The role of competitiveness – necessary or not?

Mario Draghi’s report on EU competitiveness, The Future of European Competitiveness, offers a sobering assessment of the European Union’s economic standing, highlighting the urgent need for strategic investments, deeper single market integration and a renewed focus on innovation and productivity. Against this backdrop, the EU’s recently adopted Pay Transparency Directive, set to be transposed into national law by June 2026, presents a mind-boggling situation. While lauded for its social justice aims of reducing the gender pay gap and promoting equal pay for equal work, a critical examination is necessary to ascertain how, or if, this directive truly aligns with and contributes to the ambitious competitiveness agenda outlined by Draghi.

The Draghi report fundamentally argues for a Europe that can compete on the global stage through technological leadership, efficient capital markets and streamlined regulatory environments. It emphasises the need for a regulatory environment where businesses thrive, innovation flourishes and the EU can secure its strategic autonomy. The report’s focus is largely on macro-economic drivers and structural reforms designed to boost productivity and foster a dynamic business landscape.

The Pay Transparency Directive, conversely, is primarily a social policy instrument. Its core tenets include mandatory disclosure of salary ranges, the right for employees to request pay information, information on career progression, regular gender pay gap reporting for larger companies and prohibition on inquiring about a job applicant’s past salary history.

Proponents might argue that the directive indirectly supports competitiveness by fostering a more equitable and motivated workforce. On one hand a fairer pay system could:

• Improve talent attraction and retention: Companies with transparent and equitable pay structures may become more attractive employers, particularly to younger generations who value transparency. This could help address talent shortages, a concern implicitly acknowledged in Draghi’s emphasis on skills and education;
• Boost employee morale and productivity: A perception of fairness can lead to higher job satisfaction and engagement, potentially translating into increased productivity. A more engaged workforce is, by definition, a more competitive one;
• Drive efficient allocation of labour: By making pay information more readily available, the directive could help workers make more informed career decisions, leading to a more efficient allocation of talent across the labour market; and
• Enhance corporate governance and reputation: Companies that proactively comply and address pay gaps can build stronger reputations, attracting not only talent but also ethical investors. This aligns with Draghi’s broader call for a European model that champions sustainable competitiveness.

However, a critical perspective reveals significant headwinds that the directive could create for EU businesses striving for global competitiveness, especially when pitted against the lighter regulatory touch and market-driven flexibility often found in the United States, which directly impacts investment decisions. These headwinds include:

• Increased administrative burden and compliance costs: The directive’s reporting requirements, data analysis, and potential need for pay audits could impose significant administrative and financial burdens. This directly counteracts Draghi’s call for reduced red tape and administrative simplification. For businesses already grappling with complex EU-wide regulations, this adds another layer of bureaucracy. This diversion of resources from innovation or expansion to compliance directly hinders the ability or EU businesses to compete and can make the EU a less attractive destination for new investment;
• Wage inflation and reduced flexibility: Greater transparency could lead to upward pressure on wages, especially in industries where historical pay disparities are significant. While beneficial for employees, this could increase labour costs for businesses, potentially eroding their competitive edge in a global market already characterised by intense cost competition;
• Impact on wage negotiation dynamics and talent acquisition: As an economist I would argue that pay transparency can paradoxically stiffen employers’ resolve in wage negotiations. If giving one employee a raise necessitates raises for many others due to transparency, companies might be less willing to grant individual increases, potentially leading to dissatisfaction or a less competitive offering for highly sought-after talent;
• Risk of “levelling down”: In some instances, companies might opt to standardise pay at a lower common denominator to avoid large-scale pay adjustments, rather than raising lower salaries to match higher ones. This would undermine the directive’s goal of equal pay while simultaneously stifling competitive compensation. Such an outcome would be detrimental to both workers and the overall productivity drive;
• Difficulty in defining “work of equal value”: A significant practical challenge lies in objectively defining “work of equal value”. This subjective assessment can lead to disputes and legal challenges, creating uncertainty and additional costs for businesses, diverting focus from core competitive strategies; and
• Chilling effect on investment attraction: When investors weigh opportunities, regulatory burden and labour market flexibility are significant factors. The EU’s increasing regulatory complexity, exemplified by this directive, may be perceived as a disincentive for foreign direct investment (FDI). While the directive aims for social good, the cumulative effect of such regulations could nudge investment towards regions offering greater ease of doing business and potentially higher returns due to lower operational complexities. The Draghi report explicitly calls for attracting more investment, and if the directive inadvertently deters it by increasing perceived risks or costs, it works against this critical objective.

For the EU to truly achieve the competitiveness envisioned by Draghi, particularly in attracting investment, businesses must proactively address the directive’s potential for regulatory burden. Here are some practical suggestions.

The European Commission and national governments should provide clear, standardised templates for pay gap reporting and consistent definitions of “categories of workers” and “work of equal value”. This would reduce ambiguity and the need for each company to interpret complex legal texts, especially benefiting SMEs that lack extensive legal departments.

It would also be beneficial if the EU and local authorities develop intuitive online platforms for reporting, potentially integrating with existing national statistical offices, to simplify data submission and reduce manual errors.

While the directive already exempts companies under 150 employees from regular reporting, further tiered approaches for companies between 100-250 employees could be explored, perhaps with simplified reporting formats or less frequent submissions in the initial years. Moreover, I would strongly recommend implementing a grace period for initial compliance, focusing on education and support, particularly for companies genuinely striving for compliance.

With regards more direct help, I would encourage using EU or national funding to subsidise the adoption of specialised HR and pay equity software that can automate data collection, analysis and reporting, significantly reducing the manual effort required. This funding could also cover the expenses needed for the provision of training for HR professionals and managers on understanding the directive’s nuances, conducting pay equity audits and effectively communicating pay policies to employees.

The EU Wage Transparency Directive is a powerful statement of European values, aiming to tackle deeply ingrained inequalities. Its alignment with Draghi’s competitiveness agenda, however, is not a given and requires careful consideration of its impact on EU businesses’ ability to compete with global rivals.

For the EU to truly achieve the competitiveness envisioned by Draghi, especially in attracting the investment needed to bridge the gap with other global rivals, policymakers must ensure the directive’s implementation is accompanied by robust measures that mitigate its adverse effects on businesses. The long-term economic prosperity of the Union depends on a framework that champions both social equity and aggressive global competitiveness, rather than sacrificing one for the other.