Each year, the European Commission publishes a series of country-specific recommendations to advise EU Member States on how to boost jobs, growth and investment. But is this process a strictly technical exercise or does it reflect ideological preferences? Based on a new study, Joshua Cova stresses the role that ideology plays in shaping the Commission’s opinions on wage policies.

Although the Eurozone crisis is now more than a decade old, the changes caused by the crisis still largely define and permeate EU policy-making. Indeed, one of the lessons EU policymakers learned was that to prevent future crises from occurring, greater policy coordination between member states is needed.

In fact, due to the greater interdependence between the economic and financial markets of the Member States, the economic and fiscal problems of one country can quickly spill over and become a problem for all Member States. This is why the EU created the European Semester, an annual cycle of policy coordination between Member States. As part of the semester, each year the European Commission publishes a list of country-specific recommendations setting out a series of reform objectives in a number of policy areas.

Compared to several previous EU coordination efforts, which relied on benchmarking and ‘soft governance’, the semester also includes more coercive aspects. This means that the Commission reserves the right to impose fines in case of non-compliance with legally binding country-specific recommendations. EU recommendations can be more or less specific and can be justified in different ways and with varying level of detail. This led to a number of studies examine the possible determinants of these recommendations.

In addition, although the European Semester was designed as a budgetary and macroeconomic coordination mechanism, the Commission issues recommendations on a wide range of other policy areas, such as labor market participation, social inclusion, education and working poverty rates. Although not all recommendations are legally binding, some studies have shown that even when they are not binding, the recommendations issued by the Commission can have important consequences for the political reforms of the Member States (see for example in France Where Italy).

Given the importance of the CSRs for the development of Member States’ national policies, it is not surprising that the content of the recommendations has attracted considerable interest. Broadly speaking, European policy scholars have identified two major economic and political directions followed by these recommendations. Some scholars argued that the European Semester has undergone a process of gradual socialization, which emphasizes socially oriented objectives in the policy areas of social affairs and employment regulation, while others found evidence for greater market liberalization as well as increased deregulation of the labor market.

A Technocratic vs. Ideological Commission

In a new study, I examine the economic and institutional drivers behind the Commission’s recommendations on Member States’ wage policies and cost competitiveness indicators. In particular, I am interested in examining recommendations calling for greater wage moderation, which often call for a closer alignment between wage growth and productivity growth.

I examine two competing hypotheses about the Commission’s policy preferences. First, I assume that the Commission’s preferences are guided by what I call a depoliticized or technocratic logic. Concretely, this would mean that the recommendations are determined by the development of objective economic indicators. This means that recommendations on wage moderation would be correlated with changes in economic variables such as the unemployment rate, GDP or labor costs. Of these variables, I expect the most important to be labor costs. Why? Because economic theory tells us that higher wages are associated with higher labor costs. And higher labor costs mean more expensive exports and a less competitive economy, which in turn could hurt jobs and economic growth.

I compare this first hypothesis to an alternative hypothesis of an ideological or politicized Commission which bases its recommendations on a set of preferences on the characteristics of the labor market of the Member States. To define the types of labor market institutions that the Commission might prefer, I looked at the policy outcomes of the EU at the time of the eurozone crisis.

In countries that have benefited from bailouts, such as Greece, Portugal and Ireland, the Commission has linked financial aid programs to a package of labor market reforms designed to improve competitiveness. Examples of these reforms are reductions in minimum wage rates and decreases in collective bargaining coverage rates. Moreover, during the financial crisis, EU institutions favored decentralized wage-setting institutions and deregulated labor markets rather than more regulated labor markets with more influential and powerful social actors.

In fact, decentralized wage-setting regimes, which allow companies to set wages without having to consult and coordinate compensation proposals with unions, allow greater flexibility to adjust wage growth to changes in the economy. As a result, I suspect that an ideologically motivated Commission might, regardless of labor cost developments, be more likely to issue a country-by-country recommendation on a country’s wage development in countries with highly centralized wage-setting institutions.

Results

I find that the Commission is indeed more likely to recommend policy reforms that dampen wage growth when countries exhibit high degrees of centralization in wage setting. While I find that the European Commission is more likely to issue a country-specific recommendation when labor costs are rising and/or economic growth and the unemployment rate are falling, I also find that this effect is strongly influenced by the labor market institutions present in a country. This is illustrated in the table below.

Figure 1: Unit labor costs and likelihood of a country-specific recommendation

To note: For more information, see the author’s accompanying article in European Union Politics.

The horizontal axis represents the annual growth in labor costs and the vertical axis represents the probability that a country will receive a specific recommendation regarding wage growth and competitiveness. The three panels represent different types of wage-setting regimes, ranging from centralization of low-wage setting to centralization of high-wage setting.

As can be seen, for all panels, the greater the increase in labor costs, the greater the likelihood that a country will receive a specific recommendation in the areas of wage growth and competitiveness. high. It makes sense and meets expectations. However, one can also see to what extent this effect is determined by the type of wage setting regime a country exhibits. Countries with more centralized and coordinated wage-setting institutions are obviously more likely to receive country-specific recommendations.

Finally, I have also sought to contribute to the debate introduced above on the socialization or liberalization of the European Semester. I find evidence that the European Semester is undergoing a gradual process of socialization. This means that compared to the start of the semester, an increasing number of recommendations call for higher wage growth, which is now seen as an important driver of aggregate demand and economic growth.

A more social EU?

While the idea of ​​a European social model has proven to be an attractive but elusive concept among EU policy makers, a series of new policy initiatives, for example, the working conditions of platform workersOr on the minimum salary, underline the increased importance that the social dimension plays in EU policy-making. The introduction of the European Pillar of Social Rights as well as a Social Dashboard, designed to assess Member States’ progress in achieving a series of key indicators, clearly indicate the EU’s intention to engage more closely in the achievement of social objectives. Wage growth policies are also important in this regard.

Finally, the pandemic has led to a greater institutionalization of the European Semester, as the national implementation of policy recommendations is now also linked to the disbursement of funds from the Recovery and Resilience Facility. In any case, whatever direction the Commission’s future policy recommendations take, the Commission is playing an increasingly important role in the labor markets of the Member States.

For more information, see the author’s companion article in European Union policy

Note: This article gives the author’s point of view, not the position of EUROPP – European Politics and Policy or the London School of Economics. Featured image credit: European Council