Sharp rise in inflation leads to automatic rise in minimum wage

As the annual increase in the consumer price index was higher than 2% in April 2008 – and in line with the automatic mechanism for increasing the national minimum wage – the latter increased even before the annual examination by the social partners due to take place in July 2008. This is the first time that this has happened in 10 years. As a result, this development has led to discussions on purchasing power and the way in which the mechanism for increasing the minimum wage functions.

On 14 April 2008, the National Institute for Statistics and Economic Studies (Institut national de la statistique et des études économiques, INSEE) published the consumer price index (CPI) for March 2008. As expected by many observers, the CPI showed that prices had risen since May 2007 by more than the 2% threshold, thus setting in motion the legal mechanism that automatically increases the national minimum wage (salaire minimum interprofessionnel de croissance, SMIC) (see also Industrial relations developments in France in 2006). Given the low level of inflation over the past 10 years, this automatic adjustment mechanism had not functioned between the usual annual revisions of the SMIC. These annual revisions are generally programmed to take place at least once a year each July (FR0708039I, FR0607019I) and must take into account at least two elements:

  • changes in inflation, based on the CPI, excluding tobacco;
  • half of the increase in purchasing power of blue-collar workers’ basic hourly pay.

The readjustment to the SMIC that has taken effect already from 1 May 2008 is a sign that inflation has accelerated in France over the last year.

Reaction of social partners

According to the General Confederation of Labour (Confédération générale du travail, CGT), the increase in the SMIC ‘is always worth having for the workers concerned, but is not enough to maintain their real purchasing power, and even less so to increase it’. This is because their main fixed expenses – such as those concerning housing, energy and transport – are increasing ‘more quickly than the average increase in prices’. CGT considers that it is, above all, essential to keep partial indexation of the SMIC on the purchasing power of blue-collar workers’ average basic hourly earnings, because, in the end, this mechanism makes it possible to ‘pull’ all workers’ pay levels upwards.

On the employer side, the President of the Movement of French Enterprises (Mouvement des entreprises de France, MEDEF), Laurence Parisot, considered the automatic increase in the SMIC on 1 May ‘normal’, given the level of inflation. Ms Parisot recalled the employers’ position, namely that ‘it is necessary to ensure that, besides absolutely objective circumstances such as the current increase in inflation, increases in the SMIC are based on identifiable and indisputable economic criteria’.

Commentary

The increase in the SMIC has led to a renewal of the debate on purchasing power, which marked the presidential campaign in 2007 and which, according to opinion polls, has now become one of the major concerns of French people. The most recent statistics published by INSEE show that more than 30% of the increase in household income in 2007 was absorbed by increased savings, which are mainly concentrated in households that are in a better financial position. This finding indicates that growth of incomes has not been equally distributed across wage levels – wage growth in 2007 benefited those on the lowest pay levels the least. This explains the growing tension regarding purchasing power. Over a longer period of time, a series of indicators show that the purchasing power of net pay has only slightly increased over the last 30 years approximately.

In the weeks to come, the debate on indexation mechanisms regarding the SMIC runs the risk of becoming a topic high on the government agenda. According to a study divulged by the media, some experts are recommending that the government should radically reform these mechanisms by indexing the legal increase solely on inflation. The same experts suggest creating a ‘Commission of independent experts’, which could provide an assessment of any increase in the SMIC beyond the rate of inflation. The trade unions have clearly expressed their opposition to any such plan that could jeopardise an increase in the SMIC.

Pierre Concialdi, Institute for Economic and Social Research (IRES)

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