Labor pressure to tie wage hikes to inflation unsettles central bankers


Workers in parts of Europe and South America are increasingly successful in striking deals linking wages to inflation, a trend closely watched by monetary policy makers as they seek to rein in inflation. price increase.

Tying people’s wages to inflation remains much less common than in the 1970s, when it was prevalent in several economies, including the United States and the United Kingdom. But agreements that include indexation clauses have never gone away in some countries and there are signs of a resurgence in places like Spain and Brazil.

Claudio Borio, head of the monetary and economic department at the Bank for International Settlements, often dubbed the central bankers’ bank, said that by distorting market signals, indexing makes inflation harder to move.

“The decisions won’t be the right ones,” Borio said. “With indexing [inflation]is integrated, this is what happens [automatically].”

In Spain, where annual inflation in August was 10.5% and electricity bills rose 70% over the same period, unions are winning negotiations to have more of their members’ contracts indexed to prices .

These contracts already cover almost a third of Spanish collective wage agreements, compared to less than a fifth at the end of 2021, and should reach half next year, according to the country’s central bank.

Bank of Spain Governor Pablo Hernández de Cos warned earlier this year of the risk of a dreaded “wage-price feedback loop”, where inflation becomes harder for banks to control. power plants and translates into even greater pressure for higher wages.

Defending the agreements, the UGT, one of Spain’s biggest unions with 960,000 members, said workers should not be “once again the ones paying the price for a crisis”.

So far, Spanish wages are rising well below inflation, like those of most workers in Europe. Spanish bank CaixaBank introduced a payroll tracking tool based on customer payslips, which showed payrolls rose 2.5% in the year to June, up from 2, 4% in May.

However, figures released on Thursday by Eurostat, the statistics office of the European Commission, showed that hourly wages increased by 4.1% in the euro zone in the second quarter of 2022, compared to the same quarter of the previous year. . The surge – the strongest in at least a decade – surprised economists, who expected the pace of wage growth to drop from 3.3% in the first quarter to 1.8% in the three months before June.

If the strong wage growth and indexation trend continues, this should become a growing concern for monetary policymakers of this generation.

The European Central Bank, which itself rejected calls from its staff union for inflation-linked pay rises earlier this year, discussed signs of indexation becoming widespread at its July meeting.

In some countries, including eurozone members such as Luxembourg, Cyprus, Malta and Belgium, indexation never completely disappeared. But this year, Luxembourg suspended wage increases due under its indexation rule and instead gave workers tax credits.

In Belgium, there is an ongoing debate over rules that automatically adjust the pay of most workers in the public and private sectors according to a “health index” of inflation that excludes the prices of fuel, alcohol and tobacco.

The rule means that hourly labor costs in Belgium are expected to rise by a total of 12% over the next two years, according to forecasts by the country’s central bank, 4.8 percentage points more than in France, Germany and in the Netherlands, where indexation is less common.

The country’s Unizo employers’ association said wage growth at this level would be ‘devastating for our economy and jobs’ and called on the government for an ‘index jump’ to reduce expected wage rises This year.

This idea was rejected by Lars Vande Keybus, economic adviser to the ABVV, Belgium’s largest trade union with 1.5 million members. “Purchasing power is extremely important if we don’t want to fall into a deeper recession next year,” he said.

This practice also offers a way to protect the most vulnerable from cost-of-living crises – in many economies, minimum wages and pensions have long been indexed to prices.

But in Brazil and Argentina, economists say the practice is becoming an increasingly important reason why the recent surge in inflation is taking root.

After years of having to settle for weak wage growth, more than 70% of wage increases granted to Brazilian workers in June were at or above the rate of consumer price inflation.

Column chart of the share (%) of wage settlements each month, versus annual inflation at the time, from July 2021 to June 2022 showing wage settlements above inflation are becoming more common in Brazil

Alessandra Ribeiro, an economist at the consultancy Tendências in São Paulo, said that until 2019 indexation accounted for 32-35% of consumer price inflation. Today it’s 40 per cent, she said, adding: ‘It’s a huge problem. This creates enormous difficulties for the central bank to control inflation.

Brazil’s minimum wage was increased by 10 percent at the end of last year to keep pace with rising prices.

In neighboring Argentina, where inflation is expected to reach 90% this year, indexation is also becoming more entrenched, extending to private healthcare costs this year.

Soaring prices have led to the replacement of annual salary rounds with semi-annual and even quarterly negotiations in Argentina. “The faster propagation of shocks [encouraged by indexation]can lead to a series of bad results,” said Santiago Manoukian, chief economist at the consultancy Ecolatina in Buenos Aires.


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