Agora #89
Pages 4 - 9
This article provides an ECB staff union perspective on ECB´s wage moderation stance and how the perceived risk of wage-price spiral is weighing on monetary policy decisions and inflation management.
It argues that such a stance is not underpinned by ECB´s own research and reveals a bias against workers, which is contributing to the fuelling of inequalities. Instead of rejecting them, the ECB should embrace the value of collective bargaining, workers´ participation mechanisms and more generally democracy at work.
The high level of inflation reached in the Euro area in 2022 – 5 times European Central Bank´s inflation target of 2% – would never have been deemed possible since the creation of the ECB. Still, it is there, and all workers in Europe are paying a heavy price, with wage increases being typically much below what is necessary to compensate for the high inflation (roughly half of it). ECB staff are of course impacted, losing about 6% of purchasing power over the last two years, with significant side effects on our pensions as well.[1]
_
[1] ECB staff pensions are computed based on past salaries. In order to correct for inflation, those individual salaries are not revalued by the HICP but by ECB staff General Salary Adjustment. Therefore a loss of purchasing power in one year will reduce the value of all the acquired years. For a 35 years long career, a 6% loss of purchasing power in one year brings a pension cut of ca 5.4% (and not only 0.17%= 6%/35 as one might intuitively think). The damage is therefore quite severe.
How come that the ECB could not protect its own staff from the high inflation? First, it is not a secret that the high inflation was not anticipated by the ECB, who even publicly stated that it would be only temporary – and therefore called upon its staff to show some patience. One year later this call, inflation increased further to 10% and it became obvious that the purchasing power losses were indeed not only substantial but also of a more permanent nature.
The failure of the ECB to protect its own staff against inflation
Are we not, however, supposed to be protected by a salary increase methodology, like all European civil servants? As Germans would say, the answer is “Jein” – a contraction of Yes and No. We do have a methodology, the so-called General Salary Adjustment (GSA) methodology, which is based on the average salary increase of our comparators – mainly the National Central Banks (NCBs) in the Euro area who own the ECB. But the methodology is not protective enough, because it suffers from many flaws in its design and implementation. NCBs are competing with the ECB on labour markets and are therefore placed in a conflict of interest – the higher the figure they input into the GSA, the higher the disadvantage they face when hiring specific talents hesitating between NCBs or the ECB. More fundamentally, most Euro area central banks are on a downsizing trend – a natural consequence of European consolidation. This means that they do not have great incentives to treat their own staff well. Contrary to La Méthode used at the EU Commission, the GSA methodology is asymmetric (outcomes can be cut if too high but not topped up if too low), somewhat arbitrary (the criteria for cutting – an outcome not in line with wage “moderation” – is undefined) and it does not provide for retroactive payments (meaning that even when the GSA equates inflation ECB staff nevertheless loses because the adjustment comes with a lag).
Beyond this, we regularly face implementation issues which sometimes go against common sense. For instance, the salary of one comparator (the Bank of International Settlement) is expressed in Swiss Francs. One would expect that such figures would be converted in Euro to compute an average increase in Euro. But the ECB refused to make this conversion, literally adding apples and pears. This conceptual mistake means that ECB staff salary are 3% lower than what they should be. Coming from the lender of last resort of the Euro area, such a conceptual mistake is not helping building confidence in the system. In fact, in a recent survey carried out by IPSO, 40% of respondents reported either “low trust” or “no trust” in ECB´s leadership, with an additional 34% reporting that trust was only “moderate”. Only 14% of respondents reported “high trust”, admittedly a very low figure. [2]
So far, our GSA methodology could more or less track inflation over the long-term, but not productivity growth (which, according to economic theory, should also be captured by wage growth). The link with inflation holds for the period of low inflation experienced since the ECB inception. It is however not clear if there will be a catch-up effect once the inflation wave has passed (which according to ECB´s own projection should not happen before 2025). For the time being ECB workers lose a substantial amount of purchasing power, and we have no guarantee that next year will be better. This is captured in our aforementioned survey, where 63% of the respondents showed concerns about ECB´s capacity to protect their purchasing power. This finding incidentally shows that the incapacity of the ECB to protect its own staff against inflation development is inevitably damaging ECB´s own credibility. If ECB staff is concerned, why should European citizens not be?
_
[2] Reuters, F. Canepa, Exclusive: ECB union says staff losing faith in leadership over inflation, pay, 18 January 2023
High inflation and ECB staff cognitive dissonance
For an ECB staff, this situation nevertheless creates two paradoxes: First, our job was to keep inflation under control, therefore why should we be compensated when we have essentially failed to deliver on our mission? Second, given the official ECB stance in favour of wage moderation to minimize the risk of a wage-price spiral, should we not behave in line with what we preach and merely accept the purchasing power losses?
