STU 02-97 : Special Topic - Labor costs in industry and market services [ Short Term Update 02-97 - 05/11/1997]

An improvement in the most recent economic indicators and a better outlook for the European economy have prompted the FPB to revise its growth forecasts. GDP is now expected to grow by 2.4% in 1997 and 2.7% in 1998, compared to the previous forecasts of 2.1% and 2.5% respectively.

Higher growth rates are forecast for domestic as well as external demand. The revision, however, is mainly based on external factors. Exporters are benefiting with a certain time lag from a stronger USD and UKP. The combined expected depreciation of the BEF over 1997-98 is now 4.5%. As it concerns essentially a depreciation of the currencies of the whole DEM-zone, not only Belgian exporters benefit from this, but the impact on the economies of the other continental European countries is also positive. This, in turn, improves market opportunities for Belgian exporters.

The recent import price increases are linked to the exchange rate evolution. Consumer price inflation, however, remains subdued and is expected to amount to 1.65% in 1997 and 1.7% in 1998. The recent and expected rises in short term interest rates on the European continent should not have a significant effect on economic activity.

There are a few small signs of an improving labour market. In 1998, employment should increase by 44,000, taking into account specific programmes targeting unemployed people. This should therefore lead to increased private consumption and higher tax receipts.

The macroeconomic impact of the 1998-Budget is small. The government deficit should be well below 3% of GDP in 1997 and 1998. The deficit figures of 2.5% and 2.3% for 1997 and 1998 respectively, announced by the FPB in April, should be achieved without difficulty. The expected economic growth and the measures set out in the 1998-Budget should even enable the deficit to be reduced further.

The competitiveness laws of 1989 and 1996 refer respectively to past and expected developments of labour costs on a macroeconomic level in the main trading partner countries. In this analysis the recent evolution of a number of indicators for cost-competitiveness of Belgian firms is assessed. It is based on the most rudimentary sectorial breakdown possible: industry on the one hand and market services on the other hand. The issue of the importance of working time in the assessment of competitiveness is also addressed. Given the important delays in the availability of sectorial data, this exercise can only be performed in a reliable way for the 1987-94 period.

Legal framework

The 1989 ‘Competitiveness Law’ authorizes government intervention if the average overall wage increases proves (ex post) to result in an upsurge of relative labour costs per head in common currency (vis-à-vis Belgium’s seven most important trading partners), and in a deteriorating external performance of enterprises in the private sector.

The 1989 law was extended in 1996 so as to enable the government to shape and monitor even more closely the wage bargaining process. The most important changes with respect to the 1989 law consisted in a shift from an ex-post to an ex-ante assessment of labour costs and also in the fact that the number of countries used as a benchmark was reduced to three. The forecasted weighted growth of foreign hourly labour costs in national currency (to be understood as a weighted average for France, Germany and The Netherlands) now acts as an upper limit for wage negotiations at all levels (macro; sector; firm), the lower limit remaining, as before, the automatic price indexation of wages, plus wage drift.

Both the 1989 and the 1996 laws were profoundly macroeconomic in nature. Nevertheless, both laws may also be seen as contributing to a uniform evolution of relative wages and labour costs across sectors, firms and workers.