## WAGE INDEXATION AND INTERNATIONAL COMPETITIVENESS IN BELGIUM: AN UNEASY COEXISTENCE

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### A. Introduction — context and main aims
- Belgium maintains near-universal indexation of base pay to inflation across firms, industries, and the public sector.
- Objective: survey drivers of recent surge in inflation, outline features of Belgium’s wage-formation process, identify weaknesses, and propose recommendations to balance benefits of wage indexation with economic costs.
- Focus indicator: harmonized index of consumer prices (HICP).

### B. Recent inflation developments — magnitude and composition
- Headline HICP inflation:
  - peaked at 13.1 percent in October 2022;
  - was 10.2 percent in December 2022.
- Core inflation (excludes energy and unprocessed food) reached 7.1 percent (annual rate, December 2022).
- Since end-2020, Belgium’s headline inflation rose by 9.9 percentage points.
- Contribution to December 2022 headline inflation:
  - energy: around one third of the 10.2 percent rise;
  - processed food: 2.4 percentage points;
  - services: 1.8 percentage points;
  - non-energy industrial goods: 1.9 percentage points.
- Energy price inflation (annual rates):
  - 33.0 percent in December 2022;
  - 69.2 percent peak in October 2022.
- Belgium’s energy taxation is lower than euro area average; OECD finds Belgium has much more modest excise taxes on diesel and natural gas for use in buildings than other EU countries.
- Higher weight of energy in Belgium’s HICP (notably housing/heating) and a highly liberalized energy market with short adjustment intervals amplify pass-through to headline inflation.
- Statbel measures energy inflation using newly concluded contracts; short fixed-price contract duration (typically one year) implies most contracts renewed at prevailing prices.

### C. Drivers of the inflation surge
- Sequence of shocks:
  - Re-opening after pandemic: pent-up demand for services;
  - Ongoing supply chain bottlenecks and returning labor market tightness;
  - Russia’s war in Ukraine: steeply rising energy and food prices;
  - Ongoing labor supply constraints.
- Supply- and demand-side contributions to core inflation:
  - Items affected by re-opening: 15.4 percent of HICP items in 2022; contribution to headline inflation rose from 0.5 to 2.0 percentage points since September 2021.
  - Items affected by supply disruptions: 13.9 percent of items in 2022.
  - Processed food contribution to core inflation rose from 0.6 percentage points in February 2022 to 2.0 percentage points in December 2022.
- Non-financial corporate (NFC) sector:
  - Aggregate gross profit margins improved between Q4:2020 and Q2:2022, staying above most other euro area countries and higher than before the pandemic.
  - Micro evidence indicates a sizeable share of firms experienced a decline in gross profit margins between 2021 and 2022; aggregate improvement driven by a few large corporations.

### D. Inflation-setting differences vs. euro area peers
- Phillips curve estimates (country-by-country New Keynesian Phillips curve including external and commodity price variables) indicate:
  - Belgium is among a small group where food prices enter headline inflation with various lags (coefficients of relatively small magnitude).
  - Energy prices are a statistically significant driver of headline inflation with somewhat higher impact than median euro area country.
  - Persistence in headline inflation is the lowest among the euro area countries in the sample.
  - Forward-looking inflation expectations play a somewhat more prominent role in Belgium than in the median euro area economy.
  - For core inflation, Belgium’s distinctiveness declines and commodity price statistical significance vanishes.
- Country sample for comparisons includes: Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, the Netherlands, Portugal, Slovakia, Slovenia and Spain.

