The Bank of Spain notes in a report published this Wednesday that this year only 1 in 4 workers is protected from inflation. The institution calculates that barely 25% of wage earners with an agreement already signed for 2022, until August, would have safeguard clauses to compensate for the damage caused by price increases, which have been widespread in recent months.
The unions press to update the salary of the 2022 officials for inflation and raise it above 3.5%
The percentage is even lower than at the beginning of the year, when it was close to 30% of workers protected from inflation in their agreements, although the Bank of Spain points out that, according to the partial information available for 2023, the introduction of clauses of Salary review has increased to just over 45% of workers.
Mario Izquierdo and José Luis Herrera, the economists who sign the report, point out that 25% this year is a percentage higher than the 16.6% average between 2014 and 2021, “although significantly below that registered at the beginning of the years 2000”.
These types of clauses contemplate salary revisions if inflation at the end of the year (or the period of validity of the agreement) exceeds the initially agreed salary increase and, therefore, they try to compensate the workers, totally or partially, for the “ inflationary surprises”, according to the experts of the institution.
These clauses are exactly what the unions ask for in the salary agreement, although for three years, which must include the rent agreement. That is, the distribution between companies and workers of the blow of inflation [debido a que el salario da cada vez para menos]since, for the time being, the profits of the companies are growing by transferring the increases in costs (mainly due to the rise in fuel and electricity) to final prices while employees see their purchasing power reduced, in a context of year-on-year inflation close to 10%.
The maximum of the majority unions is to recommend salary increases now around 3.5%, well below the price increases, but with the commitment that the difference be compensated for the employees in the next three years through clauses of salary guarantee. The employer refuses this type of compensation. And Unai Sordo, general secretary of the CCOO, has already warned that “this leads us to propose a wage increase of 8% and that can generate the [temida] inflation spiral [un proceso según el que los salarios persiguen a los precios en un bucle empobrecedor aunque ahora mismo muy lejano]”.
This Thursday, both the CCOO and the UGT called on the workers “to go out into the streets” on October 7 and November 3 to demand a rise in wages. Indeed, numerous economists warn that, without a true income pact, it is not only who bears the most damage from the inflation crisis at stake, but also that the slowdown in activity is even more abrupt due to the blow to consumption and risk of non-payment of mortgages, among other consequences.
The different types of clauses
The Bank of Spain report this Wednesday indicates that the inflation reference used in the agreements is usually the year-on-year rate at the end of each year, although in some cases the average year-on-year rates for the year as a whole are also used. The institution has not identified any agreement that uses subjacent inflation or any other measure of inflation that discounts the evolution of the energy component of prices as a reference for the evolution of prices.
Regarding the time horizon of the clauses contained in the agreements, the Bank of Spain points out that just over 60% of covered workers have an annual reference, so that the eventual revision of their salaries would be determined based on inflation at end of the year. On the other hand, 20% of the workers have a multi-year reference, so that the possible salary revisions would be determined based on the behavior of inflation throughout the term of the agreement.
Likewise, the Bank of Spain indicates that just over half of the workers with an agreement in force in 2022 would be affected by safeguard clauses without retroactive effects.
The risk of a recession
The majority unions themselves and various experts warn that the absence of an income pact has so far meant that the distribution of the damage from inflation between business profits and wages is not a distribution, but that the blow has fallen on one of the parts, that of the workers.
This conclusion was confirmed this Thursday by the Bank of Spain with the publication of the Quarterly Balance Sheet (data from 920 companies). The institution notes that, in the first half of 2022, “the turnover of companies grew at a very high rate, reflecting both the recovery of activity and the increase in sales prices.” And that this evolution “translated into an improvement in the profitability of the companies [la capacidad de convertir los ingresos en beneficios]”.
“Despite the notable increase in production costs, business surpluses [los beneficios] they expanded at a high rate, and levels were already very similar or even somewhat higher than those existing before the COVID-19 crisis”, continues the Bank of Spain. Of course, there are differences by sectors, since some do suffer from the increase in energy. Meanwhile, on the positive side, industry and commerce and the hospitality industry stand out, and more specifically “electric power generators”, with improvements in margins of up to 25 percentage points.
Just maintaining the margins “is a lot”, according to different economic sources, in a context of 10% inflation (according to the CPI). Even the Ministry of Economic Affairs admits it when looking at the GDP deflator. This is another way of measuring price increases, and that in the second quarter it stood at 3.6%, showing the containment of salaries, as do other indicators, such as 2.6% that barely rise wages in negotiated agreements.
And the fact that there is no distribution of the damage derived from inflation effectively has implications for the purchasing power of families, for equity… and lastly for activity in general. This fundamental derivative forces us to overcome the idea that the party most interested in the rent agreement, or in an agreement to raise wages, is that of the workers.
Broadening the perspective, the blow that inflation deals to household consumption, and that exacerbates the absence of an income pact, means aggravating the slowdown that growth is already suffering in a context of high uncertainty due to the Russian invasion of Ukraine and the the escalation of the energy crisis. In short, avoiding the loss of purchasing power of families is everyone’s problem. Also from businessmen. And of course, the Government.
It is a macroeconomic problem. More relevant given the decision of the European Central Bank (ECB) to raise reference interest rates to “cool down” the economy and thus fight inflation. The institution seeks to make mortgages and other loans more expensive to curb consumption and investment, and thus stop fueling price increases.
The ECB does not hide, it assumes the risk of causing a recession and an increase in unemployment, which underlines the importance of reaching the income pact. Last Thursday, in the economic bulletin that it publishes every month, the institution admitted that “the new data indicate that, in general, the evolution of wages continues to be contained [en el conjunto de la eurozona en este caso]”.