Belgium: Selected Background Issues
Author: International Monetary Fund
Publication Date:
07 May 1996
eISBN:
9781451803143
Language:
English
Keywords:
ISCR; CR; wage; Belgium; cost; private sector; retirement pension; wage differentiation; labor cost; aggregate wage growth; wage dispersion; wage development; Wage adjustments; Employment; Social security contributions
Download PDF (1.3 MB)

This Selected Background Issues paper analyzes sectoral wage differentiation and labor cost issues in Belgium. The paper discusses wage dispersion across sectors in Belgium and compares it with the pattern in other European countries. It analyzes the data for the Organization for Economic Cooperation and Development used in the Central Economic Council assessment of competitiveness, underscoring the role of social security contributions and restrictions on part-time work in the evolution of labor costs per employee. The paper also examines trends in saving and investment, and the pension reform in Belgium.

Abstract

This Selected Background Issues paper analyzes sectoral wage differentiation and labor cost issues in Belgium. The paper discusses wage dispersion across sectors in Belgium and compares it with the pattern in other European countries. It analyzes the data for the Organization for Economic Cooperation and Development used in the Central Economic Council assessment of competitiveness, underscoring the role of social security contributions and restrictions on part-time work in the evolution of labor costs per employee. The paper also examines trends in saving and investment, and the pension reform in Belgium.

I. Sectoral Wage Differentiation and Labor Cost Issues in Belgium 1/

1. Introduction

In 1993 the Central Economic Council (CEC) pointed to a deterioration in Belgium’s external competitiveness. In particular, it indicated that since 1987 labor costs had grown much faster in Belgium than in its five main trading partners. 2/ Although partially offset by productivity increases, this edge between domestic and external labor costs has been translated into high unemployment rates in Belgium, thus raising important issues in addition to the evolution of external competitiveness (after a brief increase before 1993, total employment in Belgium is currently below the level of 1980). The Government responded to those findings by adopting a change in the price index used for indexation of incomes and by an economy-wide real wage freeze for 1995-96. A wage freeze, although temporarily addressing the problem of escalating labor costs, has some serious drawbacks. Not only does it reduce the responsibility of the social partners: it constrains changes in wage differentials within and across sectors—which thus may not respond adequately to the sectoral evolution of labor costs in neighboring countries.

It is therefore particularly interesting to examine developments in sectoral wage compensation—both to determine how far developments in Belgium may be out of line with conditions in neighboring economies and to assess whether sectoral indicators could be constructed that are sufficiently robust to provide a useful input to the wage formation process.

Although information requirements for such an approach are not trivial, this study attempts to illustrate the scope for such indicators. It uses Eurostat and OECD data; the former provide sectoral wage rates, while the latter reflect aggregate overall labor costs derived from the National Accounts (and thus correspond to those used by the CEC). Sectoral data cover a little more than half the jobs in Belgium, leaving out a relatively large share of services (Chart 1). Nevertheless their absence in the harmonized statistics does not invalidate the analysis developed here.

Chart 1
Chart 1

Belgium: Wage, Employment, and Trade

Citation: IMF Staff Country Reports 1996, 026; 10.5089/9781451803143.002.A001

Source: Ministry of Labor. Ministry or Trade. and Staff Estimates

This study suggests two sets of conclusions. First, sectoral data are consistent with modest sectoral wage differentiation in Belgium since 1980, albeit at levels lower than in most partner countries (Chart 2). Second, at the aggregate level, labor costs relative to partner countries in Belgium have been affected by external and domestic factors. External factors were the 1992-93 currency realignments within the EMS, which substantially improved the competitiveness of some trading partners. Domestic factors include the means chosen to finance social security, in particular the growing reliance on employer’s social security contributions until 1993—which contrasts with the approach taken in some partner countries. They also include institutional impediments to a market-based expansion of employment, which could permit the distribution of productivity gains in a more efficient way. These factors explain most of the divergence in Belgian labor costs vis-a-vis the five partners in the period analyzed by the CEC.

