Impact of national minimum wages on collective bargaining and wages for low-paid workers

There is ongoing debate on whether national minimum wages and collective wage bargaining strengthen or weaken each other. This research report provides empirical evidence on how changes to national minimum wages affect collectively agreed minimum wages and actual wages, and how they can affect collective bargaining in selected low-paid sectors. The report combines quantitative analysis (based on various databases) and qualitative analysis (based on 39 semi-structured interviews conducted with experts, policymakers and the social partners in six countries and two low-paid sectors).

Policy context

The EU Minimum Wage Directive, passed in October 2022, aims to ensure adequate statutory minimum wages, to promote collective wage bargaining and to enhance effective access of workers to minimum wage protection. The deadline for transposing the directive into national law elapsed in November 2024, but it has been influencing developments in national statutory minimum wage setting since its adoption. National statutory minimum wages have increased significantly in relation to actual wages over the past few years in many Member States. In addition, the benchmark for adequate bargaining coverage (80 %) has already shaped discussions on the reform of collective bargaining in some countries. These developments potentially have an impact on the interaction between national minimum wages and collectively agreed wages in various ways.

Key findings

Impact of changes to national minimum wages on collectively agreed wages

Econometric analyses estimating the impact of changes to national minimum wages on collective agreements and negotiated wages show the following.

• The cumulative variation in national minimum wages since the last collective agreement increases the probability of signing a new agreement, while cumulative inflation and the unemployment rate do not influence this probability. The time elapsed since the last agreement is also an important factor. The inclusion of the Kaitz Index (the ratio between the minimum wage and the average wage for each country and year) in this specification suggests that signing new agreements is less frequent in countries with a high national minimum wage compared with the average wage all else being equal.

• The main determinant of the size of negotiated wage floor adjustments is the cumulative inflation rate since the last agreement. If inflation increases by 1 %, negotiated minimum wages increase by close to 0.7 % (that is, they have an elasticity of close to 0.7). The cumulative variation in national minimum wages in real terms also has a positive and significant effect on the size of negotiated wage floor adjustments, with an elasticity of 0.22. The unemployment rate has a significant but negative effect on the size of wage adjustments, providing clear evidence that negative cyclical conditions limit growth in bargained wages.

• There is substantial heterogeneity in several dimensions: over the period considered, with stronger effects observed for 2020–2022; between low-paid sectors; and among groups of countries distinguished by different models of interaction between national minimum wages and collective bargaining.

The qualitative analysis provides in-depth insights from interviews on how national minimum wages interact with collective agreements in six countries (France, Germany, Portugal, Romania, Slovenia and Spain) and within two low-paid sectors (the manufacture of food and beverages sector and the residential and social care sector). The analysis highlights the following.

• The social partners’ perceptions of the role of the national minimum wage varies across countries, sectors and subsectors. High inflation and labour shortages have made employers and trade unions in the residential and social care sector more favourable towards it. In the manufacture of food and beverages sector, the national minimum wage has been perceived as ‘a lesser evil’ needed to help maintain purchasing power in the context of inflation.

• The national minimum wage is having a limited impact on collective bargaining processes. There is some evidence of reduced room for manoeuvre in terms of negotiating pay and working conditions but no strong evidence of a crowding-out effect in collective bargaining, despite concerns expressed by the social partners in some countries. There is no significant impact on the duration or renewal of collective agreements in the countries and sectors analysed.

• National minimum wage increases are having some impact on collectively agreed wages and their structure.

  • A common trend observed in the two sectors and most of the countries analysed is the increasing relevance of pay bonuses and supplements addressed in collective bargaining, very often negotiated at company level, because of the increases in national minimum wages. This is because basic pay rates tend to increase at a slower pace than national minimum wages, and companies resort to these bonuses to guarantee that actual wages remain above the legal rates.

  • In the residential and social care sector in Germany and Spain, after increases in the national minimum wages, employers are no longer willing to improve other working conditions, which were used to compensate for low wages in the past. A similar pattern was observed in the food and beverages industry in Portugal.

