Does Automatic Wage Indexation Destroy Jobs? A Machine Learning Approach

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.