Chamber of Commerce

Linking wage indexation to productivity gains

The Chamber of Commerce continues to oppose the automatic indexation on the basis of the evolution of consumer prices. (Photo: Edouard Olszewski/archives)

The Chamber of Commerce continues to oppose the automatic indexation on the basis of the evolution of consumer prices. (Photo: Edouard Olszewski/archives)

The chamber of commerce issued its opinion on the bill establishing the consumer price index for 2022. The weighting mechanism should be refined, according to the Chamber.

In Luxembourg, wage indexation is an automatic mechanism that takes into account inflation, and therefore consumer prices. Each year, a new grand-ducal regulation sets the weighting scheme.

As household consumption has been strongly impacted by the health crisis, a simple update of prices this time “was not sufficient to guarantee the representativeness of the weighting scheme”. It will therefore be established for 2022, provisionally, “on the basis of data from the third and fourth quarters of 2020 and first and second quarters of 2021, updated to October 2021 prices”. This will be the case “until the final weighting of the consumer price index for 2022 is determined, based on the fourth quarter of 2020 and the first three quarters of 2021, updated to December 2021 prices”.

A system detrimental to businesses

On a technical level, the Chamber of Commerce approves the project.

But it recalls its opposition to the system of automatic and full indexation of salaries and pensions to the increase in the cost of living. This is “detrimental to companies since wages evolve mainly according to the national consumer price index and not in parallel with the evolution of productivity”. This would be an almost unprecedented situation in Europe.

According to the Chamber of Commerce, the current system is particularly harmful in Luxembourg, “a country with a very open economy. Because of the automatic indexation mechanism, unfavourable inflation differentials tend to exert upward pressure on relative wage costs. This wage drift in turn leads to an inflationary surge, or at least a damaging inflation differential compared to competitor countries, particularly in services that are not subject to much international competition, with the result that the inflation differential with our main trading partners widens further”.

The competitiveness of many sectors, which are more dependent on cross-border than domestic demand, would thus be handicapped, even with a lower or less frequent indexation.

Indexation should therefore “only expire if companies have been able to achieve sufficient productivity gains”.

While waiting for a complete revision of the indexation mechanisms, the Chamber of Commerce asks that "the current price index be adapted to environmental issues, by reducing its sensitivity to energy products, mainly fossil fuels”. And it reiterates that this same index “should be established excluding taxes and excise duties insofar as the inclusion of these elements, coupled with the indexation mechanism, transforms a tax on consumption into a tax on production”.

This story was first published in French on Paperjam. It has been translated and edited for Delano.