### E. Wage formation framework in Belgium
- Legal framework:
  - “Law on the Promotion of Employment and Maintaining Competitiveness” (Wage Law), codified 1996.
  - Obliged social partners to negotiate salary increases over a two-year period within: an upper limit based on anticipated hourly wage developments in key export markets (France, Germany, the Netherlands) and a floor determined by expected inflation in Belgium.
  - Wage Law accounts for wage drift (seniority, promotions, employment-structure shifts).
- Indexation mechanism:
  - Wages indexed to inflation via the “health index” (CPI excluding alcoholic beverages, tobacco products and motor fuels except LPG).
  - A smoothed 4-month moving average of the health index underpins indexation of public-sector wages, most private-sector wages, pensions, social security benefits and some prices (rents, certain insurance premia, some doctors’ fees).
  - Indexation can lead to compensation rises exceeding the Wage Law ceiling if actual Belgian inflation surpasses expectations and wage growth in neighboring economies.
- Historical adjustments and reforms:
  - Wage Law broadly successful first decade, but a 4 percent gap emerged by 2010 due to under-enforcement and prolonged wage restraint in Germany.
  - Federal government set a comparatively moderate benchmark for 2011-12 and 2013-14 rounds and suspended indexation between April 2015 and April 2016, helping close the gap.
  - 2017 reform: Conseil Centrale de l’Economie (CCE) determination of the maximum permissible wage increase made binding; ceiling derivation revised to include:
    - a correction term for past overshoots of wage developments between Belgium and its three neighbors;
    - a safety margin for forecasting errors.
  - Current Wage Law effectively caps real wage rises social partners can negotiate by considering expected gaps between nominal hourly wage developments in Belgium and abroad over the coming two years, correcting for past deviations, and including a safety margin.

### F. Economic trade-offs and risks from indexation
- Advantages:
  - Cushions purchasing-power losses for workers; reduces immediate need for broad fiscal compensation by enabling targeted support to vulnerable groups.
- Costs and risks:
  - Higher labor compensation due to indexation typically becomes a permanent cost; nominal wages rarely adjust downward if shocks reverse.
  - Firms face squeezed profitability if they do not pass on higher costs; passing on costs can damage export competitiveness and make imports more attractive.
  - Potential for a wage-price spiral, especially problematic in a currency union.
  - Indexation raises public expenditures via indexed public-sector wages and social benefits; although nominal revenues may rise (VAT, income tax brackets), indexation absorbs revenues that could be used elsewhere.
  - Uniform compensation increases across income brackets can limit differentiation by productivity and aggravate labor market rigidities.

### G. Recent wage developments and tensions
- Reformed Wage Law allowed two-year real wage improvements of 1.1 percent in 2017-18 and 0.8 percent in 2019-20.
- For 2021-22, available scope for real wage hikes identified at 0.4 percent, provoking labor union opposition and requiring government mediation with non-negligible fiscal costs.
- Since end-2020, pace and degree of wage indexation accelerated:
  - Each cumulative 2 percent increase in the smoothed health index implies an equivalent, near-immediate rise in nearly half of private sector salaries and in public sector wages as well as in pension and social security outlays.
  - For the large remainder of private sector pay (close to two-fifths) indexation takes place in January of each subsequent year, which implied an approximately 10 percent rise at the start of 2023.
  - Social benefits and public sector wages are indexed a respective one month and two months after a 2 percent increase in the smoothed health index.
- CCE estimates: wage gap of 2.9 percentage points by end-2022 relative to the three neighboring countries; gap anticipated to widen to 5.7 percent by end-2024.
- Government proposed a €500 (€750) bonus payment for 2023 for firms that were (exceptionally) profitable in 2022 in the form of consumption vouchers that are fully tax-deductible for companies and tax-free for employees.

### H. Systemic weaknesses of the wage-setting framework
- Rapid transmission of price shocks to wages:
  - Smoothed health index is not well insulated from fluctuations in volatile HICP components, such as energy or food, so global or idiosyncratic price shocks get rapidly transmitted to Belgian wages.
- Protracted rigidity from the Wage Law:
  - Provisions mandate prolonged periods of low or no improvements of real compensation if salaries abroad do not fully catch up with near-universal wage indexation in Belgium.
  - Bargaining space for labor unions becomes unduly constrained while employers lose leeway to adjust real base pay for existing employees in line with firm- or sector-level productivity developments.
  - Aggravates labor market rigidity, which already exhibits relatively low job-to-job transition rates.
- Increased frequency of government intervention:
  - Tension between compensating workers for purchasing-power losses and maintaining external competitiveness fosters confrontational stances and leads to frequent government intervention (e.g., indexation freeze in 2015-16; brokering compromises in 2021 and 2022) at additional budgetary costs.