Chart 2
Chart 2

Belgium: Sectoral Wage Developments

Citation: IMF Staff Country Reports 1996, 026; 10.5089/9781451803143.002.A001

Source: Ministry of Labor; Eurostat: and Staff Estimates

The study is organized as follows. Section 2 discusses wage dispersion across sectors in Belgium and compares it with the pattern in other European countries. Section 3 turns to aggregate figures and analyses the OECD data used in the CEC assessment of competitiveness, underscoring the role of social security contributions and restrictions on part-time work in the evolution of labor costs per employee. Section 4 sets out the main policy implications of the study.

2. Wage dispersion in Belgium and trade partners

Chart 1 (bottom) indicates that wage dispersion for Belgian male workers in industry has increased somewhat since 1980. For instance, average wages in strong sectors such as oil refining and chemical industries increased faster than in the rest of the economy (average wages in sectors undergoing restructuring, e.g., steel and textiles, have also outpaced those in other sectors, probably due to the elimination of the lowest paid jobs). Overall, the ratio between the highest and the lowest paid sectors increased from 1.85 to 2.05. 3/

Chart 2 (top) suggests that most of the differentiation took place during the peak in economic activity observed in the early 1990s. This is not surprising, since wage negotiations were freed in 1987 and the buoyancy of the economy in 1990-91 would have motivated wage demands. Of course, changes in average wages capture a number of factors, including a change in the mix of jobs within a sector (due e.g. to technological changes). Nevertheless, even after controlling for these factors, cross-sector differentiation appears to have taken place. Chart 2 (middle), which spans 1980-92, shows that cross-sectoral increases in pay scales for manual workers in industry varied within a range of 10 percent.

The impact of the mix of jobs is well illustrated by comparing the evolution of women’s and men’s wages. For instance, Chart 2 (bottom) shows that increases of women’s wages have shown larger sectoral dispersion than men’s (the ratio of the standard deviation of increases in women’s wages across sectors to increases in men’s wages across sectors is close to two). Because increases often occurred in sectors in which pay scales increased faster than industry-wide average, total wage differentiation in Belgium in fact increased slightly more than indicated by pay scales and by average wages for men.

In a European context, however, the sectoral wage dispersion documented above is not large. In 1987-93, changes in sectoral wage differentiation in Belgium have been among the smallest in the group comprising its main trading partners, being comparable only with those in Germany. Chart 3 shows the increase in nominal wages (translated into Belgian francs) across sectors in the main partners for the period 1987-93. (There are no sectoral data for Italy; the values shown for Italy in the chart are notional, reflecting Chart 4 the aggregate wage growth in Italy, with the sectoral distribution simply conforming to the average in the other partners). 4/ In 1987-93, the standard deviation of cumulated changes in Belgium was around half of those in the United Kingdom and the Netherlands and ¾ of those in France (Table 1).

Chart 3
Chart 3

Belgium: Cumulated Gross Wage increases in 1987-93

Citation: IMF Staff Country Reports 1996, 026; 10.5089/9781451803143.002.A001

Sources: Eurostat and Staff Estimates1/ (A) Non-manual workers; (B) Manual workers (hourly wage)2/ Calculated by subtracting trade-weighted sectoral average increases from individual countries’ sectoral increases
CHART 4
CHART 4

BELGIUM: Wage and Employment Developments

Citation: IMF Staff Country Reports 1996, 026; 10.5089/9781451803143.002.A001

Sources: IMF, International Financial Statistics; OECD; and Eurostat1/ Average labor costs (OECD).2/ Gross wages in Belgium.
Table 1.

Standard Deviation of Wage Increases Across Sectors

Source: Staff estimates.

In addition to a comparison of sectoral wage dispersion, Chart 3 permits an analysis of the evolution of sectoral wage increases in Belgium compared with increases in partner countries. International comparisons of wage increases per se, although not adequate to measure competitiveness changes precisely (due to differences in productivity growth across countries), can be useful to assess the scope for employment growth. Indeed, considering the speed with which technological innovation is disseminated among developed countries, and barring the development of particular market niches, increased relative wages tend to lead to shrinking employment. In particular, substitution of capital and high-skilled labor for overpriced low-skilled labor often lurks behind stable unit labor costs in the presence of fast wage increases. Although such a pattern may reflect social choices, it is not prima facie consistent with an emphasis on reducing unemployment (as suggested by wage and employment developments illustrated in Chart 4).

