Politicians in Belgium want to "revitalise industry," but its rigid labour market may be getting in the way, warned the OECD (Organisation for Economic Co-operation and Development) in its latest economic survey of the country and its economic policies.
The OECD, a club for 38 market-based economies, highlighted in their report that Belgium's industry faces labour shortages across all skill levels. Overall, Belgium has the second-highest job vacancy rate in the EU, as roles sit empty partly because of its inflexible labour market.
While the organisation recognises the current government's work on unemployment benefits, long-term sickness, and pension reform as steps to boost labour supply, it argues that additional measures are needed to address "labour market inefficiencies and better attract talent." Chief among these additional measures is changing Belgium's wage-setting system.
Fixing labour market inefficiencies matters for the federal government, which set out in its coalition agreement that reindustrialisation is crucial for improving living standards, boosting jobs, ensuring the social security system remains affordable, and providing "sustainable prosperity."
These aims matter for the Brussels-Capital Region too, with Brussels Economy Minister Laurent Hublet (Les Engagés) making a similar case for bringing industry back to the Brussels Region.
Greater flexibility in wages to improve worker mobility
The OECD has identified introducing sector flexibility in the wage-setting system as a crucial reform needed to address inefficiencies in Belgium's labour market. These inefficiencies include limited hiring and poor labour mobility between sectors and regions.
Belgium is one of only two countries in the eurozone with full automatic wage indexation, a system that automatically increases employees' wages to keep them in line with inflation. The aim is to maintain workers' purchasing power.
The system also has a balancing effect, ensuring Belgian companies remain competitive relative to Germany, France and the Netherlands. Belgium's Wage Norm Law establishes a buffer for how fast the total cost of employing someone can rise, relative to these countries.
Automatic wage indexation sits within that buffer; whatever remains of the buffer after automatic indexation is factored in can be used for any additional pay increases.
While wages in Belgium rose rapidly after the pandemic to keep pace with inflation, growth has slowed in recent years, as the correction for Belgium having outpaced its neighbours narrowed the buffer. As a result, wages in Belgium are set to grow by just 0.89% this year on top of automatic indexation.
The wage-setting system is not without its problems, with unions and employers disagreeing on what should be included in the definition of employer 'wage costs', as well as how much of a gap really exists with Belgium's three neighbouring countries.
The larger the gap by which Belgian labour costs have outpaced its three neighbours, the less room there is for pay rises, as the buffer shrinks. Meanwhile, a broader definition of wage costs could also reduce the buffer, for example, if employers argue that more cost items should be counted.
The current federal government wants to reform how the system works, and has already introduced a partial cap on automatic increases for wages above €4,000 gross a month.
The government has also tasked unions and businesses with reporting by the end of this year on shared proposals to reform how the system operates. These reforms would include examining a new benchmark with a broader definition of wage costs that also addresses the accumulated 'handicap' relative to neighbouring countries.
Moving away from a national wage setting system
The OECD's study adds a further consideration: introducing greater variation by sector in the wage framework, allowing sectors with higher productivity growth to pay higher wages. These sectors, according to the OECD, include manufacturing sectors such as computers and electronics, electrical equipment and pharmaceuticals.
Meanwhile, in sectors with lower productivity growth over 2019-2024, such as metals, chemicals and automotive, pay rose even while productivity fell, because of the nationally set approach to wages.
According to the organisation, the current rigid framework caps pay rises for workers in high-productivity sectors that could afford to pay more because the wage buffer is set nationally for all sectors.
The OECD also argues the wage-setting system makes it harder for firms to use wages as a price signal to attract workers. Additionally, the wage-setting system narrows the gap between high-productivity workers and the rest.
This lack of differentiation between job roles based on productivity contribution means more productive workers have less incentive to move. That may also weaken any incentive to retrain for a better-paying job.
Some sectors have seen weaker productivity growth, but the wage-setting system doesn't allow this nuance to be factored in. Adopting a sector-based approach to wage setting, argues the OECD, "could help increase job mobility of higher-skilled workers and contribute to easing labour shortages."
That flexibility matters for the manufacturing industry, which is more internationally focused than other parts of the Belgian economy and therefore needs to be more internationally competitive on wages. It also matters for some parts of manufacturing, which tend to have higher productivity growth than others but have limited scope to vary wages to attract the workers needed.
