This past fall, the European Union passed a “watershed initiative” to raise minimum wages and strengthen collective bargaining. There are numerous complexities to the new EU directive, but for pro-worker Americans the key point to understand is that the “historic” new law aims to improve working conditions by increasing minimum wages and dramatically increasing collective bargaining coverage. Critically, the policy aims to cover almost all workers with collective bargaining agreements — making it part of a growing trend of countries around the world seeking to promote sectoral bargaining.

The new directive requires EU member countries to have a process for setting their minimum wage at a sufficiently high level to provide a “decent standard of living” — which the EU suggests is at least 60 percent of the median wage and 50 percent of the average wage. The new EU law also encourages collective bargaining by requiring countries to create action plans if bargaining coverage is below 80 percent.

To some it might seem strange for a minimum wage directive to also contain collective bargaining provisions, but the two concepts are closely connected. As the Council of the European Union explains, “countries with high collective bargaining coverage tend to have a smaller share of low-wage workers and higher minimum wages than those with low collective bargaining coverage.”

A policy that promotes both collective bargaining and minimum wages has advantages over one that only promotes legislated standards. Collective bargaining is a way to set minimum standards rooted in civil society — businesses and workers — rather than determined solely by elected officials. Thus, collectively bargained minimum standards can reflect deep knowledge about market conditions. “Collective bargaining is crucial,” Ursula von der Leyen, President of the European Commission explained, “because you need to tailor the minimum wage to the local and the sectoral conditions.”

In addition, minimum wages and collective bargaining can be complementary — with minimum wages targeted at the very lowest-paid employees and collective bargaining setting higher standards in many industries and occupations. A sufficiently high minimum wage can also help support a stronger baseline for bargaining.

Further, in some countries legal minimums can be set in reference to collectively bargained standards. (In the United States, prevailing wage laws provide a legal minimum wage on government contracts that, in occupations and localities with high union density, can be the collectively bargained wage). Other countries, such as Denmark and Sweden, don’t have a legal minimum wage, but rather ensure high minimum standards through high collective bargaining coverage. Understandably, labor unions in Europe pushed to ensure the directive included strong standards for both minimum wages and collective bargaining.

Not only does the new directive support collective bargaining as a way of setting workplace standards, but it also aims to ensure most workers are covered with collective agreements. In Europe, collective bargaining coverage is generally higher than in the US, where just 12 percent of workers are covered. Still, only a minority of EU countries, such as Sweden, Denmark, Belgium, France, and Italy, currently meet the goal of 80 percent coverage, and coverage has been declining in most countries over recent decades in part because of anti-union policy changes. A few countries are just below the threshold, such as Netherlands (75 percent), but most EU countries –including Germany (54 percent), Ireland (34 percent), Greece (14 percent), and virtually all countries in Eastern Europe — have coverage rates well below 80 percent, indicating just how ambitious a target policymakers have set.

To achieve collective bargaining coverage of over 80 percent, sectoral bargaining is a “necessary condition,” according to a European labor federation as well as the researchers at Organization for Economic Cooperation and Development. Sectoral bargaining, sometimes known as broad-based bargaining or industry-wide bargaining, is a type of collective bargaining between unions and employers that sets minimum standards on issues such as wages, benefits, safety, and training for all workers in a sector or occupation and typically works in conjunction with worksite-level bargaining.

The new law makes the EU part of a global trend of economically advanced countries promoting sectoral bargaining. In November, New Zealand passed a new sectoral bargaining law that labor allies in Britain may seek to emulate. In December, Australia passed a new policy that promotes multi-employer bargaining. Studies show that sectoral bargaining leads to higher wages, better benefits and safer working conditions, significantly reduces economic inequality, helps close pay gaps for women and people of color, and creates a level playing field for employers that can boost productivity, which has helped drive its growing support in both the EU and New Zealand.

The sectoral bargaining debate in the United States is not as far along, but the policy is gaining momentum as many leading American elected officials support sectoral bargaining. In related developments, California lawmakers passed a groundbreaking bill in September to create a sectoral council for fast food workers and a number of cities and states have passed similar policies in recent years.

It is important to note that the EU does not have the legal authority to directly change member country laws on minimum wages or collective bargaining; countries retain those legal rights for themselves. Rather, the new EU directive strongly encourages member countries to comply and helps define a process for making plans through consultations with businesses and unions. The EU also has a process for ensuring countries comply with its directives. As a result, how countries choose to set minimum wages and adopt action plans to promote collective bargaining will determine the effectiveness of the new policy and will need to be closely monitored.

Country-specific implementation will begin over the next two years, though Romania has already taken action to facilitate multi-employer collective bargaining. To be effective and ensure workers have sufficient power to secure fairly bargained deals, country-specific implementation plans will need to include policies that support broader-based bargaining, such as extension mechanisms, as well as policies that increase union membership, such as those that improve union access to workers.

Still, the new EU policy is a big deal. The directive represents a “paradigm shift” for the European Union away from neoliberal policies that previously sought to weaken unions and towards the recognition that unions and collective bargaining help make economies and democracies work properly. The law makes clear that improving conditions for workers requires higher minimum wages and increased collective bargaining coverage. It also seeks to cover most all workers with a collective bargaining agreement and highlights that policymakers around the world are increasingly recognizing the importance of sectoral bargaining in conjunction with workplace bargaining.