### I. Key contextual facts about Belgium’s external position and wages
- Belgium is a highly-integrated small open economy with technology-intensive merchandise exports: medium- and high-tech manufactures account for more than half of total exports of goods.
- More standardized goods (commodities and natural resource-based manufactures) account for a 35 percent share of exports.
- Belgium does not occupy a dominant supply position in its three main foreign markets for the vast majority of its manufactures, implying the existence of substitutes and the need to sustain price competitiveness.
- Despite rigid wage formation, sectoral salaries largely reflect productivity differences; evidence shows more notable divergence at the firm level or between educational attainments.

### J. Policy recommendations and reform avenues
- Review the basis for indexation (the smoothed health index):
  - Fully explore excluding highly volatile items (energy, food) from the smoothed health index to distribute losses more evenly, particularly in the event of a terms of trade shock.
  - A re-defined health index could make salaries and wage costs more predictable and reduce alternation between briskly rising compensation episodes and prolonged moderation mandated by the Wage Law.
  - If fuller compensation of households for purchasing power losses is desired, use well-targeted fiscal support for vulnerable groups, leveraging indexation to cushion parts of the impact of higher prices.
  - Loosening rigidities by re-defining the health index may give social partners more frequent opportunities to negotiate (real) salary increases differentiated across sectors or firms.
- Account for productivity trends in wage assessments:
  - Capture deviations of labor costs between Belgium and key export markets by considering labor productivity and nominal unit labor costs per person.
  - Improvements in productivity above comparator economies could be reflected in higher wages; slower-than-comparator productivity gains could be reflected in lower wages.
  - Consider widening the group of comparator countries beyond France, Germany and the Netherlands, since those three constitute less than half of Belgian merchandise exports.
- Temporarily widen flexibility of the indexation regime:
  - Contemplate well-considered relaxation of strict indexation rules where the going concern of a viable firm is at risk, allowing particularly affected companies to pause or limit wage indexation to preserve investment and employment.
  - In the long term, assess reviving contracts with all-in clauses that compensate for expected rather than actual inflation.
- Rely more on excise duties to tax energy products for housing-related purposes:
  - In an international context, taxation of energy supplies for heating and powering buildings is low; prefer excise rather than ad valorem taxes to dampen pass-through of energy price fluctuations from wholesale to retail and on to consumer price inflation and wages.
- Accelerate product market reform:
  - Belgian corporate profit margins appear elevated across euro area countries, possibly indicating lack of competitive pressures.
  - Weakening firms’ ability to transmit higher input costs to sales prices by encouraging competition via product market reforms would help contain risks of a wage-price spiral and foster a more dynamic economy.

*Source: IMF staff analysis from "WAGE INDEXATION AND INTERNATIONAL COMPETITIVENESS IN BELGIUM: AN UNEASY COEXISTENCE" (February 10, 2023).*

### References ____________________________________________________________________________ 15

### WAGE INDEXATION AND INTERNATIONAL COMPETITIVENESS IN BELGIUM: AN UNEASY COEXISTENCE

### A. Introduction — context and main aims
- Belgium maintains near-universal indexation of base pay to inflation across firms, industries, and the public sector.
- Objective of paper: survey drivers of recent surge in inflation, outline features of Belgium’s wage-formation process, identify weaknesses, and propose recommendations to balance benefits of wage indexation with economic costs.
- Prepared by André Geis (EUR) with comments from Mark Horton (EUR) and staff of the National Bank of Belgium and the Federal Planning Bureau.
- Focus indicator: harmonized index of consumer prices (HICP).

