In Europe, Workers Use Minimum Wage Laws to Exclude their Competition

Economists often warn about the perverse effects of the minimum wage. It is acknowledged this measure does not increase the salary of less productive workers. It reduces their employability, their ability to increase their skills and experience and thus constitute a powerful barrier to social mobility. But an effect is “perverse” only if consequences are unintended. The recent behavior of the French and German governments, however, leads one to believe that some recent effects of minimum wage laws are very much intended.

Labor unions and local businesses from Western Europe have complained for many years about the “unfair competition” of workers from Eastern Europe. Even when they are cheaper than French workers, Eastern European workers can still make three times more than what they would at home for the same work. Unfortunately, political and unions leaders do not understand the concept of comparative advantage. These political activists claim free movement of labor can only be fair if social conditions are the same everywhere. However, as economic theory shows us, inequalities and differences are precisely why the division of labor is beneficial.

This protectionist feeling reached its climax in 2005 and 2006 during the European debate about the Services in the Internal Market Directive, also called the “Bolkestein Directive.” Its main goal was to lower trade barriers between national labor markets in order to make labor mobility easier within the European Union. Western Europe protectionists started a campaign against “the Polish plumber” who has become the symbol of European deregulation allowing low-cost workers to “steal” French jobs.

Protectionist claims have shown up again in 2013 with the “posted workers scandal.” A posted worker is, according to the European Commission, “an employee who is sent by his employer to carry out a service in another EU Member State on a temporary basis.” This system stimulates regulatory and fiscal competition between EU states since labor taxes and so called “contributions” to finance public insurances had to be paid according to the posted worker’s country’s law, and not according to the law of the state within he actually works.

Nevertheless, the increasing number of posted workers led countries like France and Germany to take measures against them. The French government has increased administrative controls over businesses hiring workers from Eastern countries like Poland. It asked for further harmonization of labor laws across Europe, implemented the minimum wage to foreign truckers who cross the country and extended the reach of national and local collective agreements in order to artificially raise the cost of hiring Eastern Europeans. The goal is to reduce their comparative advantages (their weaker salaries) in order to reduce their employability in favor of French workers and unions.

This classical situation echoes Ludwig von Mises’s comments about unions’ traditional mistrust against labor immigration despite their so-called “internationalist” state of mind. Indeed he wrote in Socialism:

The migrating workers depress marginal productivity of labor wherever they betake themselves. The fact that wages, their income, sink, directly damage the workers who were employed in centres of migration before the incursion of new workers took place. They regard the “immigrants” as the enemy of wages. Their particular interest would be served by a prohibition of “immigration.” It becomes a cardinal point of the particularist policy of all such particular groups of workers to keep newcomers out.”

The Economic, Social and Environmental Council, a French official advisory body, recently noted in a report — while commenting the impact of posted workers in Europe — that “The minimum wage in France has reduced the economic advantages of hiring posted workers.”

Under pressure from Central and Eastern European countries, the European Commission took “legal actions against France and Germany owing to the consequences of the application of their respective minimum wage legislation to the road transport sector.” Indeed, Eastern and Central European states have always strongly opposed “social harmonization” wanted by protectionist forces in Western Europe. Eastern and Central European workers are indeed perfectly aware of the fact that kind of harmonization won’t increase their salaries. “Harmonization” will only exclude them from the labor force in Western Europe. “They are trying to push them out of the markets” says a Hungarian protester in Brussels to the European Television Euronews about the new French labor law.

Minimum wage and price controls to implement protectionism is not a new strategy in Europe. A research paper published in 2012 by the Institute for the Study of Labor showed the multiplication of collective sectoral agreements creating minimum wages in several German industries in the 1990s was also a means to create barriers to entry. Moreover, it is interesting to note those barriers were not only requested by German unions against Eastern workers — they were also welcomed by established companies which aimed to raise barriers against their own competitors by forcing them to pay wages above the market prices.

The protectionist use of the minimum wage shows governments, far from being totally ignorant about economics, are perfectly aware of the effects of wage legislation. They don’t hesitate to use them in order to protect special interests against free competition, even from poorer workers aiming to raise substantially their wages by working in richer countries. European governments which face high rates of unemployment in their respective countries are therefore deeply cynical when they pretend to do everything they can to reduce unemployment while supporting measures which — as they know — obviously prevent a lot of people from finding a job.

This article was initially published on Mises.org.