Salaries are set by collective agreements between employers and employees.
The idea that anyone who works full time should earn enough money to comfortably live doesn’t sound like it should be particularly controversial. But from a business perspective, wages are a cost that eats away at profits. There’s therefore an incentive to reduce this cost as much as possible, especially for roles that are easily replaceable and/or aren’t considered to generate a lot of value for the business.
Workers, for their part, aren't always in a position to push back. Generally, the more staff lack better options such as other job offers, savings, or decent government welfare programs, the lower the wages they'll accept. People can end up working a job that doesn't pay enough for them to afford comfortable housing or even enough food, because workers calculate that this awful situation is slightly less awful than being homeless and starving.
This story has played out throughout human history, and it has led to a great deal of suffering and economic inequality. One of the tools that has been developed to stop it is the minimum wage; a legal requirement that all workers have to be paid a certain amount an hour. (Whether these hourly rates are high enough to comfortably live on is a different, contested, debate.) The vast majority of countries now have minimum wages. So it is perhaps odd that Denmark and Sweden, both part of a Scandinavian bloc famed for progressive policies, do not.
The thing is, Denmark and Sweden have a different way of doing things, which they think works better: collective bargaining. Here’s how it works: a representative of the employers and a representative of the employees sit down and hash out between them what the pay, benefits and working conditions should be for staff members. These representatives - aka unions - exist at different levels: national, industry, and local. Many workers have different parts of their compensation worked out by multiple unions across these levels.
For example, the national union for employees and the national union for employers may have agreed broad frameworks like maximum working hours and what percentage of salary each party pays into the worker’s pension pot. The industry-level unions may then be in charge of salary bands for different job levels, leaving the local union and the company to hash out the nitty-gritty specifics of pay and benefits for each individual worker. The government is not involved at all.
This system seems to get results. An entry-level McDonalds worker in Denmark can expect to earn double the amount of their equivalent in the UK (£8.25 vs £16.50) despite the fact that Big Macs cost almost exactly the same in both countries. (This gap will close a bit when the UK minimum wage goes up in 2022.) Should the UK therefore copy the Scandinavian example and scap our minimum wage entirely?
The idea of empowering and expanding unions is becoming increasingly popular amongst Brits. But many might be concerned that completely removing a legal compunction to pay their employees a minimum amount would encourage some bosses to behave badly. In Sweden and Denmark companies aren’t compelled to join employer unions and be bound by their rulings. In theory, it would therefore be perfectly legal to start a business that pays staff nothing. In practice, so many companies do sign up that 83 percent of Danish workers and 88 percent of Swedish ones are covered by collective bargaining agreements. But there’s no guarantee that the particular cultural and economic norms that allow this status quo to flourish in Scandinavia would be replicated elsewhere.
Read our explainer on: minimum wages.