2023-05-08 13:44:34
DNB president Klaas Knot has long argued for wage increases. That was good for workers and would help contain inflation. But now that the unions are sticking to a wage increase of at least 10 percent, Knot “is leading to the first bit of concern,” he said on the TV program Buitenhof.
He points out that wages are already rising. In fact, there is talk of an ‘acceleration’. Wage growth last April was higher than in March, which was higher than in February and January. Working Dutch people have been earning for several months a little more each month – on average then. According to Knot, wage increases of another 10 percent or more threaten a wage price spiral.
Wage price spiral drives up inflation in two ways
Such a spiral fuels inflation in two ways. Firstly, employers want to recoup the higher wage costs. They do this by raising the prices of their services and products. That in turn leads to higher wage costs, which in turn leads to new price increases, which in turn lead to wage increases, and so on. Hence the name ‘wage price spiral’.
The higher wages also drive up prices because citizens have more to spend. They want to buy nice things for that money. So there is more demand, which leads to higher prices, says ING macro economist Marcel Klok.
Such a wage price spiral can damage the competitive position of the Netherlands, because products and services become more expensive and it becomes more attractive for buyers to purchase products and services from companies in another country. Moreover, the high labor costs lead to an incentive to automate, says professor of labor economics Joop Schippers (Utrecht University). Higher wage costs will therefore lead to job cuts.
Knot maintains a wage increase of 6 to 7 percent
Knot therefore calls on employers and employees to ‘keep a cool head’. There is certainly room for a wage increase, but it should be limited to 6 or 7 percent. Particularly in the services sector, people have to be frugal, because labor costs have a much greater impact on prices there. After all, banks, architectural firms and accounting firms do not have to buy expensive raw materials and equipment to make products.
The trade unions, on the other hand, argue that shareholder and executive remuneration has risen much faster than wages. Graafflation, they call it. Working people pay for the increased wealth of the wealthy. A wage increase of 10 percent ‘is extremely well defendable’, CNV writes in response to Knot.
The last wage price spiral was in the 1970s
The last time the Netherlands was caught in a wage price spiral was in the 1970s. Even then, inflation and wage increases were the result of high energy costs. At the time, it was all regarding the price of oil. Now the gas price.
But that’s where the comparison ends, says Klok. At the time, an automatic correction for inflation was agreed in many collective agreements. If inflation went up by 2 percent, wages also followed by 2 percent. If prices rose by 20 percent, so did the salary.
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Only a few collective labor agreements still have automatic inflation adjustment
Such agreements hardly exist anymore, if at all, says Jannes van der Velde of employers’ association AWVN. In 2022, such an agreement was made in only two collective labor agreements, namely in the collective labor agreements of raw materials trader Cargill and in those of Tate & Lyle, which supplies ingredients to the food industry. “There are also a few companies around the port of Rotterdam that have these kinds of agreements, but they still have them from the 1970s – so those agreements have been in place for fifty years. The employers want to get rid of it, but the unions are not going along with it,” says Van der Velde.
The chance of ‘accidents’, ie an unbridled wage price spiral, is now much smaller than it was then, says Schippers. “Employers and employees have to make choices in every round of negotiations whether they are going to correct wages and to what extent.” ING’s Klok considers it plausible that wages will rise a bit more. “As long as the staff shortage persists, unions have a greater chance of agreeing wage increases. But it is not the case that the unions automatically get what they ask for.”
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