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Does Automatic Wage Indexation Destroy Jobs? A Machine Learning Approach
Gert Bijnens1,2, Shyngys Karimov3, Jozef Konings4,2
1National Bank of Belgium, de Berlaimontlaan 14, 1000 Brussels, Belgium.
Abstract:
This paper analyzes the impact of automatic wage indexation on employment. To boost competitiveness and increase employment, Belgium suspended its automatic wage indexation system in 2015. This resulted in a 2% fall in real wages for all workers. In the absence of a suitable control group, we use machine learning for the counterfactual analysis. We artificially construct the control group for a difference-in-difference analysis based on the pre-treatment evolution of treated firms. We find a positive impact on employment of 1.2%, which corresponds to a labor demand elasticity of - 0.6. This effect is more pronounced for manufacturing firms, where the elasticity reaches - 1. These results show that a suspension of the automatic wage indexation mechanism can be effective in preserving employment.
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