Answering these difficult questions for us, as ECB trade-unionists, is in our view a good way to dig into the matter at stake.
The anti-indexation dogma: myths and reality
Let´s first start with ECB´s wage-moderation stance. It usually comes with a worry for potential second round effects and the risk of triggering a wage-price spiral. It is also flanked with an anti-indexation stance and a call for reducing the collective bargaining of workers, to reduce the risk of excessive wage growth.
Turning first to indexation mechanisms, the matter has become a taboo. That indexation cause prejudice is not something open for discussion. In all fairness, this is not only a view which is held by central bankers but also by many economists. Since the oil price shock in the 70´s the common view is that indexation mechanisms have contributed to an automatic acceleration of wages, thereby resulting into a wage-price spiral which could only be stopped at the cost of very high interest rates. This sequence of events might well be historically true, but it should not be a reason to blindly reject one tool without considering the function it was fulfilling.
Indeed, there are some economic arguments in favour of indexation. For instance, a renowned economist such as Milton Friedman was supporting indexation because it saw it as a mechanism which would prevent monetary authorities to play with the monetary illusion. With all nominal variables automatically adjusting, only real variables would matter. In a different vein, one important advantage of indexation is that it helped reduce the level of social conflicts to achieve stability of the labour share in value-added, a desirable outcome from a macro-economic perspective. No need for yearly strikes to have wages catching up with inflation, the matter is sorted out automatically. In fact, such indexation schemes worked perfectly well after the second world war, and were the basis of a shared prosperity model until the 1970s. Therefore, if one now decides to reject indexation as a wage adjustment mechanism, it is necessary to explain which other mechanism should be used to perform a similar function, that is achieving a fair distribution of value added between labour and profit without resorting to permanent social conflicts.
Let´s recognise that such an automatic catch-up might not be feasible in the short-run, because of an external price shock damaging the terms of trade. Higher prices for oil need to be financed by someone: either the employees/consumers, or the firm via reduced profit margins, or the future generation via government intervention and public debt. This scenario is no surprise. It was already foreseen by Philips in his 1958 seminal paper which formed the basis of the famous Philips curve. Yet, this does not mean that no indexation should take place. There are ways to amend the indexation formula, for instance excluding energy prices as Belgium does. Coordination at the national level involving both the employees and employers’ representatives could take place to negotiate and agree on the fair amount of indexation to apply.
Turning back to the ECB itself, and contrary to its anti-indexation stance, it does in fact resort to an indexation mechanism (the GSA) and it is not willing to drop the principle that wages increase should be set according to some objective methodology. This methodology was however unilaterally decided instead of negotiated, which explains why the outcome is not so protective, whereas the existence of a methodology provides an easy excuse for the ECB to reject the taking place of negotiations.
In reality, fifty years after the first oil price shock, indexation mechanisms remain widespread in the euro area economy, for instance for adjusting minimum wages or to guide wage negotiations. Indexation is a useful tool for all sort of contracts, beyond labour contracts. Every landlord who forgot to add an indexation clause in their rental contract knows how costly this omission can become after a few years have passed, even endangering the market value of their asset. Leaving the adjustment to a yearly negotiation with the tenant means yearly conflicts down the road. Similarly, energy companies who forgot to add a possibility to adjust their price upwards in case of a higher input cost are bound to go bankrupt. If one has an honest look around most of the contracts prevailing in the economy, one realises indexation is still everywhere. This is because it performs a useful function.
ECB´s rejection of collective bargaining
In any case, assuming that indexation would not be the way to go, there should be a mechanism allowing for wage adjustments otherwise real wages will naturally be driven to zero. This is where negotiations kick in. The issue with negotiation as a mechanism to distribute value added between workers and capital holders is that its success relies on the underlying bargaining power of workers. Unless workers face an altruistic employer, employers will generally try to retain as big as possible a share in the value added. Therefore, to secure bargaining power, workers need to engage into some form of social conflicts.
This is where the ECB also intervened. Internally, the ECB made it clear towards its staff that its rejects collective bargaining, even if this is a fundamental right granted by the EU Charter (Article 28). Externally, the ECB has been supporting policies aiming at reducing the bargaining power of unions, with a view to drive wage demands down: call for decentralisation of collective bargaining and call for reducing employment protection, all embedded in the neo-liberal European structural reform agenda.
At first sight, decentralised collective bargaining might look like a good way to ensure that wage conditions reflect local production constraints. On a closer look, this merely enables working conditions to become a parameter in the competition between firms. Firms offering better conditions than others in the same industrial sector would become less competitive and bound to disappear/downsize. Then, employees are placed in front of a trade-off where they have to either accept a reduction in their conditions (and in particular, their salaries), or face the risk of losing their jobs. Similarly, making dismissals easier strongly reduces the bargaining power of workers – an effect known since Karl Marx who flagged that the mass of unemployed persons was serving as reserve army of workers for employers, adding downward pressure on wages. This concept was later formalised by economists into the so-called NAIRU or NAWRU (non-accelerating inflation/wage rate of unemployment).