### B. Recent inflation developments — magnitude and composition
- Headline HICP inflation:
  - peaked at 13.1 percent in October 2022;
  - was 10.2 percent in December 2022.
- Core inflation (excludes energy and unprocessed food) reached 7.1 percent (annual rate, December 2022).
- Since end-2020, Belgium’s headline inflation rose by 9.9 percentage points.
- Contribution to December 2022 headline inflation:
  - energy: around one third of the 10.2 percent rise;
  - processed food: 2.4 percentage points;
  - services: 1.8 percentage points;
  - non-energy industrial goods: 1.9 percentage points.

Findings on distribution and transmission:
- Energy price inflation in Belgium (annual rates):
  - 33.0 percent in December 2022;
  - 69.2 percent peak in October 2022.
- Belgium’s energy taxation is lower than euro area average; OECD finds Belgium has much more modest excise taxes on diesel and natural gas for use in buildings than other EU countries.
- Higher weight of energy in Belgium’s HICP (notably housing/heating) and a highly liberalized energy market with short adjustment intervals amplify pass-through to headline inflation.
- Statbel measures energy inflation using newly concluded contracts; short fixed-price contract duration (typically one year) implies most contracts renewed at prevailing prices.

### C. Drivers of the inflation surge
- Sequence of shocks:
  - Re-opening after pandemic: pent-up demand for services;
  - Ongoing supply chain bottlenecks and returning labor market tightness;
  - Russia’s war in Ukraine: steeply rising energy and food prices;
  - Ongoing labor supply constraints.
- Supply- and demand-side factors resulted in larger contributions to core inflation:
  - Items affected by re-opening: 15.4 percent of HICP items in 2022, contribution to headline inflation rose from 0.5 to 2.0 percentage points since September 2021.
  - Items affected by supply disruptions: 13.9 percent of items in 2022.
  - Processed food contribution to core inflation rose from 0.6 percentage points in February 2022 to 2.0 percentage points in December 2022.
- Non-financial corporate (NFC) sector:
  - Aggregate gross profit margins improved between Q4:2020 and Q2:2022, staying above most other euro area countries and higher than before the pandemic.
  - Micro evidence indicates a sizeable share of firms experienced a decline in gross profit margins between 2021 and 2022; aggregate improvement driven by a few large corporations.

### D. Inflation-setting differences vs. euro area peers
- Phillips curve estimates (country-by-country New Keynesian Phillips curve including external and commodity price variables) indicate:
  - Belgium is among a small group where food prices enter headline inflation with various lags (coefficients of relatively small magnitude).
  - Energy prices are a statistically significant driver of headline inflation with somewhat higher impact than median euro area country.
  - Persistence in headline inflation is the lowest among the euro area countries in the sample.
  - Forward-looking inflation expectations play a somewhat more prominent role in Belgium than in the median euro area economy.
  - For core inflation, Belgium’s distinctiveness declines and commodity price statistical significance vanishes.
- Country sample for comparisons includes: Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, the Netherlands, Portugal, Slovakia, Slovenia and Spain.

### E. Wage formation framework in Belgium
- Legal framework:
  - “Law on the Promotion of Employment and Maintaining Competitiveness” (Wage Law), codified 1996.
  - Obliged social partners to negotiate salary increases over a two-year period within: an upper limit based on anticipated hourly wage developments in key export markets (France, Germany, the Netherlands) and a floor determined by expected inflation in Belgium.
  - Wage Law accounts for wage drift (seniority, promotions, employment-structure shifts).
- Indexation mechanism:
  - Wages indexed to inflation via the “health index” (CPI excluding alcoholic beverages, tobacco products and motor fuels except LPG).
  - A smoothed 4-month moving average of the health index underpins indexation of public-sector wages, most private-sector wages, pensions, social security benefits and some prices (rents, certain insurance premia, some doctors’ fees).
  - Indexation can lead to compensation rises exceeding the Wage Law ceiling if actual Belgian inflation surpasses expectations and wage growth in neighboring economies.
- Historical adjustments and reforms:
  - Wage Law broadly successful first decade, but a 4 percent gap emerged by 2010 due to under-enforcement and prolonged wage restraint in Germany.
  - Federal government set a comparatively moderate benchmark for 2011-12 and 2013-14 rounds and suspended indexation between April 2015 and April 2016, helping close the gap.
  - 2017 reform: Conseil Centrale de l’Economie (CCE) determination of the maximum permissible wage increase made binding; ceiling derivation revised to include:
    - a correction term for past overshoots of wage developments between Belgium and its three neighbors;
    - a safety margin for forecasting errors.
  - Current Wage Law effectively caps real wage rises social partners can negotiate by considering expected gaps between nominal hourly wage developments in Belgium and abroad over the coming two years, correcting for past deviations, and including a safety margin.