Eurostat data suggest that sectoral increases in gross monthly wages in Belgium appear to have lagged those in Germany (data cover the period starting in October 1987 and ending in October 1993; data on hourly wages in Belgium, however, stop in April 1993). They were, however, often significantly larger than in France and the Netherlands. The same pattern is replicated in the case of hourly wages (increases in German hourly wages were to an extent matched by negotiated reductions in working hours). Interestingly enough, wages in the financial sector, in which the proportion of employees is still much larger than the European average, have increased very modestly compared with wages in this sector in other countries, as well as with those in other sectors in Belgium.

To facilitate the comparison of individual sectors across countries, a scaling of sectoral wage increases according to trade-weighted sectoral averages is presented (Chart 3, bottom). The scaling is achieved by subtracting the international average sectoral increase from sectoral increases in individual countries. This approach follows the logic of the Competitiveness Law; but being applied to sectors, it also underscores which sectors have become more or less competitive (for given productivity). 5/ In the chart, positive values indicate wage increases above the partner’s average. Generally, wage increases in Belgium are above the 5-partner’s average—4.9 percent in the case of average wages of non-manual workers in industry.

Table 2.

Relative Increase in Gross Monthly Wages in 1987-93

(in Belgium francs, in percents)

Source: Staff estimates.

Noticeably, wage costs in Italy had shown a significant fall by late 1993, reflecting the devaluation of the lira. By contrast, wage increases in the United Kingdom seem to have offset a large part of the gains obtained when the country left the ERM in 1992. More interestingly, wages in a strong-currency country such as the Netherlands were (in Belgian francs) much below those in Belgium. Not only hourly wages increased less in the Netherlands than in Belgium (on average 7 percent less), but greater flexibility in working hours has permitted a larger sharing of employment (and wage incomes). Indeed, part-time employment has played an important role in promoting a market-based reduction in working hours with the accompanying employment sharing. In a less extreme case, wage developments in France were also quite moderate.

The analysis of sectoral wages leaves, however, some questions unanswered. Although fluctuations in the Italian and British exchange rates in 1992-93 (Chart 5) explain a large part of the relative increase in labor costs in Belgium in recent years, Chart 3 does not suggest a divergence of about 8 percent as indicated by the CEC. 6/ Indeed, except for a few sectors (e.g., employees in chemical industries and constructions), the deterioration was around 5 percent—and it was generally smaller than in Germany. The next section briefly discusses some of the factors explaining the divergence found in aggregate indicators.

CHART 5
CHART 5

BELGIUM: Exchange Rate and Wage Developments

(In Belgian Francs, 1987=100)

Citation: IMF Staff Country Reports 1996, 026; 10.5089/9781451803143.002.A001

Sources: IMF, International Financial Statistics; OECD; and Eurostat.

3. Increases in Labor Costs in Belgium

As indicated in the introduction, sectoral data do not cover the whole economy. In addition, they provide information only on wages. By contrast, the OECD calculates average labor compensation (in the business sector) as wage and non-wage labor costs (obtained from the National Accounts of individual countries) per employed person. 7/ Moreover, the National Accounts identify the increase in labor costs attributable to gross wages and to employers’ contributions to social security (Table 3). It is noticeable that in 1987-93 employers’ contributions increased faster than gross wages. The table also indicates that while social security expenditure grew at a slower pace than GDP in 1987-93, state transfers to the social security grew at an even slower pace. Among the reasons for the relative increase in wage-based contributions was thus the need for offsetting the decline in the subsidy from the state. Additionally, there was a strong reliance on social security contributions to finance unemployment benefits—especially long-term unemployment benefits.

Table 3.

Labor Compensation in the Private Sector and Social Security Funding

(In current Belgium francs, 1987=100)

Sources: Belgian National Accounts and Ministry of Labor.

In percent.

Includes government employees.

