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Automatic wage indexation back in the firing line

A recent study by UCL may generate the necessary social and political traction needed to implement proper reforms

Automatic wage indexation was put in place to protect those most vulnerable in society from an increase in the cost of living due to inflation. Yet, the mechanism is now more beneficial for wealthier households, because of the effect mounting housing and energy prices have on the index. This calls into question its current form.

The recent findings by the Université Catholique de Louvain (UCL) demonstrate that the indexation mechanism is far from perfect. Instead of protecting the purchasing power of lower income households, the rising cost of housing and energy has tipped the balance in favor of wealthier households. Households with a net income of €25,000 have lost 9% of their purchasing power between 2000 and 2011, while wealthier households lost only 2% over the same period.

Furthermore, the study revealed that indexation fails to protect pensioners and young people. Citizens over the age of 65 and under the age of 25 have lost 8% and 5% respectively of their purchasing power. Conversely, young professionals (aged 25-35) have only lost 1%. These results make it clear that the mechanism needs to be revised. While recent changes to the composition of the basket of goods used to calculate the index have helped to reduce inflation, in the long run this is not enough.

Not only is the mechanism not having the desired social effects, it is also expensive for businesses in Belgium and the state itself, as the index has an unlimited effect on the entire compensation of workers, including bonuses and pensions. Ernst & Young recently reported that labor costs in the manufacturing sector in Belgium have risen 5% between 1992 and 2012. Comparatively, the cost of labor has remained stable in the Netherlands and even decreased by 2% in Germany. If Belgium wants to create a more competitive labor market, reforming the automatic wage indexation must be its top priority.

AmCham Belgium’s position

Wage indexation is seen as a fundamental right in Belgium to the point that it is a taboo to discuss reform. AmCham Belgium is hopeful that this research, which proves the social and economic disadvantages of the current system, will finally give reform efforts some political traction. AmCham Belgium will propose detailed reforms in our 2013 Priorities for a Prosperous Belgium on May 29.