FinancialGuy Writes!

Anecdotal stories from friends in recent months have alerted me to a stunning drop in wages for new hires here in my adopted home of Malta.

Essentially, the economy has been so bad in [enter name of country here] that young people have upped and moved, looking for better opportunities elsewhere. Since the Maltese economy has been quite steady in the last few years, lots of Italian, Spanish and French twenty-somethings have arrived. The influx of labour has pushed down the prices for all new hires. While I am sure this is great news if you are an employer, it isn’t so great if you are one of the many people that needs to earn to eat.

For this reason, I was interested to invite myself to an event run by EESC in Brussels last week. It was a public hearing of the EESC’s Single Market Observatory (SMO) to release a draft final report on “The working of the services directive in the construction sector”.

The main problem being discussed is known as “Social Dumping” a rather unpleasant phrase used to describe a situation where workers from a nation with lower labour costs move in large numbers to a nation with higher labour costs. For example, construction workers moving from Bulgaria to Germany.

In EU speak, this issue relates to the Services Directive (2006/123/EC) which enables people to freely move from one EU member state to another. This is known as freedom of establishment and the free movement of services. It also relates to the Posting of Workers Directive (96/71/EC) which enables free provision of cross-border services while guaranteeing rights of posted workers.

What was interesting for me was the agreement in the room. The report was based on interviews with employers, employees and government officials in six different member states. Speaker after speaker said something along the lines of, “Everyone I spoke to agrees that the current system does not work well”. There were many variations as to why the current system is not working, but the fact that it is a problem seemed to be virtually universal.

Since I cannot imagine trying to encapsulate the complexity of the entire event into a blog post, I shall try to convey what seemed to me to be the most important point: this is a structural problem at the heart of the EU that has the power to further cripple European economies. Or to put that another way, we are in a race to the bottom.

We all know that the job of business owners and managers is to deliver profits growth and dividends to shareholders. To do this, the manager needs to balance a fine line of improving sales while lowering costs to boost profit, preferably in a sustainable way. We also all know that for most businesses, wages are their largest single expense.

Therefore, when presented with an opportunity to cut costs by hiring low or semi-skilled labour from another country where expectations and prices are lower, many businesses will gladly choose the lower priced employee. It seems that some firms do this legally and others do this illegally – I guess that for some people, “cheaper” or “cheapest” are never enough.

This creates a downward spiral where hourly rates are cut and cut, forcing the locals out of the market and into the unemployment lines, while the new hires use a two year window to pay their taxes and social security in their home country. Meanwhile, should anything unfortunate happen at work, the host country will be footing the bill for medical services etc.

On the one hand, the natural inclination of the EU is to open borders, but somehow they need to find a way to limit the impact, enforce rules more consistently and prevent member states from taking a protectionist stance. Meanwhile, the current situation provides populist politicians and media outlets lots of room to complain about “foreigners taking our jobs”. One speaker even described the situation as “mission impossible”.

Your author does not propose to have the answer – nobody does at this stage – but it is clear that this is a thorny issue that needs to be addressed if the rights of workers everywhere are to be protected.

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