BEERG Newsletter - Collective Bargaining: Indexation on the way back?

European policymakers and central bankers charged with keeping inflation under control are concerned that “wage indexation” may be about to make a comeback. 

Longstanding readers of this newsletter will remember that back in the 1970s wages in many EU countries were indexed automatically to rises in the cost of living. If the consumer price index went up, say, 8%, wages automatically went up 8%, before any negotiations on sharing productivity gains even began. Policymakers came to see indexation as “locking in” inflation expectations, and gradually the systems were largely dismantled. But they never went away completely.

In Spain, where annual inflation in August was 10.5% unions are succeeding in building indexation into more and more contracts. Such contracts cover almost a third of Spanish collective wage agreements, from less than a fifth at the end of 2021, and are expected to reach half next year, according to the Bank of Spain. While the Bank fears a “wage-price feedback loop,” the UGT, with 960,000 members one of Spain’s biggest unions, said workers should not be “once again the ones to pay the cost of a crisis”.

Spanish wages are rising well below inflation, like those of most workers in Europe. CaixaBank has built a wage tracker based on customers’ payslips that showed they rose 2.5% in the year to June from 2.4% in May.

Figures published last week by Eurostat, the European Commission’s statistics bureau, showed hourly pay rose 4.1% in the eurozone in the second quarter of 2022 against the same quarter the previous year, the strongest rise for at least a decade.

In countries including Belgium, Cyprus, Luxembourg and Malta, indexation was never entirely done away with. Luxembourg this year suspended pay rises due under its indexation rule and gave workers tax credits instead.

In Belgium, there is concern over a trigger that adjusts the pay of most public and private sector workers in line with a “health index” of inflation that excludes fuel, alcohol and tobacco prices. Under the trigger, hourly wage costs are set to rise 12% in total over the next two years, the National Bank of Belgium has forecast, 4.8 percentage points more than in France, Germany, and the Netherlands.

Belgium’s Unizo employers’ association said wage growth at that level would be “devastating for our economy and employment” and called for an “index skip” by the government to lower expected wage rises this year. In response, Lars Vande Keybus, adviser at ABVV, Belgium’s largest union with 1.5mn members said: “Purchasing power is extremely important if we do not want to fall into a deeper recession next year”.