COST-OF-LIVING ADJUSTMENTS IN WESTERN EUROPE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00287R000500810002-8
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 6
• Document Creation Date: December 22, 2016
• Document Release Date: August 17, 2010
• Sequence Number: 2
• Publication Date: February 24, 1983
• Content Type: MEMO

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Memorandum for:
The attached is a study concerning
cost-of-living adjustments in West European
wage contracts. It was requested by
Lehmann Li, Office of Policy Development,
The White House.
EUR M 83-10068
24 February 1983
E U R A
Office of European Analysis
Orig - Lehmann Li, Office of Policy Development
The White House
1 - OD/EURA
2 - EURA/Production Staff
4 - IMC/CB
1 - Division File
1 - Author
Duplicate of
005514328: RIP
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24Feb83
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CONFIDENTIAL
Central Intelligence Agency
24 February 1983
MEMORANDUM
SUBJECT: Cost-of-Living Adjustments in Western Europe
Over the last two years there has been a sharp movement away from cost-
of-living adjustments in eight West European countries where such systems have
been widely used. However, the de rIn and permanence of the changes vary
considerably among the countries. Denmark and Norway, cost-of-living
adjustments are unlikely to reappear soon, while in Belgium they will resume
this year. Italy's system remains intact but has been made less generous.
France is mounting a major eff t to abolish its de facto indexing system but,
the outcome is far from certain In most of the other countries, labor likely
will se cost-of-living adjustments when the current economic crisis
eases. 25X1
The main reason for the shift is the same in all the countries: the
prolonged recession and its accompanying record levels of unemployment. The
changes were initiated mainly by governments, except in Italy where business
took the lead. High joblessness undermined labor's ability to resist and in
some cases union leaders admitted the need for change. .Labor opposition is
further restrained in France and Sweden by the reluctance of most unions to
undercut polici of left25x1governments with which they are basically
sympathetic
Italy
Italy's wage indexation system (scala mobile) covers all public and
private workers who are not self-employed; as of 1978 this amounted to 72
percent of all employed workers. The system was made substantially more
generous in a 1975 labor-management accord, which provided quarterly wage
adjustments designed to keep the average employee abreast of inflation. All
workers get the same lira increase, regardless of pay level,(meaning that
lower paid workers may be overcompensated for inflation while igher paid
employees receive progressively less protection. The system thus has the side
effect of compressing the wage structure by narrowin th percent---
differential between higher and lower paid worker
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A new labor-management accord signed 22 January 1983 revised tAe scala
mobile formula downward and changed the base period. It did not, however,
structurally alter the system. The net effect of the new agreement is that
the lira amounts of future scala mobile increases will be about 15-18 percent
below what they would have been under the old formula. However, the basic
elements of the 1975 system, such as the basket of goods on which the cost of
livin index is based and the quarterly adjustment provision, remain intact.
members in Genoa have rejected the new labor-management accord
It is still unclear to whom the changes apply. The accord was signed by
the national government, the leading private industry association
(Confindustria), and the three major labor confederations. Cmployer
organizations in some sectors (agriculture, commerce, artisans, credit,
merchants) have yet to sign the accord, although most have indicated their
willingness to conform to the new system. Moreover, Communis trade union-25x1
Impetus for change in the Scala mobile came from Confindustria. Last
June, after two years of stalemated labor-management negotiations, it
unilaterally terminated the 1975 labor-management accord on which the scala
mobile is based. Other employer organizations, including the biggest
association of state-controlled industries, followed suit. The largest party
in the governing coalition, the Christian Democrats, in effec endorsed the
move, but the Socialists and smaller coalition members at first opposed it.
The main opposition to change, however, came from the Communist labor
confederation (CGIL) and militant rank and file workers. Persistent world
recession, the weakening of Italian firms, and the at Pendant bleak prospect o
rising unemployment were the key factors which diminished labor militancy and
unity and led to a labor-management compromise. Most labor spokesmen are now
giving priority to job security over income levels. 25X1
France
Explicit indexation has been outlawed since 1958 but an implicit
guarantee of purchasing power has been a widespread practice for some years.