Increases in employers’ social security contributions added about 2 percent to wages in 1987-93, explaining a substantial part of the divergence between total labor cost increases and increases in wages. 8/ The remaining difference can be attributed to two factors. First, it is likely that part-time employment in the service sector—especially in the activities not covered by Eurostat—is larger than in industry. To the extent that in partner countries part-time employment has grown faster than in Belgium, the ratio of total labor cost per employee in partner countries (e.g., the Netherlands) would tend to grow less than sectoral average monthly wages. 9/ Second, the amount of fringe benefits may have increased faster in Belgium than in partner countries. 10/

Leaving aside the issue of fringe benefits, labor cost developments in Belgium raise two questions, which to an extent have been addressed by the Conseil Supérieur de Finances (CSF). The CSF has noted that in several countries—in contrast to Belgium—long-term unemployment benefits have their counterpart in minimum-income programs funded by general taxes (CSF, 1994, 1995). 11/ Indeed, from an economic perspective, universal rights (e.g., defense and the police) can advantageously be financed out of taxes instead on contributions levied on labor. In fact, such a reasoning could be applied not only to minimum income benefits, but to public health care expenditure which are also seen in Belgium as a universal benefit. Without moving towards a tax reform, the government has acknowledged the burden created by increasing social-security contributions and has since 1994 sought their reduction in a selective way (targeted on low salaries).

The second issue concerns the distribution of labor productivity gains. Institutional arrangement currently favor a dichotomy between full-time workers and the unemployed, implying that the distribution of productivity gains is achieved through inefficient social security transfers, instead of through the market. A mandatory reduction in working hours would not only increase labor market rigidities in general (even if accompanied by proportional wage reductions), but raise problems at the sectoral level. Therefore, to the extent such a mandate would result in higher labor costs, it would increase rather than lower unemployment. A more flexible approach, based on part-time jobs would likely expand job opportunities.

Certain reforms in the social security are, however, needed for permitting an expansion of voluntary part-time employment. For instance, the CSF has noted that for workers receiving minimum income (MINIMEX), part-time jobs do not increase income at the margin, because all working compensation is deducted from the minimum-income allowance. Reforms in benefits would increase the effective labor supply and, in tandem with labor-demand-side measures such as the recent annualization of working hours in small firms, employment. Although recent reforms have reduced it, the possibility of a poverty trap is still substantial, as noted by the CSF. 12/ Thus, further measures permitting those taking a part-time job to receive at least the equivalent of the basic unemployment benefit should be pursued, subject to the government budgetary constraints. More generally, measures increasing the flexibility of the labor market would reduce the wage wedge and reduce the attraction of informal employment.

4. Conclusions

Wage differentiation in Belgium appears to have been less marked than in the economies of its main trading partners. In addition, wide-spread reliance on social security contributions and the weak growth of part-time employment are undoubtedly among the reasons why since 1987 total wage compensation (per employed worker) has increased substantially more in Belgium than in even a hard currency country, such as the Netherlands. Therefore, greater flexibility in the labor market and reforms in the financing and scope of social security benefits, together with a further shift in sectoral wage alignments toward the pattern in key trade partners, could be essential ingredients in improving Belgian employment prospects.

Wage adjustments compatible with sectoral developments in trading partners can strengthen the competitive position of Belgium and favor a better allocation of resources in the economy (including labor). In this regard sectoral indicators would provide a useful input to sectoral negotiations among social partners. Nevertheless, taking into account that for some countries (including Belgium) harmonized sectoral indices are published with great delays, some effort may be required to fuller use this source of information.

Another area requiring continued efforts is the reform in social security necessary to make voluntary part-time employment more attractive. In particular, there is the need to make individual income responsive to part-time work. Greater reliance on market-driven part-time employment would permit a more efficient distribution of productivity gains through higher employment. Reforms in benefits should thus aim at increasing the effective labor supply and, in tandem with labor-demand-side measures such as the recent annualization of working hours in small firms, employment.

Further reductions in social security contributions should also be pursued. A reduction in the tax wedge owing to controlling social security expenditure and shifting a portion of it—e.g., health care spending—to tax-based financing could thus be considered.

Bibliography

  • Banque Nationale de Belgique, 1995, Comptes Nationaux. 1994 - Agrégats et Comptes, Brussels.

  • CCE-Conseil Central de l’Economie, 1993-95 Evaluation de la Position Compétitive, (several issues), Brussels.

