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A 2.8% increase in the social minimum wage: A draft bill that needs to be withdrawn or, failing that, neutralised financially

07.12.2020 11:16

Opinion of the Chamber of Commerce and the Chamber of Skilled Trades and Crafts

Faced with the current difficulties of businesses and an uncertain economic outlook, the Chamber of Commerce and the Chamber of Skilled Trades and Crafts strongly criticise the Government's decision to increase the social minimum wage (salaire social minimum, SSM), a measure that will negatively impact companies during this health and economic crisis. They demand the withdrawal of the related draft bill or, failing that, a vast compensatory measure aimed at all economic sectors.

A decision taken at the worst possible time

The proposed increase of the social minimum wage by 2.8% on 1 January 2021 hits all economic sectors hard, and especially many SMEs from the sectors most affected by health restrictions and a drop in their turnover. The announcement provoked strong reactions from companies, reactions commensurate with the additional problems that this increase in costs generates for them in a context of exceptional difficulties with a recession of 6.0% of GDP estimated by STATEC for 2020. Many companies have seen their cash flow deteriorate sharply in recent months and will not have the capacity to amortise this unexpected increase in labour costs. Such an increase will also weigh overwhelmingly on very labour-intensive sectors, and will have consequences on employment in the country.

Worsened loss of cost competitiveness for Luxembourg companies

The planned adjustment comes on top of a total cumulative increase in the social minimum wage of some 24% since July 2010, correlative to the two mechanisms that are the social minimum wage adjustment and the salary sliding scale. The recurring increases have strongly contributed to the increase in unit labour costs for Luxembourg, which has therefore suffered a marked deterioration in its cost competitiveness compared to its main partners and commercial competitors.

Indeed, the significant increase in the social minimum wage strongly impacts the general salary scale of the entire economy as recipients of salaries close to the social minimum wage or of comparable salary levels are encouraged to demand increases in their own salary level. In addition, the social minimum wage's adjustment mechanism is unfair in the sense that rising wages in some sectors indirectly lead to higher wages in other sectors, without taking into account productivity assessment in these sectors.

The expected increase will further deteriorate the competitiveness of businesses and their ability to invest in recovery efforts in the new economic context, at a time when the sustainability of many of them is called into question by the crisis. In addition, it will limit the country's ability to attract new businesses, again due to the cost of labour that risks becoming a handicap vis-à-vis other economies.

A lethal measure for the most vulnerable in the labour market

The high level of the social minimum wage already poses significant problems in terms of the employability of low-skilled residents. In these times of crisis, raising the social minimum wage risks aggravating the difficulties experienced by residents with little or no qualifications when looking for a job, especially since the increase in the cost of labour of the least qualified work encourages the use of more qualified workers, particularly from the Greater Region.

Any increase in the level of social minimum wage will result in an increase in the potential number of job seekers, among the less qualified in particular, further weaken social cohesion, and undermine a political objective pursued by the Government to create social compensation for the benefit of poorer households and those strongly impacted by the crisis.

Withdraw the draft bill, or failing that, neutralise the impact of the social minimum wage for all economic sectors

The Labour law in no way requires the Government to raise the level of the social minimum wage. Consequently, and given that the ‘general economic conditions’ do not justify such an increase, the Chamber of Commerce and the Chamber of Skilled Trades and Crafts expressly ask the Government to make use of the possibility granted to it by law to not act and therefore to withdraw the bill from the role of the Chamber of Deputies.

In the event that the Government intends to ignore this request from the two chambers, they insist on a subsidiary basis that the Government assume its responsibilities and they ask for a complete financial neutralisation for the benefit of all the companies concerned by the negative impact of the increase and not only in the sectors most seriously affected by the pandemic. In the present context, it would be important that the requested compensatory measure be effective at least over a period of three years, that is from 2021 to 2023.

This general neutralisation of the impact on labour costs by the increase in the social minimum wage should be done through multi-year payments to the companies concerned in an amount equivalent to the overall cost of this adaptation.

The planned lump-sum aid of EUR 500 for vulnerable sectors and in-store retail is insufficient, given that many other sectors, such as construction, stand out with a considerable number of employees earning salaries located at the social minimum wage (or qualified social minimum wage) or its vicinity. It is therefore important that the Government adopt a generalised compensation approach and one that covers a period longer than the next six months alone.

As a reminder, the bipartite agreement of 15 December 2010 concluded between the government of the past and the UEL as part of the discussions on strengthening the competitiveness of the economy had decided to neutralise the effect, at the level of labour costs, of the 1.9% increase in the social minimum wage on 1 January 2011, by paying an amount equivalent to the overall cost of this adaptation to the Mutuality of Employers.

Therefore, the Government should decide on an amendment to the 2021 draft State budget and to the draft multi-year financial plan for the period 2020-2024, forecasting this payment for next year and the following years.

Press Release by the Chamber of Commerce and the Chamber of Skilled Trades and Crafts