Belgium’s tradition of mandatory wage hikes under pressure as inflation soars

Inflation hits differently in Belgium.

The country has a national law that locks in mandatory salary hikes, linked to rises in consumer prices.

The rule applies across the civil service, to pensions, unemployment benefits and to private sector salaries – though in the latter there is variation in whether salary hikes are applied annually, monthly or by the fortnight.

The practice of pegging wages to inflation dates back to a time of deep economic instability in the wake of the first World War, when the prices of staple goods surged wildly.

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But other European countries including Denmark, France, Italy and the Netherlands abandoned it because of runaway inflation in the 1970s and 1980s, when it was blamed for causing wage hikes that led to more price rises in an inflationary spiral.

An automatic salary bump at the end of the month according to the consumer price index might seem like a fairytale in Ireland, where many employees need to fight to stop their wages devaluing over time.

The driving rationale for indexation is to preserve “social peace” – the harmonious relations between workers, employers and the various groups that make up society.

But the system is far from a settled consensus. The issue of indexation – as well as the periodic grand collective negotiations over separate additional pay rises and other terms and benefits between the government, unions and employee representatives – are a constant source of quarrel and controversy.

Purchasing power

Thousands of people demonstrated in the centre of Brussels last month in a protest called by Belgium’s main unions, holding banners such as “freeze prices, not people”. The protesters complained that government plans to subsidise winter energy bills were insufficient, that salaries had in effect stagnated and further hikes were needed to restore ordinary citizens’ purchasing power.

Critics point out that household expenses do not rise in the same even way as the overall inflation index, pointing to energy bills that have multiplied many times over, hitting some households more than others.

The FGTB union, Belgium’s second-largest with 1.5 million members, argues that the current law acts as a “straightjacket” on wages, by preventing case-by-case negotiations with employers for salary increases.

Businesses that thrive should be able to increase wages more, the union argues. It contends that the overall share of wealth in the economy that goes into salaries has decreased over time.

But employers see it differently. Since inflation began to spike, industry figures have come out to warn publicly that the mandatory salary increases will put unbearable pressure on businesses, particularly those already weakened by the Covid-19 pandemic.

A survey of 200 employers by a Flemish business association this summer found that one-third had delayed recruitment and investment because their budgets were depleted by the need to pay the mandatory inflation-linked salary hikes.

Wage competitiveness

“Rising costs force entrepreneurs to eventually raise their prices… As a result, inflation will rise again and consequently wages and therefore costs will rise again,” Unizo predicted, warning of “bankruptcies and the threat of job destruction”.

There is also constant concern that the wage bills make Belgian businesses uncompetitive compared to companies in neighbouring countries.

Dubbed the “wage handicap”, the amount by which Belgian salaries rise more than in France, Germany and the Netherlands is calculated by the government’s Central Council of the Economy and is factored into wage negotiations. It recently forecast that Belgian salaries would increase by 4.6 per cent more than in neighbouring countries between 2020 and 2024.

As Belgium’s rate of year-on-year inflation neared 10 per cent this summer, the Federal Planning Bureau forecast that the level of inflation that automatically triggers a national salary hike would be hit four times during 2022 and again next year – causing a fresh increase of 2 per cent each time.

It’s a scenario the country has not seen since the early 1980s. It spurred speculation as to whether Belgium would once again be forced to “skip” a round of salary hikes to spare businesses and the national budget, as it did in 1982.

It’s a step that would be guaranteed to cause uproar. As it stands, Belgium’s two largest unions have already called a general strike for November 9th.

The FGTB has demanded the “freedom to negotiate real wage increases”. The CSC – whose membership of 1.7 million makes up almost 16 per cent of the Belgium population – has called for a cap on gas and electricity prices, travel expenses and other measures, warning that its members are “experiencing major financial difficulties and are afraid of facing a freezing winter”.