Households are hit harder by the high price increases than businesses. A substantial wage increase can rectify this skewed distribution. The Central Planning Bureau (CPB) draws this conclusion in a new study on high inflation on Thursday.
The Netherlands became ‘collectively poorer’ last year, the planning office writes, mainly because the price of products that the Netherlands imports has risen faster than the price of what the Netherlands exports. The business community was not bothered by this. The CPB sees ‘increasing profits’, among other things in figures that the Statistics Netherlands keeps track of.
The pain mainly hit households. They see their energy bills and retail prices rise sharply, without their wages or benefits following that increase.
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Employees also received a smaller share of the money earned in business last year. This is shown by the so-called ‘labour income ratio’. Last year it fell from almost 75 to more than 72 percent.
Based on these figures, the CPB concludes that there is room for a ‘one-off wage wave’. This can bring a ‘more even distribution of the burden’ closer.
“The relationship between the rising profit share and a falling wage share seems out of balance,” says CPB researcher Yvonne Adema. “Although this can differ per sector and per company.” There are also companies that are having a hard time, she emphasizes.
Weak unions
It is striking that the CPB sees this scope for higher wages, because some economists warn of a ‘wage price spiral’. This occurs when wages and prices continue to push each other up, as happened in the 1970s. Companies then finance their wage increases through higher prices. And those higher prices lead to higher wages.
But that risk is small, according to the CPB. Fifty years ago it was still customary for collectively agreed wages to automatically increase in line with inflation, but that arrangement has disappeared from almost all collective agreements. In addition, it is likely that companies will not fully pay their wage increase from a price increase. After all, they also have room to eat into their profits.
Recent figures confirm that wage growth remains limited. In May, employers and trade unions agreed on an average wage increase of 3.6 percent in collective labor agreements, according to employers’ association AWVN. That’s higher than it has been in years, but still nowhere near inflation, which was nearly 9 percent last month.
Earlier this month, the Central Planning Bureau concluded that up to 1.2 million households – more than one in seven – could face financial difficulties due to high inflation. Especially if the prices stay that high, or even go slightly higher.
Extreme scenario
The planning office also looks ahead in the study: will prices continue to rise as fast in the coming years as they do now? The CPB outlines three scenarios for this.
In one, inflation will remain high and unstable for years to come. “But this scenario is so extreme that it is less likely,” says Adema.
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The other two scenarios are more likely, according to the CPB. In the first, inflation stabilizes around 2 percent, just as the European Central Bank would like. In the second, inflation returns to pre-coronavirus lows, between 0 and 1 percent. That is actually lower than the central bank wants, because ‘deflation’ is then lurking: a negative, falling price spiral.
“It is very difficult to determine which of the two scenarios is most likely,” says Adema. That also depends, for example, on the course of the war in Ukraine, sanctions between countries and new corona outbreaks.
A version of this article also appeared in the newspaper of June 30, 2022