Wage indexation as a social policy has failed

The end of this month has seen pay checks and pensions rise by 2.5% with the automatic wage indexation triggered by inflation. Wage indexation – or simply “the index” in local parlance – is the sacred cow of Luxembourg social policy. Suggestions of reform are akin to political suicide, but as a welfare mechanism it is a failure.

With the last round of indexation, the minimum wage increased by roughly €81, translating into a gross salary of €3,222.48, which is exempt from income tax. But the more you earn, the more indexation will flush into your pockets.

Since January 2020 – just before the pandemic hit – there have been seven indexation payments. If your salary was €10,000 at the end of 2019, it will have risen to €11,883 this month (without any other raises). With a starting salary of €5,000, you will now make only €940 extra compared to just over five years ago, but your costs for everyday items will have risen just the same as for higher earners.

A 500g stick of butter at two large Luxembourg supermarket chains went up in price by 15 to 20 cents after the index was announced (yes, I checked), a 2.5-3.3% increase on the previous price. After all, payroll for the supermarket went up, and its suppliers are probably also charging more. The higher cost to some extent must be passed on to the customer.

This pay increase will invariably push us towards the next indexation payment (currently foreseen for autumn next year), which will continue growing the gap in incomes.

Business lobbyists have long complained about the index, citing competitiveness concerns and saying the steadily rising prices risk putting off consumers. A bowl of pasta loses some of its appeal when it comes with a standard price tag of around €25. With a glass of wine and water, you’re easily set back €40. I’ll skip dessert, thank you very much.

Even the slightest suggestion of reform, however, has been rejected by Luxembourg’s powerful labour unions.

As the war in Ukraine and energy inflation triggered successive indexation payments, a trilogue was needed between the government, employers and trade unions to smooth things over and ensure that companies, cash-stripped from the pandemic fallout, could keep the lights on as well as keep paying wages.

Reform would be entirely possible, for example offering regressive increases depending on your salary bracket, to ensure everyone receives around the same additional amount in absolute terms. This would help level out social inequalities rather than increasing them.

Logically, that should be in the interest of labour unions, protecting their most vulnerable members and taking money out of the pockets of business fat cats. Or perhaps self-preservation is the name of the game.

Cross-border workers – with no political power in the country – earned an average of €65,487 in 2022, according to a report published by Statec last year, the latest of its kind. That compared to €78,747 for foreigners living in the country and a whopping €92,093 for Luxembourg nationals.

The starting salary for a Luxembourg civil servant in the top A1 echelon with the January government wage agreement and May indexation amounts to €8,272. Multiply that by 12 and you reach nearly €100,000 – and that’s only in your first two years on the job after which it will steadily go up (peaking at 11+ years in service).

A version of the index was first introduced in 1921 and it was applied across the public and private sectors in its current shape from 1975 onwards. Designed as a mechanism to uphold purchasing power, it is frequently cited as a source of social peace in Luxembourg.

Rather than social peace, however, automatic wage indexations have the distinct taste of merely pacifying the voting classes that will elect the next government, rather than being an effective policy to reduce the gap between rich and poor.