  • CSF-Conseil Supérieur des Finances, 1995, Caractéristiques et Sources Possibles du Chômage de Longue Durée en Belgique, Brussels.

  • CSF-Conseil Supérieur des Finances, 1994, Avis Relatif aux Interventions des Pouvoirs Publics sur le Marché du Travail, Brussels.

  • European Commission, 1995, Earnings - Industry and Services (Theme 3. Series C), Luxembourg.

  • OECD, 1995, Economic Outlook, n. 57, Paris.

1/

Prepared by J. Levy.

2/

The partners are Germany, France, the Netherlands, the United Kingdom and Italy. In accordance with the 1989 Competitiveness Law, the CEC provides a bi-annual evaluation of competitiveness (CCE, several issues); see SM/94/289 for an analysis of this Law, the main indicators used, and the working of the CEC.

3/

Taking a long-term view reduces possible biases created by misalignments in the base-year. Nevertheless, in most discussions the base year chosen is 1987, to facilitate the comparison with figures generated in the framework of the competitiveness law. This can, however, be slightly unsatisfactory because, although for aggregate figures one can make a case that 1987 was a neutral year (i.e., after a recession and before a peak), at sectoral levels the choice of a neutral base year is very difficult.

4/

Data for the chart come from the Earnings (Industry and Services) Eurostat 1994 yearbook-Series C, Theme 3—Accounts and Surveys on Population and Social Conditions (European Commission, 1995). They are drawn from the harmonized statistics of earnings, reflecting the average gross monthly earnings of non-manual workers in industry and services, and the average gross hourly earnings of manual workers in industry. Wages are converted from local currencies into Belgian francs using the yearly average exchange rate found in the IFS yearbook.

5/

The weighing used is the 1980 IMF aggregate weights. The weights are meaningful from the Belgian perspective; in assessing competitiveness in other countries, the weights of their foreign trade should be used.

6/

This divergence increased after 1993, in part due to the strengthening of the Belgian franc after the second half of 1993. In addition, sharp adjustments in employment in partner countries since 1993 (e.g., France) on top of moderate wage increases have substantially reduced unit labor cost in these countries since the economic recovery started.

7/

Page A80 of OECD Economic Outlook n. 57 (OECD, 1995). See also Banque Nationale de Belgique, 1995.

8/

In 1994, the use of “alternative” finance has alleviated the problem considerably—while targeting the relief to jobs paying low wages.

9/

Given the variance of sectoral wage increases in the service sector (e.g., wages in wholesale trade sector seem to have increased much faster than in the retail trade sector) it is, however, difficult to make precise inferences.

10/

The effect of these benefits in wage dispersion is ambiguous. If they are skewed towards higher paid workers (e.g., cars provided by employers, stock options, etc), they are an implicit way to increase dispersion. Given that the social security system provides many benefits that in other countries might be included among non-wage compensation and that contributions are not subject to ceilings, fringe benefits in Belgium probably comprise mainly high-budget items to high-salary workers.

11/

In France, for instance, minimum income benefits (the RMI) are funded by the budget. Although stricter application of eligibility criteria in Belgium (mainly regarding unemployed spouses of employed workers) has removed some 70 000 beneficiaries from the unemployment rolls since 1993, the financing of unemployment benefits from contributions is still a burden on labor costs.

12/

For instance, recent reforms permitted workers who have held part-time jobs (for a limited time) to accumulate rights entitling to unemployment benefits equivalent to those computed on a full-time wage basis. Although positive, this measure has some drawbacks, because of the potentially expensive entitlements it creates and the risk of having the worker dropping from part-time employment after the incentive runs out.

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Cover IMF Staff Country Reports
Belgium: Selected Background Issues
Author: International Monetary Fund
Volume/Issue:
Volume 1996: Issue 026
Publisher:
International Monetary Fund
ISBN:
9781451803143
ISSN:
1934-7685
Pages:
64
DOI:
https://doi.org/10.5089/9781451803143.002

Belgium: Wage, Employment, and Trade

Belgium: Sectoral Wage Developments

Belgium: Cumulated Gross Wage increases in 1987-93

BELGIUM: Wage and Employment Developments

BELGIUM: Exchange Rate and Wage Developments

(In Belgian Francs, 1987=100)