High inflation and hidden wage losses

Although the increase in wages after a period of time (six months, a year, a presidential term) end up “equalizing” inflation, the feeling that there was no loss of real income for workers may turn out to be totally false. Above all, if we are talking about periods of high monthly inflation and salary compensation arrives with a certain delay or lag with respect to the rate of increase in prices.

This is precisely what has happened in the race between wages and prices in recent years. A loss of real income for workers that conventional statistics do not record. Why it happens? Because in the “meanwhile the salary level is corrected”, the workers with the “old” salaries already bear for some time (a month until they receive the new updated salary, or more as usually happens in joint agreements) the impact of the “new prices”, already increased, of the products they consume.

And that difference in purchasing power in the “meanwhile” is not compensated. The new wage increase, if it equals inflation, simply brings prices and wages back to the same parity as at the starting point.

Because although the worker can consume again, with the salary updated for inflation, the same thing that he could consume at the “zero” moment or at the start of the period, what he stopped consuming in the intermediate period, when prices were already increasing, Nobody returns it.

This phenomenon of lag in wages compared to inflation is analyzed in a study just published by Celag (Latin American Strategic Center for Geopolitics). The work, signed by Guillermo Oglietti, Mariana Dondo and Alfredo Serrano, is entitled “How much income is lost by going behind inflation?” and traces in detail the evolution of prices and wages since the beginning of the government of Alberto Fernández.

It also refers to the loss of purchasing power of wages during the last two years of the Mauricio Macri government. But it was after the management of the government of the Frente de Todos that the goal was set for the evolution of wages to go ahead of inflation. And this is the question, based on the observed results, that Celag disputes with his report.

accumulated loss

“In times of high inflation, even if at some point in time wage growth equals that of inflation, the real wage will have accumulated a loss over the time that elapsed until the wage increase reached that of prices” , points out the report before presenting the case of Argentina in the first two years of the current government. And he describes it as follows:

“Twenty-two months after the start of the Government of Alberto Fernández, in October 2021, the nominal minimum wage and the minimum wage adjusted for inflation were the same. The wage “catch up” with inflation, it could be sustained. However, in the “meanwhile ”, families had significant losses, because during the entire period inflation exceeded the staggered increase in the minimum wage.

“In these months, families accumulated a loss of their income that at current value is equivalent to 95 thousand pesos, a figure that represents 2.4 minimum wages (38,940 pesos in April 2022),” the report details.

The loss of income was verified in the first months of the current government (January to September 2020), when, as there were no changes in the SMVM, a growing deterioration in real income was accumulated, month by month, at current values. Following Celag’s methodology, this loss was in the order of 500 pesos in January and increased until it reached close to 4,000 pesos in September.

In October and December 2020, there were increases in the minimum wage, which, although they made it possible to reduce the loss of real income of those who received the minimum wage, still produced negative results with respect to what they would have received with a SMVM adjusted for inflation month by month. The loss of real income with respect to that hypothetical adjusted salary remained at more than two thousand pesos (in current values) in both October and December 2020, despite the increases in the SMVM.

Already in 2021, the first increases in the minimum wage are applied in March and May, but in parallel to a first four-month period with very high monthly inflation rates (between 3 and 4.8% per month). Consequently, the loss of real income for those who receive the minimum wage increased month by month in January, February, March (even despite the nominal increase in the SMVM) and April. In this last month, according to Celag, it reached 5,000 pesos.

This means that the minimum wage should have been 5,000 pesos higher in that month to match the real purchasing power it had in December 2019.

In the second half of 2021, a much more dynamic policy was applied to recover the minimum wage, with a month-to-month increase until October. This was lowering the loss of real income month by month and, in October, practically equaled the real level of the minimum wage in December 2019. With respect to that month, the increase in the minimum wage was, in accumulated terms, equivalent to inflation.

But the mistake, as Celag points out, is to assume that this is the same as saying that “wages tied for inflation.” Because in each and every 21 months from January 2020 to September 2021 inclusive, the minimum wage was below what it would have been if adjusted for inflation. In the first months between 500 and 1,000 pesos, then it rose to between 3,000 and 4,000, and reached a maximum monthly loss of real income of 5,000 pesos.

The sum of these partial losses, updated, gives Celag about 95 thousand pesos. In those 21 months, 2.4 minimum wages were lost due to the deterioration of the purchasing power of minimum wages when they do not follow, month after month, inflation.

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