All in all, ECB stance both advises against indexation and against collective bargaining. Under this setting, workers are bound to be the one paying for the external price shock, without even allowing for a collective discussion on a socially fair level of burden sharing.
Wage moderation stance and anti-workers bias
This anti-worker bias mechanically shows up in the wage moderation stance. Very recently, the Vice-President of the ECB called for unions to moderate their wage demands, which should not be excessive to avoid a wage-price spiral.[1] En passant, it is worthwhile noting that an institution which has been granted clear tools to control inflation, in particular the main refinancing interest rate, makes a clear choice to go beyond such tools and enter into the social domain in order to instruct social partners to follow a particular course of action. It is also worthwhile flagging that such recommendations are only made towards one party, that is workers representatives, whereas the profit margin behaviours which are obviously also a possible inflation driver are not even addressed.
In any case, such a wage moderation guidance is not accompanied by a clarification regarding what should be considered as excessive and what should not. If there is an excessive wage demand, there must be a non-excessive one, that is one which would not fuel a wage-price spiral and could therefore be granted to workers. Such a benchmark, which should be based on an underlying assessment of ECB´s optimal labour share, is however not provided, and the guidance therefore conveys the impression that the lower the wage increases, the better it will be for the ECB. The ECB however works for European Citizens, most of whom are workers. They suffered a lot from the high inflation and deserve that this suffering is reduced as much as possible, based on economic possibilities. Asking them to maximize their loss as a way to minimize the risk that the ECB misses its inflation target is not the socially optimal path to take. Eventually, this is contributing to the fuelling of social inequalities.
_
[1] Agence France Press, “ECB warns unions against ‘excessive’ pay demands” (02/08/2023)
Risk of wage-price spiral not underpinned by ECB´s own research
Turning now to empirical evidence, according to ECB´s own research, no labour market indicators proved to be significant in terms of projecting inflation developments.[2] Furthermore, in the same research, wage developments are at best a lagging or coincident indicator of inflation – and therefore not driving it. In another occasional paper, some other ECB researchers state “Labour cost developments are an important element in price setting, but empirically so far only a loose link between wage growth and consumer price inflation has been documented”[3] In the same vein, quoting the ECB Bulleting “Second-round effects played a major role in the transmission of oil supply shocks to inflation in the 1970s and 1980s, but these have been largely absent on average in the period since the euro was launched.”[4].
Furthermore, it is largely possible to allow for a wage catch-up without triggering a wage-price spiral, depending on labour-market tightness and productivity development. As stated in a recent research recently published by the IMF: “an acceleration of nominal wages is not necessarily a sign that a wage-price spiral is taking hold.”[5] Speaking of the current developments (we underline): “Sustained wage-price acceleration is hard to find when looking at episodes similar to today, where real wages have significantly fallen. In those cases, nominal wages tended to catch up to inflation to partially recover real wage losses, and growth rates tended to stabilise at a higher level than before the initial acceleration happened. Wage growth rates eventually became consistent with inflation and labour market tightness. This mechanism did not appear to lead to persistent acceleration dynamics that can be characterised as a wage-price spiral. “. In fact, the previously quoted ECB research stated that “the link between wage growth and inflation is stronger when demand shocks are more prevalent than supply shocks”[6]. The current high inflation being driven by a supply shock, ECB´s own research finding is not backing the view that a wage-price spiral is to be feared.
All in all, a closer look at the available factual evidence, be it ECB´s own research or IMF´s one does not support the wage moderation stance. One might even wonder why official communications are putting so much emphasis on this risk, whereas ECB´s own research is pointing to a different message?
_
[2] Gabe J. de Bondt, Elke Hahn, Zivile Zekaite, ALICE: A new inflation monitoring tool , ECB Working paper 2175 September 2018
[3] Gerrit Koester, Eliza Lis, Christiane Nickel, Chiara Osbat, Frank Smets Understanding low inflation in the euro area from 2013 to 2019: cyclical and structural driversECB Occasional Paper Series No 280 / September 2021, Box 7 page 49
[4] “Wage share dynamics and second-round effects on inflation after energy price surges in the 1970s and today”, Prepared by Niccolò Battistini, Helen Grapow, Elke Hahn and Michel Soudan, Published as part of the ECB Economic Bulletin, Issue 5/2022.
[5] “Wage-price spirals: The historical evidence”, Alexandre Sollaci Evgenia Pugacheva Youyou Huang Niels-Jakob Hansen John Bluedorn Jorge Alvarez / 30 Nov 2022.
[6] Reference in footnote 5, page 49.