### F. Economic trade-offs and risks from indexation
- Advantages of wage indexation:
  - Cushions purchasing-power losses for workers; reduces immediate need for broad fiscal compensation by enabling targeted support to vulnerable groups.
- Costs and risks:
  - Higher labor compensation due to indexation typically becomes a permanent cost; nominal wages rarely adjust downward if shocks reverse.
  - Firms face squeezed profitability if they do not pass on higher costs; passing on costs can damage export competitiveness and make imports more attractive.
  - Potential for a wage-price spiral, especially problematic in a currency union.
  - Indexation raises public expenditures via indexed public-sector wages and social benefits; although nominal revenues may rise (VAT, income tax brackets), indexation absorbs revenues that could be used elsewhere.
  - Uniform compensation increases across income brackets can limit differentiation by productivity and aggravate labor market rigidities.

### G. Implications for policy and reform considerations (inferred from analysis)
- Maintain benefits of indexation (purchasing-power protection and targeting of fiscal support) while attenuating drawbacks for competitiveness and fiscal/corporate finances by:
  - Ensuring Wage Law mechanisms remain effective in anchoring wage growth to comparator economies and expected inflation, including use of correction terms and safety margins.
  - Monitoring sectoral and firm-level heterogeneity in profitability to tailor policy support and avoid broad-based perpetuation of cost pressures.
  - Considering measures that limit permanent cost escalation when shocks are temporary, given low downward nominal wage flexibility.
  - Evaluating energy taxation and consumption-basket weighting that amplify energy pass-through to headline inflation.

*Source: IMF staff analysis from "WAGE INDEXATION AND INTERNATIONAL COMPETITIVENESS IN BELGIUM: AN UNEASY COEXISTENCE" (February 10, 2023).*

### 10.      Despite successfully maintaining wage competitiveness in recent years, the current

### 10.      Despite successfully maintaining wage competitiveness in recent years, the current

### Recent wage developments and tensions
- The reformed Wage Law allowed for two-year real wage improvements of 1.1 percent in 2017-18 and 0.8 percent in 2019-20.
- For the period 2021-22, the available scope for real wage hikes was identified at 0.4 percent, drawing the ire of labor unions and requiring government mediation with non-negligible fiscal costs.
- Since the end of 2020, the pace and degree of wage indexation has accelerated with rising inflationary pressures.
  - Each cumulative 2 percent increase in the smoothed health index implies an equivalent, near-immediate rise in nearly half of private sector salaries and in public sector wages as well as in pension and social security outlays.
  - For the large remainder of private sector pay (close to two-fifths) indexation takes place in January of each subsequent year, which implied an approximately 10 percent rise at the start of 2023.
  - Social benefits and public sector wages are indexed a respective one month and two months after a 2 percent increase in the smoothed health index.
- CCE estimates point to the opening of a wage gap of 2.9 percentage points by the end of 2022 relative to the three neighboring countries; this gap is anticipated to widen to 5.7 percent by the end of 2024.
- In the spirit of the Wage Law, the extent of this overshoot suggested no space for real wage growth in 2022-24, requiring government intervention to secure deals between social partners.
- For firms that were (exceptionally) profitable in 2022, the government proposed a €500 (€750) bonus payment for 2023 in the form of consumption vouchers that are fully tax-deductible for companies and tax-free for employees.

