Inflation is on track to remain a lasting phenomenon. What if we reindexed wages? (Credits: © tadamichi – stock.adobe.com)
Triggered by the coronavirus crisis and reinforced by the war in Ukraine, inflation is indeed back in France. Should wages be indexed to this price change? The question is valid.
Par MoneyVox,
Since last year, inflation has been galloping: in February 2022, INSEE announced a price increase of 3.6% over one year. However, wages do not follow this trend, mechanically causing a loss of purchasing power for households. Indeed, the indexation of wages to inflation has not been on the agenda since 1983 in France. However, other countries still apply this operation. Should we go back there? The point on the advantages and disadvantages of such a measure.
Taking inflation into account would preserve the purchasing power of employees
After the coronavirus health crisis, the war in Ukraine has further reinforced the upward trend in prices. The Consumer Price Index, or CPI, is a fair reflection of this: in February 2022, INSEE posted a rate of +3.6% in one year. What does not evolve, or little, on the other hand, are wages. With higher prices, but almost stable wages, the French are therefore penalized in their daily lives and lose purchasing power. Faced with this, a measure came back in force with the presidential campaign : the indexation of wages to the level of inflation.
Several candidates for the Elysée present in the first round were in favor of such a measure. This was particularly the case of Philippe Poutou, Nicolas Dupont-Aignan and Nathalie Arthaud, who raised the issue in his program, saying that “salaries, pensions and allowances had to increase at the rate of increases that measured by refueling and filling your shopping cart”. And even if these candidates will not be present in the second round of the presidential election, this idea remains in tune with the times and at the heart of the debates. Moreover, some countries already apply it. This is the case in Belgium for salaries, rents and allowances, with different terms. Among our neighbours, Luxembourg also uses a mechanism of partial indexation of salaries to inflation.
Read also: How do presidential candidates want to raise salaries?
Rising wages and inflation: a vicious circle?
Indexing wages to inflation is not a new idea: until 1983, this system existed in France. But this posed a major problem: the rise in wages brought with it a further increase in the prices charged by companies, and therefore a strengthening of the level of inflation. Charles Dennery, economist at the General Directorate of the Treasury, explains this: “if in times of crisis, wages are indexed to the rise in prices, this means that this will almost increase the production costs of companies by the same amount, which will have to raise prices once more. There is then a price-wage loop which means that we cannot curb inflation with this mechanism”. In other words: this measure would ultimately be counter-productive, and would make it impossible to control the rise in prices.
For Charles Dennery, other solutions exist to compensate for the decline in household purchasing power, in particular those already taken by the current government: freezing energy prices, lowering fuel prices, distributing an inflation bonus, etc. . However, these are only one-off support measures, which are not intended to be permanent. The objective is simply to allow households to absorb a sudden increase, and to adapt to this new rhythm of life. For the economist of the General Directorate of the Treasury, “We will have to succeed in explaining to people that we have to tighten our belts”. However, not all experts agree with this analysis. For Liêm Hoang-Ngoc, economist and former MEP, “the indexation of wages to prices is the minimum required to stem the erosion of household purchasing power”, and this should start with a measure taken by the State for its civil servants in order to set an example for private sector companies to follow.