Abstract
Since the outbreak of the inflationary crisis in 2021 governments and central banks have reacted by increasing public spending and tightening monetary policy. The indexation of wages to prices remained off the policy agenda, leaving to collective bargaining alone the task of protecting wage purchasing power.
Wage indexation to inflation, whether in the form of contractual clauses or legal provisions, was a pillar of wage setting in the post-war mode of regulation of Western economies. The so-called ‘stagflation’ of the 1970s brought about a paradigm shift. In the new dominant macroeconomic framework, wage indexation came to be seen as a source of uncontrolled wage-price spirals. European wage-setting mechanisms have been thoroughly reshuffled since then, with automatic indexation of wages to prices being dismantled across most advanced economies. Today, automatic indexation mechanisms are a rarity in Europe (Table 1).
Automatic wage indexation in EU countries, 2022.
Source: Author’s elaboration based on Carcillo et al. (2022).
Some wage indexation mechanisms do still exist across European countries, however. In France, the eurozone’s second largest economy, indexation has survived only for the statutory minimum wage (Salaire Minimum Interprofessionnel de Croissance, hereafter SMIC). The SMIC plays a very important role in wage formation. Indeed, the French Kaitz index (the ratio of the nominal legal minimum wage to the median wage adjusted for industry-level coverage) is among the eight highest in the OECD (60 per cent). The importance of the SMIC, however, also reflects the weakness of collective bargaining in setting wages. In a context of wage restraint in collective bargaining, automatic SMIC indexation remains the only driver of real wage protection, but it is not able to secure adjustment to inflation of the whole pay scale. During the current inflationary crisis, this dysfunctionality has emerged with particular clarity. The French case can thus be instructive when reflecting on the relevance of different indexation mechanisms and on the interaction between statutory minimum wages and collective bargaining in the contemporary inflationary environment.
Background: the historical erosion of the French wage-setting system
Since the early 1980s, the French system of industrial relations has undergone a process of ‘neoliberal’ transformation (Amable, 2016; Baccaro and Howell, 2017). The system of wage formation was a major target of neoliberal reforms, leaving it only partially equipped to face inflationary crises. Indeed, at the height of the inflationary crisis, in 1983, the Socialist-led government abolished the commitment to indexing wages to inflation, a major break with the previous system of wage setting (Bouquin and Martinez-Garcia, 2024). Concomitantly, the Finance Ministry froze public sector wages for one year through an emergency act (Di Carlo, 2023). Only the statutory minimum wage remained indexed to inflation.
Meanwhile, governments pursued the decentralisation of collective bargaining. Firms were expected to become the new dominant locus of social dialogue, especially regarding wage formation (Baccaro and Howell, 2017). In 1982, the government introduced mandatory firm-level negotiations (although not agreements), together with financial incentives, namely social contribution rebates (Blavier and Pélisse, 2022; Naboulet, 2011).
In the new post-indexation regime, the system of wage formation had to rest on the interaction between the SMIC, on the one hand, and the industry and firm level, on the other (see Table 1). The firm level has struggled to adequately replace national-level collective bargaining, however (Blavier and Pélisse, 2022; Castel et al., 2013; Delahaie et al., 2023) because of the organisational weakness of the unions (Andolfatto and Labbé, 2011), the reluctance of employers to negotiate (Blavier and Pélisse, 2022), and the segregation of the workforce in a fragmented productive fabric (Godechot, 2023; Perraudin et al., 2014; for a summary, see also Giraud et al., 2018). Public sector wage setting also continued to play a key role in ensuring overall wage restraint. Since the 1990s, the Finance Ministry has continued to impose pay freezes or very moderate increases below inflation (Bordogna and Pedersini, 2013; Di Carlo, 2023).
Instead, pursuing a ‘supply-side’ agenda, governments have continued to offer tax and social contribution breaks to employers to support anaemic firm-level collective bargaining and low wages. Between 2004 and 2022, social contribution breaks for wages below 3.5 times the SMIC level grew from 1.1 to 2.8 percentage points of GDP (Ferracci and Guedj, 2023).