### Systemic weaknesses of the wage-setting framework
- Rapid transmission of price shocks to wages:
  - The smoothed health index is not well insulated from fluctuations in volatile components of the HICP, such as energy or food prices, so global or idiosyncratic price shocks get rapidly transmitted to Belgian wages.
- Protracted rigidity from the Wage Law:
  - Provisions mandate prolonged periods of low or no improvements of real compensation if salaries abroad do not fully catch up with near universal wage indexation in Belgium.
  - The bargaining space for labor unions becomes unduly constrained while employers lose leeway to adjust real base pay for existing employees in line with firm- or sector-level productivity developments.
  - This aggravates labor market rigidity, which already exhibits relatively low job-to-job transition rates.
- Increased frequency of government intervention:
  - Tension between compensating workers for purchasing-power losses and maintaining external competitiveness fosters confrontational stances and leads to frequent government intervention (e.g., indexation freeze in 2015-16; brokering compromises in 2021 and 2022) at additional budgetary costs.

### Key contextual facts about Belgium’s external position and wages
- Belgium is a highly-integrated small open economy with technology-intensive merchandise exports: medium- and high-tech manufactures account for more than half of total exports of goods.
- More standardized goods (commodities and natural resource-based manufactures) account for a 35 percent share of exports.
- Belgium does not occupy a dominant supply position in its three main foreign markets for the vast majority of its manufactures, implying the existence of substitutes and the need to sustain price competitiveness.
- Despite rigid wage formation, sectoral salaries largely reflect productivity differences; evidence shows more notable divergence at the firm level or between educational attainments.

### Policy recommendations and reform avenues
- Review the basis for indexation (the smoothed health index):
  - Fully explore excluding highly volatile items (energy, food) from the smoothed health index to distribute losses more evenly, particularly in the event of a terms of trade shock.
  - A re-defined health index could make salaries and wage costs more predictable over time and reduce alternation between briskly rising compensation episodes and prolonged moderation mandated by the Wage Law.
  - If fuller compensation of households for purchasing power losses is desired, use well-targeted fiscal support for vulnerable groups, leveraging indexation to cushion parts of the impact of higher prices.
  - Loosening rigidities by re-defining the health index may give social partners more frequent opportunities to negotiate (real) salary increases differentiated across sectors or firms.
- Account for productivity trends in wage assessments:
  - Capture deviations of labor costs between Belgium and key export markets more appropriately by considering labor productivity and nominal unit labor costs per person.
  - Improvements in productivity above comparator economies could be reflected in higher wages; slower-than-comparator productivity gains could be reflected in lower wages.
  - Consider widening the group of comparator countries beyond France, Germany and the Netherlands, since those three constitute less than half of Belgian merchandise exports.
- Temporarily widen flexibility of the indexation regime:
  - Contemplate well-considered relaxation of strict indexation rules where the going concern of a viable firm is at risk, allowing particularly affected companies to pause or limit wage indexation to preserve investment and employment.
  - In the long term, assess reviving contracts with all-in clauses that compensate for expected rather than actual inflation.
- Rely more on excise duties to tax energy products for housing-related purposes:
  - In an international context, taxation of energy supplies for heating and powering buildings is low; prefer excise rather than ad valorem taxes to dampen pass-through of energy price fluctuations from wholesale to retail and on to consumer price inflation and wages.
- Accelerate product market reform:
  - Belgian corporate profit margins appear elevated across euro area countries, possibly indicating lack of competitive pressures.
  - Weakening firms’ ability to transmit higher input costs to sales prices by encouraging competition via product market reforms would help contain risks of a wage-price spiral and foster a more dynamic economy.

*Source: IMF Selected Issues chapter text (sipea2023015).*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2023/english/sipea2023015.pdf_