• There appears to be a compression effect in the negotiated wage distribution because of the increases in national minimum wages. The intensity of this effect varies across countries and sectors; based on the qualitative analysis of collective agreements in the two low-paid sectors selected, this effect seems to be more intense in the manufacture of food and beverages. This compression effect can be interpreted as a short-term adaptation of collective bargaining to the new minimum wage, while in the medium term spillover effects may become more important as collective agreements translate national minimum wage increases to the whole wage distribution. However, the extent to which compression persists is shaped by the characteristics of the sector. Moreover, spillover effects are more likely to be observed in those sectors or countries experiencing more intense labour shortages, like the residential and social care sector.

Impact of national minimum wages on actual wages and the wage distribution

The econometric analysis of the impact of national minimum wages on actual wages, based on European Union Statistics on Income and Living Conditions for 2006–2021, found the following.

• National minimum wage developments have a significant impact on the actual wages of low-paid workers, regardless of their sector, occupation, gender and age: a 1 % increase in the national minimum wage resulted in a 0.31 % increase in the wages of low-paid employees over 2006–2021.

• The impact of changes in national minimum wages in 2015–2021 was somewhat larger than that in 2006–2014. In fact, the effect on the actual wages of low-paid workers since 2015 may have been more intense than the effect on the wages collectively negotiated for workers in low-wage sectors.

• Only large nominal increases in national minimum wages produce substantial increases in the wages of low-paid employees. Uprates of at least 15 %, in nominal terms, are the only ones with a measurable and statistically significant impact.

• National minimum wage uprates in the Member States that joined the EU in 2004 or afterwards had a greater impact on changes in the wages of low-paid workers than uprates in the pre-2004 Member States until 2015. However, the size of the effects have converged between the groups in more recent years.

• Increases in national minimum wages during the study period not only translated into wage improvements for low-paid employees but also benefited workers with higher wage levels.

• Looking at the trajectories of individual workers, the analysis finds significant increases in wages for the lowest deciles of the wage distribution, particularly when national minimum wage increases are higher.

• A causal econometric analysis was conducted to measure changes in national minimum wages and to estimate what happened to the salaries of workers who were earning below the new rate before the changes, compared with the effect on the salaries of low-wage workers who were earning slightly above the rate. The results indicate a significant and positive effect of substantial minimum wage increases of between 10 % and 15 %.

Policy pointers

• Changes in national minimum wages have a more important role in pushing for a new wage agreement being signed than changes in macroeconomic factors, such as inflation and unemployment. However, the magnitude of the increase in negotiated wages is mainly explained by inflation, followed by uprates in national minimum wages and then unemployment rate decreases.

• Considering the likely impacts on negotiated wages when setting national minimum wages can provide useful insights for policymakers on the potential (indirect) impacts of national minimum wage uprates and hence improve the entire process of setting national minimum wages.

• Increases in the national minimum wage do not seem to have a strong detrimental effect on the autonomy of the social partners to negotiate collective agreements, although a reduced margin to negotiate around some issues is reported. Crowding-out effects do not seem to be significant but, as expected, are stronger in countries with weak collective bargaining institutions and coverage. These countries require greater efforts to support the social partners and collective bargaining so that adequate minimum wages are compatible with well-functioning collective bargaining. Efforts could include guaranteeing an adequate legal framework for collective bargaining and enhancing the social partners’ capacities.

• Despite some evidence of wage compression in collectively agreed wages, there is an overall absence of wage compression. This is due to national minimum wage hikes resulting in wage growth not only among lower-paid employees, but also higher-paid ones. This may limit the effectiveness of minimum wage uprates as an instrument to reduce wage inequality over time. The impact of minimum wages on the compression of negotiated wages does, however, vary across sectors, being influenced by other variables, like labour shortages and minimum wage levels.

• Increases in national minimum wages led to similar improvements in the actual wages of low-paid workers regardless of their characteristics. However, some groups, such as female workers, still benefit more from such hikes, because they are relatively more represented among minimum wage earners.

• In countries with low collective bargaining coverage, the most important factor influencing wage increases for low-paid workers is national minimum wages. In these countries, negotiated wages have a positive, albeit limited (not statistically significant), impact on the wages earned by low-paid workers. In contrast, both negotiated wages and national minimum wages substantially affect the wages of low-paid workers in countries with high collective bargaining coverage.