Finally, confirming their attachment to wage restraint, French governments have seldom increased the SMIC beyond automatic indexation. Between 2012 and 2023, only on one occasion a (Socialist-led) government decreed a moderate boost (+0.6 per cent), in July 2012. In the following decade, despite repeated invitations by unions, French governments avoided any further boost.
All these structural deficiencies of the wage-setting system have contributed to the stagnation of workers’ purchasing power since the 1980s (Concialdi, 2023). The inflationary crisis put the question at the centre of public debate and government action.
Wage-setting dynamics during the current inflationary crisis
Since the beginning of the inflationary crisis, successive French governments have shown their preference for transitory and extraordinary measures, such as energy price subsidies financed through public deficit, rather than directly intervening on prices and wages.
Against a backdrop of high inflation (see the special issue introduction), the government raised the index point for public sector wages (the coefficient for the calculation of public sector wages) by 3.5 per cent only in July 2022, then by 1.5 per cent in July 2023. However, this increase remained well below the CPI for 2022, resulting in a further loss of purchasing power for civil servants.
The SMIC has been revalued automatically since the end of 2021, in line with cumulative inflation (seven increases, including four anticipated increases since January 2021), but no discretionary boost was implemented. Thus, the SMIC only caught up with past inflation, but with months of lag and through a mechanism that in fact produced an under-indexation (see Concialdi, 2020).
What was the impact of SMIC indexation on workers’ purchasing power? Was it a factor of ‘wage rigidity’, leading to wage-inflation spirals? Provisional evidence shows not only that this was not the case, but that SMIC increases did not really spill over to the whole pay scale. Indeed, while the SMIC has followed inflation (measured as CPI), monthly basic wages (salaire mensuel de base, SMB, which exclude bonuses and overtime) have fallen behind inflation, whether expressed as CPI or as HCPI (Figure 1).
Annual evolution of nominal monthly base wages (SMBs) for professional categories, SMIC and cost-of-living indexes (IPC and IPCH).
Why has this happened? First, because there is always some lag between actual inflation increases and nominal adjustment. Second, because of the indicator adopted to measure inflation: the SMIC is indexed to the CPI and not to the HCPI. The HCPI is usually higher than the CPI and has been increasing at a higher pace since the beginning of the inflationary crisis (Concialdi, 2023). OECD data on the period between January 2021 and September 2022 also confirm that the increase in the nominal minimum wage fell short of inflation, lading to shrinking real minimum wages at least during the first phase of the inflationary crisis (Carcillo et al., 2022). Data from INSEE also stress that in 2022 only low wages kept pace with inflation, while higher wages fell short (Godet and Sanchez Gonzalez, 2023). Third, because the spillover of the SMIC increase to the rest of the wage-scale classification depends on collective bargaining, which is weak. In fact, 2022 was marked by low compliance of collective agreement minimum wages (‘conventional wages’) with the statutory minimum wage (SMIC) due to the two infra-annual revaluations on 1 May and 1 August. The majority of sectors had not anticipated these increases and found themselves in non-compliance during the year (Groupe d’experts sur le SMIC, 2023). This was also a mechanical consequence of the rapid increase of the SMIC. However, the mechanical effects are amplified by long-term structural imbalances in the French wage structure, namely the concentration of conventional minimum wages in proximity to the SMIC level. Data on compliance show a cyclical pattern, with a peak of non-compliant sectors right after a SMIC increase and a gradual absorption through the following months. It is worth noticing, however, that during inflationary peaks the percentage of non-compliant sectors can rise to over 80 per cent, indicating a structural lack of reactivity.
