The role of public policies in tapping the potential for wage increases
This section discusses the possible role that public policies can play in supporting wage increases in a sustainable manner in the current context. It presents some policies directed at workers (Section 2.6.1.) and other structural policies (Section 2.6.2.).
Policies directed at workers
Minimum wage policy is likely to remain key to protecting the purchasing power of low-wage earners.Persistently high inflation risks eroding the purchasing power of low-wage earners, in the absence of discretionary updates of statutory minimum wages. In this context, the EU Directive on adequate minimum wages establishes a framework for setting adequate statutory minimum wages . Under the Directive, the timely update of statutory minimum wages (where they exist) should, among other considerations, take into account the developments in the cost of living. This may be particularly relevant if Member States decide to withdraw the targeted fiscal support measures introduced to cushion the effects of inflation.
Strengthening collective bargaining is also key.It is one of the objectives of the EU Directive on adequate minimum wages, as collective bargaining can help enhance the representation of workers. While services currently tend to provide higher pay rises on average, some categories of workers, notably low-wage earners, are left behind in some Member States. In particular, sectoral and cross-industry collective bargaining can help take relevant macroeconomic developments, such as productivity developments or the risk of inflationary pressures, into account in wage negotiations.
Policies promoting upskilling and reskilling can also improve the employment and wage prospects of workers, especially low-skilled workers.Skill shortages and mismatches are major bottlenecks for some occupations, for example ICT, construction, engineering or healthcare . Upskilling and reskilling workers can reduce those skills shortages and mismatches and help workers to receive higher wages within their occupation or find opportunities in other firms or sectors. This has been the focus of the initiatives of the European skills agenda and of the European Year of Skills , while the Green Deal industrial plan also includes a pillar on enhancing skills in support of the twin transitions (see Chapter 1). When designing policy instruments, it is important to ensure that their benefits effectively reach small and medium-sized enterprises, which tend to have more limited access to information and resources to reskill and upskill their employees.
Other structural policies in the current context
In addition to policies targeted at workers, a range of policies can support wage developments in a sustainable manner.These policies notably aim to ensure sound macroeconomic conditions (including fiscal and structural policies) and the good functioning of national product and labour markets and of the EU Single Market. The literature on these aspects is rich and tends to show that there is no one-size-fits-all set of policies ().
Promoting firms’ productivity and capacity to adapt is key to supporting wage developments.Enhancing productivity enhances the ability of firms to provide higher wages. Ultimately, wage developments should be backed by productivity to ensure the sustainability of wage growth and employment levels over time. The capacity of firms to adapt is also important, due to the current fast-evolving economic environment, marked by high uncertainty. In turn, well-designed policies addressing both employees’ and firms’ needs can facilitate productivity increases and structural transformation, notably by making the concerned firms more attractive for employees (through higher wages) and making skills more available to firms.
In this regard, rolling out the twin transitions successfully is a key policy priority. At the EU level, this was already among the Commission’s political priorities for 2019–2024 . Since then, the COVID-19 pandemic has contributed to accelerating digitalisation, while Russia’s war of aggression against Ukraine further highlighted the need to boost the green transition and the benefits of doing so. A number of targets, instruments and funds have been put in place at the EU level to support or accompany the twin transitions , while various policies have also been put in place at the national level, notablysupport for innovation and tax incentives. Indeed, the digital transformation has the potential to increase the innovation and productivity of the EU economy, while the green transition, in addition to its climate-related benefits, is an opportunity to increase competitiveness, boost the creation of high-quality jobs and make economic growth more sustainable and inclusive .
Addressing some other underlying drivers of high living costs can also help enhance real wages. In some countries, very high inflation has been significantly eroding wages since the end of 2021. In these circumstances, mitigating inflation can improve real wages. In addition to monetary policy, other policies aimed at addressing the drivers of high inflation include actions to enforce prohibitions on the abuse of dominant market positions and to enhance competition, notably in services. These policies can raise productivity over time, allowing for better wages. Finally, in some Member States, the higher cost of living has mainly been driven by imported goods . In these cases, the diversification of supply chains and the development of domestic production may be useful.