Workers in Europe and parts of South America are increasingly successful in securing deals linking wages to inflation, a trend closely monitored by monetary policymakers as they seek to keep price increases under control. .
Linking people’s wages to inflation is far less common than in the 1970s, when it was widespread in many economies, including the US and UK. But deals that include indexation clauses never went through in some countries and are showing signs of resurgence in places like Spain and Brazil.
Claudio Borrio, head of the monetary and economic department at the Bank for International Settlements, often called the central bankers’ bank, said indexation made inflation harder to spot, by distorting market signals.
“The decisions are not going to be perfect,” Borio said. “with index” [inflation] is embedded, it happens [automatically],
In Spain, where annual inflation was 10.5 percent in August and electricity bills rose to 70 percent in the same period, unions are winning negotiations to index more of their members’ contracts at prices.
Such contracts already cover about a third of Spanish collective wage agreements, less than a fifth at the end of 2021, and are expected to reach half next year, according to the country’s central bank.
Bank of Spain Governor Pablo Hernandez de Coso warning Earlier this year about the risk of a dangerous “wage-price feedback loop” where inflation becomes harder for central banks to control and feeds into even more pressure for higher wages.
Defending the deals, the UGT, one of Spain’s largest unions with 960,000 members, said workers should not be “once again the ones who pay the price of the crisis”.
Until now, like most workers across Europe, Spanish wages have been rising well below inflation. Spanish bank CaixaBank has created a salary tracker based on customers’ payments, which showed they grew 2.5 percent in June, up from 2.4 percent in May.
However, data published on Thursday by Eurostat, the European Commission’s bureau of statistics, showed hourly wages in the eurozone increased by 4.1 percent in the second quarter of 2022, compared to the same quarter last year. The surge – the strongest in at least a decade – surprised economists, who expected the pace of wage growth to fall from 3.3 percent in the first quarter to 1.8 percent in the three months to June.
If the trend towards strong wage growth and indexation continues, it could become a growing concern for monetary policy makers of this generation.
The European Central Bank, which itself rejected calls from its staff union for inflation-linked wage increases earlier this year, discussed signs of indexation becoming more widespread at its July meeting.
In some countries – including Eurozone members such as Luxembourg, Cyprus, Malta and Belgium – indexation never went away completely. But Luxembourg this year suspended wage increases because of its indexation rule and instead gave workers a tax credit.
In Belgium, there is debate over rules that automatically adjust the wages of most public and private sector workers to conform to a “health index” of inflation, excluding fuel, alcohol and tobacco prices.
The rule means hourly wage costs in Belgium are set to rise 12 percent overall over the next two years, the country’s central bank said. forecast4.8 percentage points higher than in France, Germany and the Netherlands, where indexation is less common.
UNIZO Employers Association of the Country Told Wage hikes at that level would be “catastrophic for our economy and employment” and called for an “index skip” by the government to reduce wage growth expected this year.
That idea has been rejected by Lars Vande Keebus, economic adviser to ABVV, Belgium’s largest association with 1.5mn members. “If we don’t want to get into a deep recession next year, purchasing power is of the utmost importance,” he said.
The practice also provides a means of protecting the most vulnerable from a cost of living crisis – minimum wages and pensions have long been indexed to prices in many economies.
But in Brazil and Argentina, economists say the practice is becoming an increasingly important reason why the recent surge in inflation is accelerating.
After years of settling for lower wage increases, more than 70 percent of the wage increases given to Brazilian workers in June were at or above the rate of consumer price inflation.
Alessandra Ribeiro, an economist at the consultancy Tendinias in So Paulo, said indexation was 32-35 percent of the increase in consumer prices by 2019. Today, it is 40 per cent, she said, “It is a big problem. It creates enormous difficulties for the central bank to bring inflation under control.”
Brazil’s minimum wage was raised at the end of last year by 10 percent to accommodate price increases.
In neighboring Argentina, where inflation is expected to reach 90 percent this year, indexation is becoming even stronger, spreading this year across private health care costs.
Rising prices mean that annual salary rounds in Argentina are being replaced by semi-annual and even quarterly negotiations. “rapid spread of shock [encouraged by indexation] could lead to a range of bad outcomes,” said Santiago Manoukian, chief economist at the consultancy Ecolatina in Buenos Aires.