Is Belgium’s Policy of Wage Price Indexation Economically Damaging?
Updated: Aug 20, 2022
By William Tarr
Along with Cyprus and Luxembourg, Belgium is one of three European nations to index their wages to consumer price increases, meaning that wages in Belgium are to a large degree automatically linked to price developments. As a result of Belgium’s labyrinthine social welfare infrastructure, salaries both in the public and private sectors must increase at least at the rate of inflation. With inflation rates reaching 40-year highs across much of the developed world, and recession warnings flooding in from central banks, some political figures in Belgium are beginning to question the viability of this policy.
One common argument against wage indexation in other western nations is the theory of the wage price spiral. This is when wages are raised in line with inflation and therefore businesses must raise prices in response, creating a positive feedback loop that stimulates further inflation. Already, indications of this phenomenon are emerging in the Belgian economy. Three quarters of small businesses in Belgium claimed they had no choice but to pass on a rise in staffing costs to consumers in June, with 47 percent of small and medium size businesses claiming that they had already done this. Evidence on a macroeconomic scale is clear; inflation in Belgium is nearing the highest in all of western Europe, registering at 9.65 percent in the 12 months up to June 2022. While this exceptional inflation rate cannot be fully attributed to the wage indexation policy, the policy can explain why Belgium’s inflation rate is higher than the majority of its EU peers, such as France, whose inflation rate over the same period was 5.8 percent.
In addition to this, some Belgian figures also lament the indexation’s impact on both the margins of small businesses and the ability of growing firms to invest in new technologies. A survey carried out by Unizo, a Flemish business association, suggested that over one third of businesses have delayed reinvestment plans and recruitments due to additional budgetary pressure from indexation. The same association suggested that the indexation will make Belgian SMEs (small- and medium-sized enterprises) less competitive as profit margins are eaten up by rising staffing costs. Purportedly, 96 percent of these businesses are unprepared for wage increases and 35 percent are considering scrapping investment projects.
Largely, however, these measures of decline in the Belgian economy are simultaneously unaffected by the wage indexation and overstated by much of Belgium’s political force. A fall in competitiveness and investment, for example, cannot be pinned on the indexation policy. With many other European nations seeing wage increases at, or just below, inflation rates as a result of organized labor and tight labor markets, the problem of the waning profit margin is not limited to Belgium. In fact, some may argue that a policy protecting purchasing power may both soften union relations, in a nation with extremely high unionization rates, and therefore cut down the risk of wildcat strikes and allow businesses to plan for cost increases through wage growth figures outlined by the government each year. If, however, costs rise too heavily for businesses, protecting smaller enterprises should be the first priority; this protection could occur through a cut to other forms of social security payments levied against employers, not an abandonment of wage indexation. Furthermore, despite fears of a wage price spiral, indexation may prove to be the key to sustaining economic growth through economically tumultuous years. With much of Belgium’s working and middle classes maintaining their purchasing power, demand for goods and services in Belgium is showing a unique resilience. Household consumption in Belgium grew 0.5 percent in the first quarter of 2022 and, despite fears of stifled investment, reinvestment of profits grew by 2.7 percent, in large part due to growing demand from domestic consumers.
In conclusion then, while not a panacea, Belgium’s policy of wage indexation shows little sign of damaging the nation’s economy. By maintaining the purchasing power of much of the population, the policy may even stimulate higher growth rates and a fairer distribution of capital. Perhaps this is another example of organized alarmism from political elites standing in opposition to good economics.