The European Council’s Pay Transparency Directive is Commendable, But Not Enough

Siân Hanson – MSc Public Policy, University of Edinburgh

On 24 October 2023, Icelandic Prime Minister Katrín Jakobsdóttir chose to strike alongside Icelandic women by refusing to perform paid and unpaid labour in a demand for equal pay. Though lauded as one of the most gender equal countries in the world, the strike highlights persistent gender inequalities in Iceland, including a gender pay gap of 13%— the same as the European Union (EU). To ensure equal pay for equal work and to address the gender pay gap specifically, the European Council (the Council) announced a new directive for pay transparency in April 2023 with three key components: (1) companies with more than 250 employees must report gender pay gaps annually and companies with 100 to 249 employees must report gender pay gaps every three years, (2) companies with a gender pay gap of 5% or more must provide an action plan to reduce the gap, and (3) increased fines and penalties will be issued to noncompliant companies. Though promising, the directive’s narrow scope fails to address horizontal segregation and the “motherhood penalty,” signalling a flawed and incomplete strategy.

An important step forward for equal pay

The Council’s directive is certainly commendable. By making pay public to employees, and even to the public, employers are subject to scrutiny and pressured to address the gender pay gap and women, armed with information, simultaneously gain greater bargaining power. Of course, actual pay transparency policies differ, with varying levels of rigour. In Denmark, for example, 2006 regulations required employers with 35 or more employees (and at least 10 employees of each gender) to report wages by gender and share this with employees; though not published publicly, employers must detail plans to achieve equal gender pay if a gap exists. As a result of this transparency, Bennedsen et al. found that the Danish gender pay gap decreased by approximately 2%.

Other pay transparency policies are stricter, mandatory, apply to a greater number of employers, and threaten fines or legal repercussions for non-compliance to transfer the responsibility for change from women to their employers. For example, Iceland’s 2018 pay transparency policy requires employers with 25 or more employees to show equal gender pay to receive certification, or risk paying a fine. While inequalities persist and require further intervention, as Prime Minister Jakobsdóttir’s strike demonstrates, Iceland’s pay transparency policy shows promise. Together, these examples show how pay transparency policies vary and ultimately suggest that a supranational EU directive could further reduce the gap, especially as the Council’s directive includes mandatory reporting for larger employers and punitive measures for those who fail to comply.

But, is it enough?

The short answer: no.

The long answer: the directive fails to address factors beyond pay transparency that drive the gender wage gap. While the Council briefly acknowledges limitations, stating that “pay discrimination has been identified as one of the key obstacles to achieving gender pay equality,” there is a lack of accompanying directives and regulations to overcome other obstacles (with the exception of the European Parliament’s legislation instituting gender quotas on corporate boards).

Three undeniable weaknesses limit the efficacy of the directive

First, the directive itself has noticeable limitations. Only companies with 100 or more employees must publish reports and only those with 250 or more employees must publish reports annually, meaning a portion of what the EU defines as small- and medium-sized enterprises are not required to disclose gender pay gaps. Second, the EU fails to address horizontal or occupational segregation by focusing solely on pay transparency. Defined as the separation of men and women by profession, horizontal segregation “means that women are typically over-represented in sectors or occupations that often offer lower rates of pay.” Though the Council’s directive encourages equal pay between men and women performing the same job, it does not address horizontal segregation. Third, the EU fails to address how the “motherhood penalty” compounds horizontal segregation. Already systematically paid less in female-dominated professions, women’s wages and salaries often fall further behind men’s as they have children, resulting in the “motherhood penalty” and an increased gender pay gap. Yet, while the directive may expose and even rectify some inequalities, neither Council’s directive nor any EU-level hard law specifically helps mothers.

So, what next?

Though laudable, the Council’s pay transparency directive is inherently limited. Future directives and regulations should consider policies that more proactively address horizontal segregation and the “motherhood penalty” to fully erase the gender pay gap in the EU. From provisions for greater paternity leave, as pursued in Norway and Sweden, to a greater number of women in political and legislative bodies to addressing more deep-seeded gender biases, additional policies paired with pay transparency may have the potential to eradicate the gender pay gap and bolster gender equality.