Dogmatic approach and monetary policy mistakes
In fact, one could argue that the wage moderation stance was at the root of some monetary policy mistakes. For instance, the ECB decided to increase its interest rate in June 2008, by concern that second round effects would develop into a wage-price spiral, just two months before Lehman brothers collapsed and when Europe was facing the biggest deflation risk since the 1930s! Symmetrically, the ECB as well as many economists wondered about the muted reaction of wages to economic growth in the last decade. It was labelled the so-called “missing inflation puzzle”. Strangely, all sorts of potential factors were looked into,[1] yet the deconstruction of trade union bargaining power was not seriously investigated. The role of trade union is unfortunately a blind-spot of central banking research, even when there is academic research showing they can play a useful economic role – for instance in ensuring workers are paid an efficiency wage.
_
[1] Gerrit Koester, Eliza Lis, Christiane Nickel, Chiara Osbat, Frank Smets Understanding low inflation in the euro area from 2013 to 2019: cyclical and structural driversECB Occasional Paper Series No 280 / September 2021, Box 7 page 49
Workers’ participation, the European Social contract and economic optimality
Yet, assuming that a wage-price spiral could be a real risk. How can one argue against sound negotiation and workers participation procedures? In fact, the German model of Mitbestimmung gained worldwide recognition because it enables employers and employees to make joint decisions which ensure the prosperity of both parties. When the Chair of the Works council has the power to dismiss the CEO (as recently happened for Volkswagen), workers are in a capacity to make sacrifices in the short-term because they know that they will have the capacity to recoup their loss in the medium-term. Unfortunately, our own internal experience is that the ECB is entirely opposed to such participation mechanisms and more generally democracy at work The independence it was granted by the Treaty is used by the ECB to deviate from the standards of the European Social Contract. The ECB rejects collective bargaining, negotiation, or participation mechanisms such as Joint Committees (like the ones in place at the EU Commission, for instance). The ECB rejects the applicability of ILO conventions, arguing that they are only binding EU Member States and that the ECB is not a Member State. ECB staff therefore finds themselves facing an all-mighty employer, empowered with a legislative competence which gives them very little chance to seek redress in court.[1] This is creating operational difficulties, such as discouraging colleagues to speak up, which can have potentially severe damaging effects including the missing of the next crisis. [2]
The more balanced approach followed by the EU Commission
It is worthwhile flagging that the European Commission follows a more balanced approach. In the 2022 edition of its Annual Review of Labour Market and Wage Developments in Europe,[3] for instance, the European Commission is trying to assess to what extent it is possible to allow for wages to catch-up without triggering a wage-price spiral. This is a completely different attitude than the one shown by the ECB, which warns against excessive wage growth without even indicating which growth would be excessive and which wouldn´t. The EU Commission is at least trying to maximize workers´ income.
Similarly, the European Commission is not rejecting collective bargaining and trade unions like the ECB do. The above report contains a full chapter advocating for the fostering of collective bargaining, explaining how this can be helpful to protect workers and also serve as useful wage coordination device.
_
[1] This is because the ECJ´s main role will be to determine if the ECB complied with rules it has itself decided. In practice, 72% of the court cases made against the ECB are lost by the ECB staff. See C. Bowles & J. Dufour, “Independence institutionnelle, concentration des pouvoirs et changements administratifs à la Banque Centrale Européenne”, Revue Francaise d´Administration Publique, 2021/4 N. 180 pages 1033 à 1056.
[2] See the author´s speaking notes for the ECON Hearing that took place on 26 October 2016. https://www.ipso.de/documents/2016-10-26(CBtoECON)EPhearing-CBspeakingnotes.pdf. See also the related press report Reuters, F. Canepa “ECB ‘groupthink’ raises risk of missing next crisis – staff representatives”, 26 October 2016 (available here)
[3] https://ec.europa.eu/social/main.jsp?catId=738&langId=en&pubId=8508&furtherPubs=yes
ECB staff union: disagreeing with ECB stance is a right and sometimes a duty
This situation is unfortunate, but it will help us answer to the first question we asked: the ECB decision-makers and the ECB staff union are two different entities. The ECB staff union is of course not bound by ECB decision-makers own choices and stance. Even more so, when we believe that the choices made regarding ECB´s own organisation, staff relations or trade union matters are mistaken, our duty should be to speak up.
In our views, workers should not be the ones paying in full for the burden of the exogenous price shock. A fair deal must be negotiated at the ECB level and Europe-wide. That is why we do call all workers to steep up their wage demand and, in line with our own stance, also maintain that it is not up to ECB workers to pay the price of decisions made by decision-makers who never asked for their consent in the first place.
Carlos Bowles
About the author
Carlos Bowles joined the ECB as a macro-economic forecaster in 2003. He earned his PhD in Economics at the European University Institute. He is currently chairing the ECB Staff Committee and also serves as IPSO´s Vice-President. This article is written in his trade-union capacity