Inflation turns up heat on pay talks

17 December 2007

MADRID – Rampant inflation during much of this year will cost Spanish companies dearly in 2008 when wages come up for review, with analysts predicting that Spanish employees are in for a EUR 3 billion windfall to help them deal with the ravages of increased prices on their personal finances.

Under the collective wage-bargaining system used in many companies and industries, employers adjust salaries each year based on target inflation and then have to compensate staff if real inflation overshoots the mark.

In November, consumer prices rose 4.1 percent year-on-year, leading analysts to conclude that the rate of inflation will end the year at around 4 percent – two percentage points higher than the government’s target. That substantial differential will require companies to pay out – 3 billion more next year, roughly the same amount that the Spanish state will have to reimburse pensioners for higher consumer prices.

In both cases, the payout will be one of the largest recorded. The last time inflation hit 4 percent in December was in 2002. Spain’s business confederation, the CEOE, estimates that because of rocketing prices each worker will cost companies an additional EUR 400 on average next year. That situation will undoubtedly add new pressures to traditionally fraught wage bargaining negotiations that are due to begin in January.

"In particular, it will create problems when negotiating new agreements," notes a CEOE director.

"The higher inflation is, the more complicated the negotiations become, but it also justifies the need for salary revisions," argues Miguel Ángel García, the head of the economic affairs department of the CC OO labor union.

"It would be very unfair to transfer the problem of inflation only onto the consumer, i.e. the worker," adds Toni Ferrer, a spokesperson for the UGT union.

The sabre rattling over how much workers’ salaries should rise in the year to come may be tempered somewhat by the increasingly murky outlook for the Spanish economy as a whole. The government has called for moderation in wage negotiations on grounds that raising salaries too much would only serve to further fuel inflationary pressures on the back of higher energy and food prices.

The Spanish economy looks set to grow at around 3 percent in 2008, considerably less than it did this year, and that could counter inflationary pressures.

"In that context there will be less to cheer about with regard to salaries," the CEOE director notes.

Despite the problems that erupt each year as wages are reviewed – sometimes spilling over into protests and strikes – both unions and business associations argue that the current model is better than many of the alternatives. Workers can rest assured that their purchasing power will remain more or less the same, while businesses are able to predict with reasonable accuracy how much their staffing costs will be and budget accordingly.

"It’s been a big step forward because it means that wages are linked to past, real inflation and not only target inflation," notes Ferrer.

On the flip side, the system has also allowed companies to avoid facing up to demands for massive wage increases after years in which corporate earnings have been growing much faster than Spain’s GDP.

Subject: Spanish news