Consumer prices index to be reformed

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In October 1999, the Luxembourg government approved a draft regulation that will reform the consumer prices index from 1 January 2000. This decision - which is of importance to the automatic indexation of pay - is based on an opinion from the Economic and Social Council that proposes two separate consumer price indexes, one based on EU harmonisation rules and one for national purposes.

Luxembourg is one of the few countries to have an automatic pay indexation system. At present, the system works in such a way that all salaries are automatically adjusted by 2.5% one month after the average cost-of-living index has risen by 2.5% in the previous six months (LU9909112N). In June 1997, a recommendation from the Organisation for Economic Cooperation and Development (OECD), suggesting that Luxembourg getting rid of this automatic indexation system prompted fierce debate among the social partners at national level. The debate on indexation has been revived by proposed changes to the definition of the consumer prices index.

The Prime Minister wrote to the Economic and Social Council (Conseil économique et social, CES) on 12 October 1998 seeking an opinion on transposing into national law two EU Council Regulations amending Commission Regulation (EC) No 1749/96, which established a harmonised index of consumer prices (HICP) in the Member States (though they can retain their own indices for national purposes). The two Regulations in question are:

• Council Regulation (EC) No. 1687/98 of 20 July 1998, which reviews the coverage of the goods and services included in the HICP, providing for an extension of the issues covered under the headings of health, education, social protection, insurance and financial services; and

• Council Regulation (EC) No. 1688/98 of 20 July 1998, which reviews the geographic and population coverage of the HICP, and will have the effect that, as from 1 January 2000, non-residents' expenditure on Luxembourg soil should be taken into account when weighting goods and services for the purposes of the index.

The government's October 1998 submission made it clear that the CES would be mainly responsible for determining, once the new HICP it is set up in line with national accounting systems, whether it can continue to be used as a reference tool for pay indexation, or whether it will be necessary to set up a parallel national index that excludes non-residents' expenditure.

The CES is a government consultative body with responsibility for examining economic, financial and social problems: it is made up of 14 employer representatives, 14 employee representatives, and seven independent representatives. It delivered its opinion on 7 July 1999, on the basis of which the government, meeting in cabinet on 29 October 1999, approved a draft grand-ducal regulation designed to reform the consumer prices index from 1 January 2000

CES opinion

Employers' and employees' representatives on the CES have differing views on the usefulness of the "sliding-scale" pay indexation system.

The employers' group refuses to accept even the principle of the statutory, automatic indexation of pay, arguing that:

• the payment of automatic index-linked increases takes no account of either the competitive situation or the individual financial situations of enterprises;

• the automatic indexing of pay has major secondary psychological effects. Many employees think that, since workers are all on an equal footing, an index-linked increase is not a real pay rise at all but an increase to which they have a right, and to which they are entitled under the law; and

• Luxembourg is a country that seeks to attract foreign investors and at same time one of the few countries in the world with an automatic pay indexation system. Potential foreign investors have the greatest of difficulty in understanding the scheme, usually seeing it as rigid and complicated.

The employees' group has reiterated its full support for a sliding-scale indexation mechanism that is both general and automatic. They argue that, apart from a few adjustments at times of economic crisis, it has proved a reliable instrument in maintaining employees' purchasing power. The scale has clearly promoted the training of workers, and helped considerably to maintain almost uninterrupted industrial peace since the mid-1970s.

In answer to the employers' key argument that the automatic indexation of pay generates costs that are both unexpected and quite unrelated to increased productivity, the workers' representatives argue that senior managers are generally well informed about movements in the prices index and their effects on pay. Most of them are able to forecast when index-linked payments will be made, and make appropriate allowances in their pay policy. The slight uncertainty about the date when an index-linked payment will be made is likely to be counter-balanced both by the resulting good relations between the social partners and by industrial peace.

In general terms, say the employee representatives, the impact of pay indexation on companies' competitiveness should also be seen in the long term. In this area, Luxembourg firms are in favourable position in comparison with companies in other countries. There has been very little uncontrolled pay growth in Luxembourg: this has been confirmed by recent publications that rank Luxembourg fourth in the world in terms of international competitiveness. Moderate pay rises have certainly contributed to this favourable ranking - despite pay indexation.

The non-residents' expenditure issue

There are now 71,000 cross-border workers working in Luxembourg, accounting for over 30% of the economically active population, and they wield a considerable influence on the economy. Even if, as the CES says, "it is not clear a priori which way this trend may develop", inclusion of non-residents' expenditure would have a considerable impact on the consumer prices' index.

The Council made a comparison between the current index and one that would take non-residents' expenditure into account; differences in weighting goods and services would include, for example, an increase of 928% oien accommodation services, 423% on tobacco, 323% on fuels and lubricants, and 254% on spirits.

The social partners used these figures to reach the diametrically opposed positions that appear in the CES opinion of 7 July 1999. They are not covered here because the CES was finally able to broker an agreement, which involves the setting up of two distinct consumer price indexes: the HICP established in line with the EU Regulations; and a "national prices index" running alongside it, which will be identical to the HICP from the 2000 onwards, except in terms of geographical coverage. In other words, when the next reform is implemented on 1 January 2000, the expenditure of non-residents in Luxembourg will be included when weighting the basket of goods and services for the HICP, but not for the national index. Only the national index will trigger the indexation of pay and social security benefit according to the relevant legislation.

As for other factors relating to the reform that will become effective on 1 January 2000 (ie the transposition of Regulation (EC) No. 1687/98), the CES advocates that the HICP and the new national index should be the same.

Lastly, the CES has asked the Centre for Statistical and Economic Studies (Service Central de la Statistique et des Études Économiques, STATEC) to continue both its examination of the "price-salary" mechanism when the next index-linked payments are made, and the research it is already conducting in this area.

As for other problems likely to arise in the context of pay indexation, particularly when the international competitiveness of Luxembourg enterprises comes under scrutiny, consensual solutions are to be found through instruments that characterise the "Luxembourg model" of politico-social dialogue

Commentary

It is comforting to note that, in a climate that has been far from cordial since the major rows that recently surrounded the National Action Plan on employment (LU9903195F), the social partners have been able to find a consensual solution to the delicate problem of modifying the consumer prices index. What is more, it is a solution that will satisfy all those concerned. (Marc Feyereisen)