When consumer prices began soaring last year, a trade union representing staff at the European Central Bank (ECB) demanded their wages increase in lockstep with inflation.
This grassroots effort to index pay to price increases was ultimately unsuccessful, but it was incendiary stuff coming from the supposed guardians of eurozone price stability. Indexation, after all, can determine who is shielded from inflation — and who suffers from it.
From the ECB’s perspective, it is fortunate that the practice of linking wage raises to the inflation rate is less common now in Europe than it was in the 1970s. Inflation is increasing at an annual rate of 7.5 percent, and the bank is desperate to avoid a spiral whereby higher consumer prices beget higher wages, which further lift the price of goods and services.
Photo: AFP
Not indexing wages to rising prices makes those dreaded second-round inflation effects less likely — but the cost is borne by workers whose purchasing power gets diminished.
However, the longer inflation persists, the greater pressure there will be to incorporate cost-of-living adjustments in pay. Asking people to simply forgo big salary increases, as Bank of England Governor Andrew Bailey rather insensitively did in February, would not cut it. Workers also have some leverage: Eurozone unemployment is at historic lows and organized labor retains a strong voice on this side of the Atlantic. This week, an influential trade union representing German steel employees demanded an 8.2 percent pay increase.
Workers have reason to feel short-changed, too. Indexation is widely used in the economy to protect the real value of payments. Companies, for example, frequently insist on indexation clauses, allowing them to pass on raw material price increases and other costs to clients. Regulated utilities, telecoms and commercial real-estate providers are particularly skilled at this. No wonder corporate profits are still going gangbusters.
State pensions are also fairly well-protected from inflation. Almost all eurozone public pension plans are fully or partially indexed, as is US Social Security, which rose by 5.9 percent this year, the largest bump in 40 years.
Pensioners can still experience a real income squeeze due to the time lag between when prices rise and when benefits payments go up.
That is why French President Emmanuel Macron promised retirees their pensions would be reindexed from the summer instead of from January.
In contrast, British state pensions this month rose by just 3.1 percent, the inflation rate that applied last fall, which is less than half the now-prevailing rate of price increases.
Indexation also has an important role in taxation, normally to prevent workers from being penalized when nominal wages rise.
However, British Prime Minister Boris Johnson’s government last year froze indexation of key income taxation thresholds until 2026. That means rising nominal wages will cause more earners to fall into a higher tax bracket, exacerbating the cost-of-living squeeze. The British Treasury is poised to collect more than £20 billion (US$25 billion) in extra revenue thanks to the freeze, far more than originally anticipated.
Manipulating indexation is stealthier than an outright budget cut, and the UK has shown quite a talent for it. Consider the financing of English universities: Institutions have been barred from hiking tuition fees beyond the £9,250 cap, so in real terms their funding will decline for a further two years.
Yet students who borrow from the government to pay those fees are set to be hit with inflation-linked interest charges of as much as 12 percent until an interest-rate cap comes into force next year.
Of course, the British government faces a big bill of its own due to the soaring cost of servicing inflation-linked borrowings. Indexed interest payments added £35 billion to UK debt interest costs in the year to March or about half the total, the British Office for National Statistics revealed this week. European governments face a similar predicament.
However, one area where indexation remains uncommon is wages. Economists and employers would say this is for good reason: Beyond the risk of a private and public sector wage-price spiral, tying employee earnings to the cost of living can make it harder for companies to adjust to economic shocks or manage a decline in their own productivity and competitiveness.
If all incomes are protected, there is also less societal pressure to stamp out inflation.
Belgium, Luxembourg, Malta and Cyprus are the only eurozone countries to require that inflation developments are automatically reflected in wage-setting, according to the ECB. These account for just 3 percent of eurozone private sector employees. About one-fifth of eurozone public sector wages are also indexed to inflation.
However, such arrangements could become more popular as trade unions push for cost-of-living allowances. Besides the German steel workers, there is evidence Spain is readopting wage indexation, having largely abandoned the practice in the wake of the 2009 recession.
As the war in Ukraine and soaring commodity prices continue to sap economic confidence and the growth outlook, job security, rather than inflation-beating pay hikes, might be the priority. Eventually, though, sagging real incomes might spark a political powder keg.
Rather than call for workers to spurn pay rises, governments should encourage companies to reinvest profits in the production of goods, services, commodities and clean energy, which in the long run would help curb inflation by rebalancing supply and demand. It is imperative, too, they help the poorest withstand the cost-of-living squeeze, either via direct fiscal transfers, a cap on household energy bills or by indexing minimum wages to consumer prices.
Meanwhile, tighter antitrust enforcement can help redress the imbalance between companies, which have too much pricing power, and workers, who have too little.
Thanks in part to differences in indexation, the inflation burden will not be uniformly shared. How long until workers find their voice? Central bankers hope they do not.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Taiwan Transport and Storage Corp (TTS, 台灣通運倉儲) yesterday unveiled its first electric tractor unit — manufactured by Volvo Trucks — in a ceremony in Taipei, and said the unit would soon be used to transport cement produced by Taiwan Cement Corp (TCC, 台灣水泥). Both TTS and TCC belong to TCC International Holdings Ltd (台泥國際集團). With the electric tractor unit, the Taipei-based cement firm would become the first in Taiwan to use electric vehicles to transport construction materials. TTS chairman Koo Kung-yi (辜公怡), Volvo Trucks vice president of sales and marketing Johan Selven, TCC president Roman Cheng (程耀輝) and Taikoo Motors Group
Among the rows of vibrators, rubber torsos and leather harnesses at a Chinese sex toys exhibition in Shanghai this weekend, the beginnings of an artificial intelligence (AI)-driven shift in the industry quietly pulsed. China manufactures about 70 percent of the world’s sex toys, most of it the “hardware” on display at the fair — whether that be technicolor tentacled dildos or hyper-realistic personalized silicone dolls. Yet smart toys have been rising in popularity for some time. Many major European and US brands already offer tech-enhanced products that can enable long-distance love, monitor well-being and even bring people one step closer to
RECORD-BREAKING: TSMC’s net profit last quarter beat market expectations by expanding 8.9% and it was the best first-quarter profit in the chipmaker’s history Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), which counts Nvidia Corp as a key customer, yesterday said that artificial intelligence (AI) server chip revenue is set to more than double this year from last year amid rising demand. The chipmaker expects the growth momentum to continue in the next five years with an annual compound growth rate of 50 percent, TSMC chief executive officer C.C. Wei (魏哲家) told investors yesterday. By 2028, AI chips’ contribution to revenue would climb to about 20 percent from a percentage in the low teens, Wei said. “Almost all the AI innovators are working with TSMC to address the
Malaysia’s leader yesterday announced plans to build a massive semiconductor design park, aiming to boost the Southeast Asian nation’s role in the global chip industry. A prominent player in the semiconductor industry for decades, Malaysia accounts for an estimated 13 percent of global back-end manufacturing, according to German tech giant Bosch. Now it wants to go beyond production and emerge as a chip design powerhouse too, Malaysian Prime Minister Anwar Ibrahim said. “I am pleased to announce the largest IC (integrated circuit) Design Park in Southeast Asia, that will house world-class anchor tenants and collaborate with global companies such as Arm [Holdings PLC],”