The Central Bank of the Netherlands recently released a survey report attributing last year’s high inflation rate to a significant increase in wages.
Since last summer, major labor unions in the Netherlands have organized a series of strikes, demanding employers to raise wage levels. At the same time, under pressure, the government also increased the minimum wage level. The Dutch Central Bank (DNB) stated on May 7th that while increased business profits also impact inflation, they are not as significant as wage increases. The increase in labor costs in 2023 led to a 3.9% rise in inflation, while business net profits only caused a 1% increase; in 2022, they were 1% and 1.5% respectively.
The central bank also mentioned that the substantial wage increase in 2023 was mainly due to higher wage demands in 2022 and a tight labor market. However, as business profit margins decreased, inflation rates significantly dropped in the second half of 2023. This clearly demonstrates that businesses are balancing the continuously rising labor costs by reducing profit margins.
Statistics show that in 2023, there were a total of 52 organized strikes in the Netherlands, the most since 1972, resulting in an average hourly wage increase of 7%. According to the Dutch Central Bureau of Statistics (CBS), this is the largest increase in 45 years. However, despite the significant rise in prices, people’s purchasing power continues to decline. For example, food prices rose by 12.1%; prices in goods and services industries increased by 6.5%. The statistical office stated that this is the first time since 1973, when they started tracking these data, that collectively negotiated wage increases have fallen far behind inflation.
The Dutch Employers’ Association (AWVN) previously stated that the reason for employers and unions reaching agreements on wage increases is due to a severe shortage of labor in the market. Many companies have a high demand for talent, and they can only attract new employees by significantly increasing salaries. Across various industries, the education sector saw the largest wage increase, reaching 7%, setting a record in that industry.
Central bank chairman Klaas Knot has expressed concerns multiple times about the “spiral” increase in wage levels, believing it will further drive up inflation rates. However, Zakaria Boufangacha, the chairman of the Dutch Trade Union (FNV), holds a different opinion. He stated that while people are worried about affording food and daily groceries, employers and right-wing economists propose the wage-price spiral and advocate for limiting wage increases, which he finds “unbelievable.” It should be noted that wage increases cannot fully compensate for people’s loss of purchasing power due to high inflation. Therefore, “we will continue to advocate for raising wages until employees can maintain a balanced financial situation.”
The central bank predicts that the average inflation rate for this year will decrease to 2.9%, and next year it will further decline to 2.2%, mainly based on the assumption that wage increases will decrease. The central bank anticipates that with the recent high wage growth and much lower inflation rates compared to last year, unions will propose lower wage demands. Nevertheless, the central bank believes that monitoring wage increases remains crucial, as many new wage increase agreements depend on past inflation developments, and the tight labor market is driving wage growth, albeit not significantly.