The loss of purchasing power of wages deepens the wound of inequality

Victor Javier Cavia, 51, has had his salary frozen for more than two years after the collective agreement that regulates his working conditions expired. What in previous years —with prices still contained— would be a minor problem, has become a major blow to his family finances: the bite of inflation is already beginning to show in his pocket and nothing suggests that the tables are turning. to change soon. “I have always loved reading and have had to cut back on books and newspapers. Before I also went to many more shows. Now even going out to eat out on the weekend seems to be turning into a millionaire activity ”, he complains.

Cavia has the support of a works council that has been in negotiations with the employer for two years to close a new agreement. However, so far they have had very little progress: the meetings, he regrets, follow one another, but the company’s management remains rooted. “They hide behind the fact that there is no agreement and, until there is, no increase will be applied. He has proposed a salary increase of 1.5% for this year, but the unions have rejected it ”. He defends the union position: “It is an insult that they try to raise wages so little when the CPI is so high.”

The case of this coordinator of marketing operators in a multinational services company perfectly exemplifies what is happening in Spain, where millions of employees are struggling these days with the loss of purchasing power. After years of lethargic prices, the abrupt awakening of inflation is further blurring the already negative picture of inequality in Spain: when the gap opened by the Great Recession, the Great Reclusion of March 2020 has chronicled a social scourge that comes from afar. Since 2008, as professors Olga Cantó (University of Alcalá de Henares) and Luis Ayala (UNED) put black on white in a study recently published by the La Caixa Foundation, “the worst evolution has been registered by the lowest incomes, and the better, the highest ”.

A glance at the salary structure survey of the National Institute of Statistics reinforces the meaning of that phrase. In 2007, the lowest average annual salary was in the hospitality industry at 14,000 euros, 31% below the average. In 2019, the last year for which this data is available, it had barely risen to 14,561 euros per year, and its distance from the average had increased to 40%.

Although inflation is showing signs of approaching its ceiling in Europe, the rising cost of living and its most dire consequence, the loss of purchasing power, are among the great concerns on the street. Inflation in Spain closed December at 6.7%, its highest threshold in almost three decades, and the average price increase in 2021 was 3.1%, the highest in a decade. By widening the focus, the impact can appear less fierce. Since 2007, in the run-up to the financial crisis, there have been five years with negative average prices, four years with inflation below the 2% target of the European Central Bank (ECB), and six years with levels equal to or higher than the ones you are looking for in Frankfurt.

Wages, however, have lagged. The Tax Agency figures its average growth between 2007 and 2020 at 10.2% -including public and private workers, as well as managers and ordinary employees, more vulnerable to dismissal when a crisis comes-, while in that period inflation rebounded, according to the INE, 20.3%, practically double.

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Increasingly polarized rents

The health crisis has been the culmination of a dangerous path of increasing inequality that began after the financial crisis. The impact of the virus on the economy has widened that gap even further: the available simulations – the only work tool until reliable statistics confirm the largest – suggest that inequality not only grew strongly in Spain, but also increased a higher rate than in the rest of the European countries. More inequality, therefore, in one of the most unequal territories of the community bloc. All, in an environment of increasingly polarized incomes: the population group with middle income is today smaller than it was 30 years ago and substantially lower than in the richest countries of the EU.

In the decade prior to 2019 (as far as the data from the National Institute of Statistics reach), the average wage per hour worked has gone from almost 14 to about 16 euros, with a significant – and persistent – gap between those who have a contract working full-time and those who can only access one part-time. The recent accelerated increase in the minimum wage, which in less than five years has gone from 655 to 965 euros, has improved things for those at the bottom of the distribution.

In parallel, the profitability of capital has not stopped growing: those on the opposite side of the scale, the wealthiest, have seen how investments in the Stock Market – international stock markets are already worth twice as much as in the worst moment of the pandemic – and, above all, in brick, they have not stopped growing even in the almost two years since the outbreak of the coronavirus.

This unequal distribution of income is, as Cantó and Ayalá underline in the study they will present this Thursday in Barcelona, ​​”one of the most important social and economic problems in Spain.” It is, they add, “a situation that persists over time and makes us more vulnerable to possible shocks adverse economic conditions ”and that economic growth is not capable of halting per se, “Given that the productive structure and the characteristics of the occupations and of our labor market tend to generate low-wage jobs, in addition to the greater extent of unemployment.” It will not be, at least, as long as the redistributive capacity of the tax system is not improved, also worse than in other neighboring countries. “These structural characteristics mean that when the economy decreases inequality increases a lot, usually through a rapid increase in the number of low-income households and the fall in the relative weight of the number of middle-income households,” they add. Exactly what has happened in the harshest months of the health crisis.

The inflationary awakening

These are not good times for lovers of gray tones. The economy has shown itself capable of jumping from one risk to its opposite with little transition. That is exactly what has happened with inflation: a year ago, the threat of deflation centered the debate after 2020 with negative price levels for Spain. Was the pandemic going to cause a downward spiral that would reduce the profits of companies and push them to cut wages? The unusualness of the virus and lockdown phenomenon made it difficult for economists to search for precedents. And with their own thesis under their arm, they took sides, leaning towards one side and the other. Deflation or extreme inflation.

“The greatest risk is that the pandemic will cause deflation in the global economy,” concluded Peter Bofinger, a professor at the University of Würzburg and a former member of the committee of scholars that advises the German government, back in the summer of 2020. Time has given the reason to those who believed otherwise, and the increasingly distant rhythms of wages and prices have created two sides that disagree on the answer.

Unions have adopted the phrase “pay them more!” with which US President Joe Biden addressed employers who complained that they were unable to find workers to fill their vacancies. Comisiones Obreras estimates that purchasing power has fallen by 6.2% in the last 11 years, a setback that it blames in large part on the labor reform approved by the PP in 2012. Chema Martínez, secretary general of the services division from the CC OO union, believes that low wages “have been very noticeable that they have been evolving below the CPI.” Martínez, however, is sympathetic that the rise in inflation should not be followed at a time when it is skyrocketing, “but we must guarantee that wages regain purchasing power in a two or three-year horizon,” when the prices could be moderated.

On the opposite side, the CEOE employers’ association defends that an excessive wage increase would generate unemployment and make a phenomenon such as inflation permanent, which they now consider transitory. The same opinion that the ECB has been repeating for months, fearful of the so-called second-round effects. In that face to face, for the moment, the seconds are imposed by a landslide.

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