Current affairs

INCREASE SALARIES NOW?

Monday, 24 de July, 2017

Por: Carlos Cid Babarro, profesor del Máster en Dirección de Recursos Humanos de EAE Business School

 

Spain is overcoming the largest economic crisis of recent times and there are now plenty of people advocating that it is time for a pay rise. The latest of these is the Minister of Employment, Fátima Báñez, who in recent statements has said that now is the time for salaries to be raised in our country. For its part, the Spanish Confederation of Business Organizations, (CEOE) has already announced its proposal for salary reviews of between 1% and 2.5%.

This seems reasonable in view of the efforts made by the working population and our country’s history prior to the crisis and since the transition to democracy. During this period, salaries were reviewed frequently in line with inflation and the agreements reached in the collective bargaining process.

However, in Spain, we are still burdened by an unemployment rate that reaches extremely high figures over sustained periods of time in comparison to other nations around us. This issue remains far from being resolved, despite the partial data reported in recent months, which shows a clear downward trend. The figures for the end of June show a decrease of 98,000 people out of work, with the unemployment rate reaching the lowest level in the last eight years, at 3,363,000 people.

The question that crops up immediately is whether an increase in salaries is compatible the continued efforts that are required to combat the high unemployment rate.

According to the Noble Prize-winner for Economics Cristopher Prissarides, as he stated in El País on 21st February, we should be cautious with our desires for pay rises. In his opinion, “for a country with as a high long-term unemployment rate as Spain, it would be better to accelerate the creation of jobs, albeit at minimum wage, and apply salary improvements when there are more people in work”.

His opinion is in line with the view of the Banco de España, which states that increasing salaries in line with variations in the RPI may have a negative effect on our country’s economic recovery, increasing inflation and decreasing our competitiveness. This view was stated in its report entitled “Macroeconomic Forecasts for the Spanish Economy, 2017-2020”.

In this report, it confirms that the macroeconomic situation has improved in recent years. The number of companies making profits is higher than a year ago, but there is still a large number of firms making losses. In view of this, it advises that the evolution of salaries should be tied to the specific evolution of companies and the productivity of their employees and the companies themselves.

As such, the models used before the recession should act as a lesson to us. In that situation, an employee’s wage review was based on a collective bargaining agreement in relation to an index, the RPI, which had nothing to do with the state and progress of the company or its income statement.

Therefore, it seems reasonable to advise caution and hold off the celebrations of a new, as yet unconsolidated, economic recovery, which could go straight down the pan if we are unable to understand our economic model and our country’s business and production reality.

Let’s not make the mistake of thinking that this is what the Classical economists at the end of the 18th Century referred to as the ‘bronze law of wages’, which stated that workers’ remuneration tended to settle around the minimum subsistence levels required by people. It is simply the case that we are at the doorway out of a recession that has precisely punished the working class much more harshly.

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