It is carried out through other mechanisms, such as salary scale revisions
that "coincide" with CPI changes. In its January 1982 survey of the French
economy, the OECD estimated that he degree of linkage to changes in the CPI
is effectively one to one and that it occurs, on average, with a lag of only
one quarter. There are no established rules for any of this: collective
bargaining is largely decentralized (no wage rounds), and the government's
direct role -- in the absence of legislation to the contrary, such as occurred
last summer to implement the wage/price freeze -- is limited to the
approximately 30 percent of the work force comprising the civil service or
employees of the nationalized sector. Of course, the government's
"persuasive" powers are formidable, and its recommendations are often
followed.
The minimum wage, which covers about 10 percent of the work force, is an
exception to the ban on formal indexation. Increases are mandated whenever
the CPI moves upward by more than a small amount and must fully offset the
rise in prices. There has also been a pronounced, if only roughly
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quantifiable, ripple effect from minimum wage adjustments, as firms try to
restore the previous wage hierarchy. In recent years, governments of both
right j d left have expended a great deal of effort to limit these ripple
effects.
The government's shift toward auster' y last summer included an effort to
evolution of its employees' purchasing power at the beginning of 1984.
effectively eliminate de facto indexation. In the first instance, the four-
month nationwide wage freeze prevented at east one quarterly adjustment for
most workers and two such adjustments for some. Beginning in November, the
government has tried to institute a new system for wage settlements based on
anticipated changes in the CPI. After permitting a 3-percent catchup on 1
November as the freeze expired, the government announced its expectation that
wage settlements for 1983 would be limited to 8 percent (the forecast CPI
increase) and would c ver the entire year rather than the shorter periods that
had been customary. The government appears to have had greater success in
obtaining 8-percent se tlements than full-year contracts, probably because the
negotiating parties entertain some doubts about how well the system will
work In its negotiations with civil servants, the government won its full-
year contract but threw in a safeguard clause that commits it to "examine" the
The government, concerned about the widening inflation gap between France
and its principal trading partners, was the driving force behind the change in
wage policy. Management was rather more enthusiastic than labor, but worker
resistance has been surprisingly modest. There is considerable grumbling
because purchasing power stability has been taken as a given for years, but
there has thus far been little in the way of strikes or refusals to sign new
contracts under the guidelines. The relatively mild labor reaction is due
mainly to economic conditions; unemployment is at record levels and
concentrated in heavily unionized industries. Other moderating factors were
the fact that a Socialist government instituted the changes and that nearly
every labs leader recognized that something had to be done about
Wage increases in 1983 are to be calculated using December 1982 as a base
for further indexation so that workers cannot recoup their 1982 losses. The
changes were brought about by high inflation, a rising budget deficit, and
losses in international competitiveness. Strikes and slowdowns called to
protest the initial measures were largely unsuccessful lasting only two weeks
and attracting only a small portion of the workforce. 25X1
salaries equal to or below the minimum wage were indexed to the CPI.
