that Member States would strengthen the enforcement of statutory minimum wages and wage clauses in collective agreements. In particular, Member States with statutory minimum wages, in cooperation with social partners, would be asked to take at least the following measures to enhance the access of workers to statutory minimum wage protection: (i) strengthening controls and field inspections by enforcement authorities, (ii) developing guidance to target non-compliant businesses, and (iii) ensuring the availability of information on statutory minimum wages.

In addition, these Member States would also take measures to ensure that workers have access to dispute resolution mechanisms and a right to redress, including adequate compensation, in the case of non-respect of their rights relating to statutory minimum wages and to the minimum wage protection provided by collective agreements. Member States would also take measures to protect workers from any adverse treatment resulting from lodging a complaint for non-respect of their rights. The specific rules for enforcement would be left to Member States to ensure the respect of national practices regarding the enforcement of statutory minimum wages and of collective agreement. Measure 5.2: In the case of Member States with statutory minimum wages, it would imply that, Member States would ensure compliance in public procurement with wages set by collective agreements and with statutory minimum wages. Measure 5.3: In the case of Member States with statutory minimum wage this measure implies that Member States would enhance monitoring and data collection mechanism on statutory minimum wages and on wages set in collective agreements. This implies that in addition to the obligations described in section 5.3.2, Member States with statutory minimum wages would develop effective data collection tools to monitor the coverage and adequacy of statutory minimum wages. This would also include monitoring minimum wage variations and deductions and the share for workers affected by them. Measures discarded at an early stage When considering the policy measures, a number of options have been discarded at an early stage. Most of these have not been listed in the previous subsection. Options discarded related to strengthening collective bargaining A number of options were discarded either because of a lack of legal basis or because they did not respect the autonomy of the social partners and their right to negotiate and conclude collective agreements or national competences. An option to replace the statutory minimum wages with collective bargaining in all countries was also considered but not retained. Collective bargaining is considered as an important way to improve the adequacy of minimum wages, or even as the best way by social partners. However, this measure was discarded from detailed analyses as it was considered as legally not feasible. Options discarded related to national frameworks to set statutory minimum wages A number of adequacy indicators related to the net income of minimum wage earners have not been considered as alternative to guide the assessment of minimum wage adequacy. In particular, such discarded indicators compared the net income of minimum wage earners with: (i) the net median wage; (ii) net average wage, and (iii) median net household income. These indicators have significant merit from an analytical point of view, as they allow the comparison of the take-home pay of minimum wage earners across countries. However, they are very complex. Thus using them would make the policy less transparent for workers and companies. Further, these indicators are affected by the tax and benefit system, while minimum wages are set in gross terms (“before taxes”). This has also been pointed out by social partners during the consultation process. A measure to call for the definition of reference budgets at the EU level to benchmark minimum wage adequacy was considered but not retained. Defining a common concept for a living wage requires a common basket of goods necessary for a decent living in various countries. This has not been done to date and may be challenging due to the differences across countries (and regions) in terms of productivity levels (reflecting businesses’ ability to pay) and needs (including climate, customs, etc.). A socially acceptable minimum decent living standard in one country may be above or below what is socially acceptable in another country. In particular, a “living wage” which is meaningful in higher-wage countries would likely translate to a very high wage in lower-wage countries, despite the lower prices in these countries. Description of alternative policy packages The policy measures presented in Section 5.2 are combined into three policy packages, for the sake of assessing impacts as well as of comparing effectiveness, efficiency and coherence. While many other combinations of measures are theoretically possible, the policy packages below represent coherent sets of measures, which comply with the Treaty provisions (see section 3.1). These packages are built around two main criteria: (i) the role played by social partners in the governance of the minimum wage setting system and (ii), in the specific case of Member States with statutory minimum wages, the degree of discretion of governments in setting and updating minimum wages. Specifically, the three packages are the following: ·Package A requires all Member States to actively support collectiv