In sectors in which bargaining was adjusted to a rise in the SMIC, conventional increases were higher in 2022 and 2023, but much more dispersed than in 2021. Branch-negotiated minimum wage increases were on average close to, but slightly below inflation in 2022 and 2023. However, increases varied considerably according to the level of the branch-negotiated minimum wage: sector-level minimum wages close to the SMIC rose more strongly, supported by the dynamics of the minimum wage. Overall, between Q3 2021 and Q3 2023, the sectoral pay levels closest to the SMIC (below 1.2 SMIC) saw a cumulative increase of around 11 per cent, compared with 7 to 8 per cent for minimum wages further away (above 1.2 SMIC). The delay in complying with a SMIC increase, compounded by the higher propensity of low wages to be upgraded, contributed to the compression of wages at the bottom of the pay scale, a phenomenon that has been widely observed (DARES, 2023; Direction Générale du Tresor, 2023; Gautié and Lerais, 2024). This compression could be considered favourable to the low-wage segment of the workforce, but it needs to be grasped in a context of long-term wage stagnation (Concialdi, 2023).
With regard to the firm level, collective agreements also took into account the upturn in inflation observed at the end of 2021. In the last quarter of 2022 and the first quarter of 2023, the firm-level annual negotiations (Négociations Annuelles Obligatoires, NAO) on agreements for 2023 forecast wage increases averaging around 4.5 per cent, a historically high level. Like the sectoral level, the average level of wage increases provided for in NAO agreements remained lower than inflation at the start of 2023, close to 6 per cent. The level of increases agreed in NAO accords varied across sectors, with industry and construction recording higher increases than services. In addition, wage settlements in companies were more likely to establish differentiated increases among categories of employees: almost 30 per cent of the agreements provided for differentiated increases in 2023 (compared with 15 per cent in 2021 and around 20 per cent in 2022). The most significant increases are agreed for the inferior pay levels in a company (Groupe d’experts sur le SMIC, 2023). To be sure, these differentiated increases are likely to contribute to compressing the wage distribution downwards within companies.
In sum, while in 2022 the real statutory minimum wage fell short of inflation, in 2023 the SMIC level was able to recover, at least in relation to CPI-measured inflation (a small but significant gap remains between the minimum wage and the harmonised inflation rate). 1 The outcome is more problematic for sectoral and firm-level negotiation, which in the spirit of neoliberal collective bargaining reforms are supposed to be the main mechanism of wage formation. The wage increases agreed in branch and company agreements rose in 2022 and 2023, but they remained below inflation. Furthermore, available data indicate a tendency towards wage compression, correlated with the unequal and differentiated adjustment of whole pay scales to the SMIC increase (Groupe d’experts sur le SMIC, 2023). Therefore, while the indexation mechanism of the minimum wage helped low wages to keep pace with inflation, this was not the case for the rest of the wage scale (see also Godet and Sanchez Gonzalez, 2023).
Conclusion
The French experience suggests that minimum wage indexation is a necessary but not sufficient condition for adjusting wages to changes in the cost of living. The spillover effect has been concentrated mainly at the lower end of the wage scale.
In theory, collective bargaining should be able to correct the fall in real wages, but in conditions of high inflation this objective remained out of reach. This leads us to question the effectiveness of collective bargaining at both company and sectoral level in a context in which union power resources have been eroded and the institutional coordination mechanisms progressively dismantled over decades of neoliberal reforms.
Furthermore, the policy of social contribution exemptions on low wages that French governments have applied since the early 1990s – and which accelerated after 2012, under socialist governments, to support firms against international competition – has resulted not only in a transfer of money from the state to the employers, but also in an incentive for them to keep wages close to the SMIC.
The presence of an automatic indexation mechanism has also shed light on the dysfunctional interaction between institutional wage-setting mechanisms. Automatic indexation of the SMIC has resulted in a wage-led economic policy; exemptions from social contributions to a profit-led one. Collective bargaining stands in the middle, constrained by these two opposites. These contradictions are likely to be exacerbated as the state of public finances, within their current framing, increasingly deteriorates.
Finally, the recent EU Minimum Wage Directive does not seem able to address this problem. The Directive was conceived in a world in which inflation and wage indexation were considered a relic of the past, so it did not provide any instrument that, in the rare cases in which the minimum wage remains indexed to inflation, could help collective bargaining to keep pace.
Footnotes
Funding
This research received no specific grant from any funding agency in the public, commercial, or not-for-profit sectors.
1
Even if such a conclusion does not consider the price increase of food and energy products which was higher than the average measured by the CPI or the HCPI.