Belgium in Brief: Time to end wage indexations entirely?

Belgium in Brief: Time to end wage indexations entirely?
Credit: Belga/Canva

Once widespread in Europe, the system by which wages are automatically indexed in line with inflation now remains only in Belgium and Luxembourg, with other nations preferring other ways to protect salaries from being undermined by inflation.

On the face of it, the policy of wages tracking inflation seems a reasonable arrangement that, all things being equal, would ensure that relative costs stay the same, though actual charges vary. But then unlike in the economics classroom, all things rarely do stay equal – there are too many externalities that escape the theory – particularly with one as beguilingly rational as this.

Whilst automatic wage indexations might be an effective measure in periods of economic stability when the rises in prices are incremental, it delivers far less satisfactory results when inflation rockets. In fact, the reason most other countries dropped the system in the 1970s and 80s was its incapacity to rectify the menace of stagflation. Now as then, it seems to be losing its power to balance household budgets.

This is leading a growing number of Belgians to lose faith in the system, arguing it falls short of the protections necessary to prevent the most dire consequences of the current energy crisis. Moreover, the business concern that higher wages will make Belgium uncompetitive and push industry abroad gains weight if the cost of employment is drastically higher in Belgium than elsewhere.

With both businesses and employees despondent about the current indexations, could it be time for a new system of preventing real wages from devaluing? Economists are quick to caution against hasty changes, there is no perfect solution to the hardship we face currently. Though other countries do it differently, it will take hindsight to have a clearer idea of which mechanisms are better for safeguarding individuals in a globalised economy.

Belgium in Brief is a free daily roundup of the top stories to get you through your coffee break conversations. To receive it straight to your inbox every day, sign up below:

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