The cost of labor has long been a challenge for all businesses in Belgium. In combination with a flat-lining economy, the high cost of labor acts as a deterrent for future investors. Additionally, it is a disincentive for companies already present in Belgium to create new jobs. As the economic crisis lingers on, unemployment figures are on the rise, particularly among the young people, highlighting the need for deeper labor market reforms. The Chamber is convinced that a reduction in the cost of labor will help to reverse these worrying trends, in addition to making Belgium more attractive for foreign investors.
1996 Law on Competitiveness
Belgium’s wage handicap, the higher cost of labor relative to neighboring countries, is hardly a recent phenomenon. In order to align the country’s salaries with neighboring countries, the government introduced a law to ‘Promote Employment and the Safeguarding of Competitiveness’ in 1996. The so-called ‘wage norm’ based Belgian salaries on the evolution of salaries in Germany, France and the Netherlands. According to VOKA, the Flemish Chamber of Commerce and Industry, the wage gap already stood at 8% at that time.
Unfortunately, the method by which the wage norm is determined suffers from several defects. Conceived at a time of strong overall productivity growth, the norm does not take into account productivity growth differentials relative to the reference countries. As Belgium has had a higher productivity rate, the wage norm has repeatedly overestimated the weighted average growth. Hence, since 1996, Belgium’s wage handicap has grown an additional 5.2%.
In November 2012, the Belgian Government made efforts to rein in the cost of labor by revising the 1996 law through the partial freezing of salaries in 2013 and 2014, with the exception of wage indexation and possible wage scale increases. In order to extend the restraining effect on Belgian salaries, the wage index was modified to include cheaper products in the basket of goods. These efforts were steps in the right direction and have had positive effects on the country’s inflation rate, which in January 2013, dropped below those of its neighbors for the first time in three years. Unfortunately, the cost of labor has continued to rise despite these adjustments.
What is the real wage handicap?
The Federation of Enterprises in Belgium (FEB/VBO) argues that the average wage handicap from 21 sectors in Belgium is as high as 16%. This has been confirmed by accounts from our member companies.
Joost Van Roost, President of ExxonMobil Benelux, has confirmed that there is a significant difference in labor costs between the company’s site in Antwerp and their similar site in Rotterdam. The wage gap is not only in relation to blue collar workers. Coincidentally, Karel De Baere, Chairman of PwC, has also reported a 28% difference in average salary costs between their offices in Belgium and Luxembourg. These dramatic differences in the cost of labor have not provoked the expected sense of urgency among policy-makers, who continue to base their analysis on inconsequential data about productivity. Indeed, Belgium has upheld its global reputation for high productivity due to the fact that many companies have switched to automated processes to maintain cost competitiveness.
Time to act
AmCham Belgium urges the government to advance long-term structural reforms. To this end, AmCham Belgium once again calls on the government to:
Lower employer social security costs
Employees’ take-home pay in Belgium is not commensurate with the high cost of labor. This is because of the social security charges that must be paid by both the employer and the employee. Standing at approximately 33% for white collar workers and 50% (including yearly holiday pay contributions) for blue collar workers, social security contributions in Belgium that are borne by the employer are among the highest in Europe, and as a consequence, Belgium has the largest ‘tax wedge’ in the OECD. Moreover, there is no ceiling on social security contributions, which makes employers think twice about hiring senior level positions in Belgium.
The Chamber recommends that these costs be lowered and streamlined to 25%. In 2007, research by the Belgian Federal Planning Bureau revealed already that a smaller tax wedge leads to more economic activity and higher levels of employment.1
The Chamber also proposes an elimination of structural deductions that are applicable to all salaried staff. This will minimize the impact of lowering the overall social security charges on the government’s budget, while simultaneously making the system much simpler to administer, both for businesses and the public administration.
Increase labor market flexibility
Historically, workers in Belgium have enjoyed strong legal protection, including the right to advance notice of dismissal and the right to severance pay or to negotiations over compensation in case of dismissal. While important for society, the cost of labor market rigidities also affects Belgium’s overall competitiveness and the willingness of employers to create jobs. High statutory severance payments and lengthy notification periods raise the effective cost of labor. AmCham Belgium recommends that the government turn the political challenge of aligning the status of blue and white collar workers into an opportunity for broader labor market reforms, which would increase flexibility.
When doing so, the Belgian Government would do well to keep Denmark’s ‘flexicurity’ system in mind, which combines a flexible labor market with generous social security and an active labor market policy with rights and obligations for the unemployed. Workers pay high taxes, and they trade job security for a guarantee, should they be laid off, of time-limited but generous unemployment insurance that they can live on and a promise of a rapid transition into a new job. Indeed, hiring and firing can happen from one day to the next, which gives Danish companies a decided competitive edge over rivals. Unfortunately, implementing ‘flexicurity’ in Belgium will not be as easy as a quick copy-paste affair, as it is based on century-old habits of dialogue between employers and unions.
Reduce the impact of automatic wage indexation
Last, but certainly not least, the country must tackle automatic wage indexation. Belgium has the most pervasive wage indexation regime in Europe. Originally put in place to protect low-income families by ensuring that income levels kept pace with inflation, it has an important role to play in society as it guarantees a constant level of purchasing power for workers. However, applied to 98.2% of employees in Belgium, it is detrimental to the country’s economy, driving up the cost of employment and decreasing overall competitiveness.
As Belgium is the only country where wage indexation remains wholly unrestricted, the country urgently needs to confront the inherent structural weakness of maintaining the index while its peers do not. Unfortunately, reforming wage indexation is a political faux-pas and remains a highly sensitive topic. Wage indexation is viewed as a fundamental right in Belgian society, and ultimately, talk of reform raises important questions about the kind of society we want to live in.
A study by the Université Catholique de Louvain (UCL) has shown that wage indexation actually benefits wealthier households the most. Indeed, research revealed that households with a net income of €25,000 lost 9% of purchasing power between 2000 and 2011, while wealthier households lost a mere 2%. The Chamber hopes that these findings will help lift the taboo that has sheltered the mechanism from reform and that the mechanism will be changed to limit its application to an agreed ceiling.
These reforms should provide for an automatic and fast-paced adjustment mechanism for past deviations from the norm and from observed divergences in productivity.
For more of our policy recommendations, please refer to our Priorities for a Prosperous Belgium.