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September 19, 2014
Thursday, March 13, 2014

If the cap fits, bear it

Protesting workers in Plaza de Mayo yesterday, but are they really more scared than angry?
By Michael Soltys / Senior Editor / Economic Outlook
The cost of a decade ignoring productivity is now upon us

If it famously takes two to tango, it also requires at least two to run any race, including a wage-price race — perhaps the key to the government’s strategy this year is a determination that wages will not be entering any such race. This incomes policy looks even more baffling when the year’s first round of collective bargaining involves such a core social function as teachers — how can a Peronist government born out of trade unionism (even if Kirchnerism does not come across as very blue-collar, especially in its youthful mode) cap pay increases for those in charge of an education which is hailed as the key to the 21st century? And even those cynics who doubt whether most people give education the importance it deserves would then have to explain why a populist government is willing to risk the wrath of parents robbed of nearly a million baby-sitters.

The explanation for this adamant defence of wage ceilings runs deeper than the need to counter an inflation which is threatening to spiral out of control — it even runs deeper than dovetailing into the orthodoxy which has generally characterized the supposedly leftist Economy Minister Axel Kicillof. What is happening is that a “model” whose main achievements (consumer-led growth and full employment) were always at the expense of productivity has finally reached the end of that road. The mirror image of what is probably the proudest Kirchnerite achievement, the defence of jobs, was a scorn for productivity gains (such as those in the mid-1990s which quickly took unemployment up from seven to 18 percent even before the 2001-2 meltdown) — even more so in the last five or six years with most job creation in the public sector (an option now removed with the fiscal deficit sliding out of control). And the tenfold gain in nominal wages which pumped up domestic consumption in the “won decade” was not accompanied by any productivity growth — the trade-offs were always at the expense of investment.

And what is the cost of a decade of ignoring productivity? Incredibly enough, an Argentine worker costs a third more than a German worker when comparing productivity and unit costs rather than paycheques (even if German workers have longer holidays and even longer weekends with Feierabend — it is not so much a question of a superior workforce as German plants having better machinery). The policy of increasing wages oblivious of productivity ultimately leads to a point like the present when an inflation which would seem to justify 30-60 percent wage increases in fact points to pay cuts of those percentages if the strictest economic logic is heeded — because the inflation reflects the difference between national income and real output. Needless to say, pay cuts according to the percentage of price inflation would be a social impossibility.

You might say that the devaluation of the currency which has been wreaking merry havoc with prices over the last month has now reached wages. With no more rope the government has reached the point where it has to start rolling back real wages if it is not to see employment levels crumble, thus making one of the proudest boasts of the “won decade” lose credence.

And most trade unions would seem to be in tacit agreement with this approach, displaying scant militancy (yesterday’s somewhat half-hearted ATE rally in Plaza de Mayo notwithstanding) in proportion to the ferocity with which inflation is devouring purchasing-power. There is nothing better for taming rambunctious trade unions than the fear of unemployment and the government’s wage ceilings might not be automatically greeted everywhere with the outraged rejection manifested by teachers (especially in the private sector).

Although not widely appreciated, the devaluation has given the Argentine economy a new chance to be competitive by lowering labour costs in dollar terms — steep wage increases chasing inflation would throw that advantage away.

The party is over, the bill has arrived and there seems no alternative to suffering substantial real wage losses if worse damage is to be avoided — the Argentine economy is simply not up to sustaining current pay levels. In fact the real wage losses have already happened — the levels have fallen some 10 points in the last eight months but workers have been counting on this season’s wage bargaining to make up the difference and that does not look like happening.

Unlike in 1975, a Peronist government (and perhaps even Peronist trade unionism) actually shows signs of understanding the futility of entering into a wage-price race and we should therefore be cautious with our criticism.

The full effects of devaluation and its antidote in the form of higher interest rates will pan out in the course of this year rather than immediately. With isolated exceptions, employers are responding to the pressures by cutting back on overtime (with labour intake definitely slower) — even short-time and temporary lay-offs are still around the corner in most cases with mass unemployment unlikely in the next couple of months. But monetary policies like the steep increase in interest rates typically take half a year to make themselves felt in the economy and if by spring (when the soy harvest dollars will start running thin) the slowdown continues with no improvement in sight, the pink slips might start. The erstwhile star, the auto industry, looks especially vulnerable — the devaluation (given that far more auto parts are imported than cars exported, yielding a heavily negative balance of trade) and the soaring interest rates on top of a three-year Brazilian slowdown are such serious problems that the debate over the viability of the new luxury car tax seems almost secondary.

Do not forget that inflation constantly pressures costs while working around it reduces the margin for investment. The slowdown should dampen inflation, of course, but sagging sales will not help business. Stagflation is notoriously the worst of both worlds.

Despite the almost unprecedented realism by a Peronist government and trade unions, this year’s collective bargaining season starting so disastrously with no school for most children cannot possibly be easy — realism apart, it is always imperative to save face and the distance between the pay offers and the wage increase demands is simply too great.

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