What if… Belgium took a new approach to the wage index?

If wages in the past six years had followed the main inflation indicator of the European Central Bank, instead of the health index, there could be 160,000 more jobs now, accounting for over € 3.2 billion net purchasing power.


In a recent study, VKW Metena, the economic think tank of the entrepreneurs’ platform of the Christian employers’ organization, proposes an alternative for the current Belgian wage indexation system.

The Belgian system of wage indexation is unique in Europe and has been subject to much political and social debate. Wages and social benefits are coupled to the health index, which excludes tobacco, alcohol and motor fuels, but includes home heating oil, gas and electricity. This implies that, for instance, international oscillations in oil prices can push the index to rapid increases. The indexation is also automatic: between 2005 and late 2010, salaries increased automatically by 11.2%, without social negotiations.


Data for the last six years show, however, that Belgium’s international competitiveness has sharply deteriorated when comparing the wage costs with its most important neighbors: The Netherlands, France and Germany. Since international research shows that each percentage point increase in wage costs in the private sector results in a one percentage reduction in jobs, the current wage indexation potentially prevented the creation of 160,000 jobs in the past six years.


VKW proposes to base wages on the core index, not the health index, thus following core inflation. Core inflation does not take into account food and energy prices, which are mainly created on international markets. For most European central banks and the ECB itself, this is the most important indicator of the evolution of domestic prices.


Calculations by VKW show that if the core index had replaced the classic index wages would still have increased by 8.5%, but the wage handicap would have decreased significantly. Although the system would result in a decrease in purchasing power (on average €70 per month), extra revenues and jobs could be created.


The impact of the wage norm

The practice of the wage norm was introduced in the Law on the Preservation of Competitiveness. Employers and labor unions set a nationwide maximum range for pay increases every two years, taking into account both inflation prospects and forecasts for the wage increases in the nation’s three largest trading partners – Germany, The Netherlands and France.


Even after the 1996 Law was introduced, Belgian labor costs continued to rise faster than in the three reference neighboring countries.


Source: Amcham Belgium