The infamous inflation/wage spiral

It’s an economic law that inflation eventually is responsible for a raise in wages, due to demands of employees. This can result into a spiral where inflation pushes wages to rise which then again pushes inflation up again. Every country in the world has had to deal with this problem every once in a while. But, there’s one country in the world where this phenomenon is an almost certainty… my home country, Belgium.

The curious case of Belgium

Belgium has an automatic wage indexation system built into its legislation. That means that once core inflation has raised prices over 2 percent. The next month, the wages of government personnel rise with 2 percent. A few months later, the wages of private employees follows the same mechanism.

This almost ensures prolongation of higher inflation, as labour costs almost immediately raise prices once again. And the cycle returns once again.

This mechanism has been legislation in Belgium since the sixties of the previous century and is impossible to get rid of due to the power of the unions.

One would think this protects the common man perfectly, but in reality it creates an environment in which the the cost of labour in the country runs out of control compared to neighbouring countries like Germany, The Netherlands and France. This weakens the position of Belgium in the European economy and eventually leads to job losses…

Things aren’t always what they seem!

Sincerely,

Pele23