months. For the next six months, through December 1982, only wages and
Belgium
Widespread indexation in the 1970s helped boost the share of wages and
salaries in GNP from 49.2 percent in 1970 to 60.7 percent in 1981. Wages in
Belgium have been determined on the basis of a national collective bargaining
agreement between labor and management, following procedures decreed by the
government. On 22 February 1982 wage indexation was temporarily modified by a
royal decree issued under special one-year governmental powers requested by
the Martens government and authorized by parliament. Under that decree wages
and salaries for all workers earning above the minimum were frozen for three 25X1
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The Netherlands
In the past a wide array of linking and indexing mechanisms were geared
to automatically preserve purchasing power and redistribute income downward --
considered a key goal of the welfare state. However, 100-percent wage
indexation was eliminated in 1980, the figure being set at 70 percent for that
year. In 1981, when unions and employers failed to reach a national wage
agreement, the government limited overall wa Jo growth to 5.5 percent and the
holiday bonus to 7.5 percent of annual pay. re recently, economic
stagnation, declining natural gas revenues, rising social welfare costs
have raised budget deficits to unsustainable levels and led to grudging
acceptance of an incomes policy on the part of both the opposition parties and
labor unions. With the unemployment rate likely to reach 17 percent this
year, some unions now seem willing to allow further wage restraint in exchange
for new job creation efforts. Public sector unions continue to resist
austerity proposals, however, and most private sector unions are unwilling to
allow more than a temporary elimination of indexing in annual labor
agreements
linkage of maximum growth in government wages to industrial pay in 1982
The new Dutch cabinet has accepted Prime Minister Lubbers' plan to reduce
the budget deficit by restricting spending, including controversial pay cuts
for civil service workers and a reduction in government employment. These
measures follow a wage freeze for public sector workers in FY 1981/82 and the
Ireland
Since FY 1974/75, Irish wages have been determined by tripartite
negotiations (unions, employers, government) resulting in a national wage
agreement. Since 1979 these agreements have been aimed at keeping pay
increases in line with demand management policy. Local bargaining for further
increases is allowed within the broad terms of the national agreement. Until
negotiations failed to produce an agreement on wages in 1982, pay increases
were determined with an eye toward full compensation of wage earners for rises
in the CPI, taking into account improvements in productivity and special local
conditions. From 1976 to 1978, however, no indexation provisions were
included in the national agreement. Recent attempts at wage and budget
restraint have met with strong resistance and have contributed to three
changes of government in the past year. The current Fine Gael government of
Prime Minister FitzGerald is strongly committed to reducing government
spending and introducing strict wage measures, especially in the public
Sweden
Swedish wage contracts are reached through nationwide bargaining, leading
to contracts covering an entire industry. Workers are represented either by
the Swedish Confederation of Trade Unions (LO), or by one of several central
bargaining organizations. Employers in the private sector are represented by
the Swedish Employers Confederation (SAF), while a special bargaining
organization negotiates for employers in the public sector. Negotiations for
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of CPI increases exceeding 8.9 percent in 1981 and 6.5 percent in 1982.
public and private sector employees take place simultaneously, but the public
sector usually bases its settlement on that reached between LO and SAF. Wage
negotiations generally begin in December and are con lud in the sprinq.
Contracts can be from one to three years in length. 25X1
The latest contract was signed in the spring of 1981 and expired on 31
December. It gave workers a wage increase of 3.6 percent in 1981 and 3.5
percent in 1982 and allowed for cost-of-living adjustments equal to 65 percent
uU VWUCIi I QUUI allu 611C JUU I a I UCIIIUI.f-d1.5.
economic slump and the perceived need to restore Sweden's international
competitiveness. An additional modera.,in factor *he close relationship
As of February, wage negotiations have reached an impasse, but a decline
in rea wages this year appears almost certain. Even the 7-percent increase
that labor is seeking probably will fall several points short of the 1983
inflation rate. The relatively restrained union behavior is due mainly to the
Norway
government imposed a price freeze from August through December.
have contained only indirect references to price developments, partly because
of government policies aimed at weakening the price-wage link. A cost-of-
living clause was briefly restored in the wage agreement signed in the spring
of 1981. However, the clause was suspended a few months later after the
Formal index clauses in wage settlements were in common use throughout
the 1960s and the first half of the 1970s. Since then contracts generally
Denmark
As part of its austerity package last fall the Schlueter government
eliminated the system of wage and benefit indexation. Che Minister of Labor
later told US Embassy officials that this step was the centerpiece of the
government's economic program and that it was not likely to be reversed in the
foreseeable future, even if the Social Democrats return to power. The
austerity measure were approved despite massive demonstrations unted by
organized labor. Jn private, however, officials of the main labor
confederation admitted that Denmark's poor economic condition requires bitter
medicinj
tentatively accepted annual wage increases of only 4 percent.
On 8 February union negotiators agreed to renew the biennial National
Wage Contract with relatively modest wage increases; rank and file approval is
expected. Except for the lowest paid categories, Danish workers will receive
wage increases of only 5 percent in 1983 and 1984 -- implying a real wage
decline of 2-3 percent in each year. A few days later public employ er25x1
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