Recent developments in social security contributions and minimum wages in the euro area

Prepared by Ferdinand Dreher, Omiros Kouvavas and Gerrit Koester

Published as part of the ECB Economic Bulletin, Issue 8/2019.

The behaviour of labour costs can be significantly affected by country-specific changes in social security contributions and minimum wages. An awareness of the nature and magnitude of such factors is important when assessing the strength of wage growth and its implications for producer and consumer price inflation. This box examines how these two factors have affected aggregate euro area wage growth.

Measures of labour costs, such as compensation per employee^[1], can at times be affected by measures related to employers’ social security contributions. If substantial enough, changes in the social security contributions made by employers can drive a wedge between different wage measures (see Chart A, panel a). For example, the gap between the growth in compensation per employee and the growth in wages and salaries per employee in 2015-16 was related to cuts in employers’ social security contributions in each of the four largest euro area countries (see Chart A, panel b).^[2] Since the beginning of 2019, a gap has again opened up, which relates mainly to a significant drop in social security contributions in France, while in Germany, Italy and Spain employers’ social security contributions have increased. The reduction in employers’ social security contributions in France was related to a legislative change implying a permanent reduction in employers’ social security contributions, which replaced the tax credit for competitiveness and employment (crédit d’impôt pour la compétitivité et l’emploi – CICE). This legislative change held back growth in compensation per employee in the first three quarters of 2019, with increases of 2.3%, 2.2% and 2.1% in the first, second and third quarters respectively – only slightly above the long-term average of 2.1% since 1999. Annual growth in wages and salaries per employee, which excludes employers’ social security contributions and is not affected by the legislative change in France, hence grew stronger than compensation per employee at a rate of 2.6%, 2.5% and 2.5% in the first, second and third quarters respectively – comfortably above the long-term average of 2.2% since 1999. Overall, growth in wages and salaries per employee is more dynamic at the current juncture than growth in compensation per employee.

Chart A

Employers’ social security contributions and wage growth in the euro area

(panel a: annual percentage changes; panel b: percentage points)

Changes in minimum wages can also significantly affect wage behaviour, as they are governed by indexation or legislation rules rather than wage bargaining processes. Minimum wages exist in 15 of the 19 euro area countries.^[3] In July 2019 the minimum wage paid in the euro area ranged from €430 (Latvia) to €2,071 (Luxembourg) per month. Over the last ten years, the minimum wage has increased, on average, by between 1.5% (Ireland) and 7% (Estonia) per year.^[4] Minimum wage levels are set using different methods – including predetermined formulas, expert committee recommendations and consultation with social partners – but are often also subject to government discretion. As a result, the frequency of change differs from one country to another. However, most countries usually revise their minimum wages every one to two years.

Minimum wage growth has so far been substantially stronger in 2019 than growth in overall wages and salaries per employee. An index for the euro area compiled on the basis of available country data^[5] shows that, after only a 1% increase in statutory minimum wages in 2018, minimum wages increased by 4.6% year on year in the first half of 2019 (see Chart B).

Chart B

Growth in wages and salaries per employee, as well as minimum wages, in the euro area

(annual percentage changes; annual data)

Growth in the level of minimum wages in the first half of 2019 was broad-based across countries.^[6] For the first time since 2008, all euro area countries with minimum wages increased the statutory national minimum wage level in 2019, with increases on the previous year ranging from 1.5% (France) to 17.9% (Spain) (see Chart C, panel a).

Chart C

Minimum wage developments and their role in growth in wages and salaries per employee

(panel a: annual percentage changes; panel b: percentage points)

The direct mechanical impact of changes in the level of the minimum wage on overall euro area wage growth tends to be small. Calculating such direct contributions requires information on the number of recipients. This box uses data from the EU Statistics on Income and Living Conditions (EU-SILC) to derive a proxy for the share of minimum wage recipients in recipients of overall wages and salaries.^[7] Bearing in mind the considerable uncertainty surrounding this proxy, the data for the euro area show that the direct mechanical contribution of minimum wages to growth in wages and salaries per employee has increased in 2019, but has – with a magnitude of around 0.1 percentage points – been quite limited (see Chart C, panel b).

For some countries, the direct mechanical impact of changes in minimum wages on the growth of wages and salaries per employee has likely been more substantial. In the first half of 2019, for example, the estimates based on the proxy suggest that minimum wage growth has contributed up to 0.5 percentage points to national wage growth (see Chart C, panel b). However, such estimates cover only the direct effects of minimum wage changes on wage growth in an accounting sense. Hence they abstract from indirect effects of minimum wages on the wage scale^[8], as well as from effects linked to the possible repercussions of changes in minimum wages on employment^[9] or to the dynamic interaction of wage-setting and minimum wage adjustments.

Taken together, wage growth has been quite robust recently, especially if developments in social security contributions are taken into account. While growth in compensation per employee has been softening over recent quarters (see Chart A), it reflects mainly lower employers’ social security contributions. Growth in wages and salaries per employee, which exclude employers’ social security contributions, remained quite robust and has also benefited recently from a somewhat higher contribution of minimum wages. Overall this box supports the view that the robustness of wage growth is mainly the result of resilient labour markets, especially when taking into account recent developments in social security contributions and minimum wages.