Wage differentiation in belgium: is there a role for productivity?

Article published in the Economic Review of 2022

Despite its membership of the European Economic and Monetary Union, Belgium decided to keep on its automatic wage indexation system. To prevent rising inflation from systematically leading to a deterioration of firms’ competitiveness, wage bargaining in the country is highly regulated.

With this highly centralised wage-setting system, is there still enough wage differentiation in Belgium? Are worker characteristics adequately reflected in their wages? From an economist’s point of view, wage differentials may be justified if they correspond to differences in productivity. This study uses a matched employer-employee dataset making it possible to identify, at firm level, the impact of different worker characteristics on the wage bill, on the one hand, and on the firm’s productivity, on the other hand. This can help to better judge the suitability of wage levels.

Misalignments between wage costs and productivity are still quite limited, according to our analysis. They are nevertheless greater for educational attainment, as the most highly educated workers have a more favourable productivity-to-wage-cost ratio from the company’s viewpoint, while the low-educated or low-skilled are by contrast more likely to run into employability problems.

Taking account of productivity to help with wage-setting is often recommended by international organisations, but it is still hard to put into practice. The study shows that wage bargaining in Belgium helps companies/sectors to arrive at wage costs that are actually fairly well aligned with productivity. It is at a more granular level, such as within certain sectors or for certain educational levels that gaps tend to appear.