An inflation-adjusted social contract for Europe
Governments protect workers from the bulk of higher energy costs, in exchange for workers moderating their wage demands.
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DUBROVNIK – WITH energy prices high and rising, and inflation soaring, it is starting to look like the late 1970s all over again. But appearances can be deceiving.
The similarities are obvious. In 2022, like in the 1970s, an energy-price shock has led to a sustained increase in the prices of many other goods. The so-called core inflation rate, which strips out volatile energy and food prices, is now approaching 6 per cent in the United States and 4 per cent in the eurozone. And fears are mounting that, as in the 1970s, this trend will prove persistent.
But we are hardly living through a repeat of the 1970s. One key difference lies in labour markets. Back then, widespread wage indexation meant that higher energy and other prices led automatically to an equivalent increase in wages. Where wage indexation was less important, unions achieved the same outcome, as they refused to accept any deterioration in their members’ living standards.
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