Debate over low pay, low productivity and high inflation

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Summer 2001 has seen considerable alarm in Portugal at the weakness of the country's economy and the rising level of inflation, while the "vicious circle" of low wages and low productivity has again been highlighted. The Bank of Portugal has called for changes in the process of wage bargaining, a proposal which has received support from some of the social partners, notably employers. The trade unions have underlined their own agenda of harmonising Portuguese pay with EU averages, and reiterated their calls for various structural changes. A lack of reliable productivity data and inflation forecasts has hampered the debate.

In mid-2001, economic data continue to indicate that Portugal's weakened economy, marked by increasing imbalances and a loss of competitiveness, is showing no signs of improvement. Within this context, two main issues have come under constant discussion: how to escape from the "vicious circle" of low wages and low productivity (PT0104141N); and the increasing inflation rate, which reached 4% in June 2001.

The controversy over such issues was sharpened when the president of the Bank of Portugal (Banco de Portugal, BP) highlighted the need for greater rigour in wage policy. Stating that improved living standards depended merely on an increase in productivity, the Bank president suggested that there should be the following changes in pay bargaining:

• wage moderation should be based on a wage reference figure that takes into account European Union inflation and pay references, not just domestic conditions;

• pay negotiations should take place every two years, in order to keep uncertainty to a minimum; and

• national-level bargaining should stimulate sectoral, regional and company-level negotiations.

The deteriorating economic situation and the pay policy issue have led the main social partner organisations to set out their positions.

Trade union views

The General Confederation of Portuguese Workers (Confederação Geral dos Trabalhadores Portugueses, CGTP) has stated that wage increases are not responsible for inflation or falls in productivity. Using this argument, the confederation states, is merely trying to solve the problem by mending its weakest link, and demonstrates a lack of viable strategies. CGTP believes that productivity has not been properly measured, and that Portuguese statistics do not reflect reality, with productivity being substantially higher than meets the eye (as indicated by statistics that show that the per capita income of the Portuguese population has been increasing towards the European average). Productivity increases, CGTP claims, have been hidden by the existence of a "parallel" clandestine economy. This parallel economy is characterised by the under-reporting of income and productivity to the authorities. This situation cannot continue to be used as an excuse to keep wages down

CGTP states that, in fact, calculations based on the number of hours worked show that productivity has increased. However, any low productivity that may exist is the result of: the low level of innovation and investment in technology; low levels of qualifications among both employers and workers; and extremely poor management and organisation in companies. CGTP calls attention to low wages in both the public and private sectors and opposes the imposition of a policy of wage moderation.

According to CGTP, the European Union is moving at different speeds, with Portugal trailing far behind. The first move should be to bring wages up to European standards, since they are currently under two-thirds of the EU average and the lowest in the Union. "Doom and gloom" arguments about pay are criticised by CGTP, as they seem to be used to justify the continuation of low-wage policies as a means of solving deeper problems in the Portuguese economy. This, it is claimed, is merely "applying a sticking plaster", which is fated not to lead to a cure since the economic model being used is outmoded and since there is virtually no strategic orientation.

CGTP asserts that the country's production machinery has been destroyed, and wholesale privatisation without first assuring the dynamic functioning of companies has taken its toll. In addition, the government's vulnerability to powerful financial lobbies has cost the state far too much money. Wealth has been poorly distributed - for example, even though Portugal has a GDP on a par with Greece, its minimum wage is lower. In CGTP's estimation, the situation is likely to get worse as foreign investors look move their capital out of Portugal and to the east (PT0104144F).

CGTP organised a day of action in support of its demands and positions on 17 June 2001.

For its part, the General Workers' Union (União Geral de Trabalhadores, UGT) is of the opinion that nominal wage increases in the EU plus productivity gains, rather than EU inflation, should be deciding factors in setting Portuguese pay increases. However, in any event, Portugal's very high inflation combined with wage restraint means that workers are fated to pay the price. UGT believes that multiannual pay agreements can occur only:

• if there is ongoing negotiation of agreements with regard to incomes policy; and

• if there is confidence in forecasts regarding price increases. The problem in this area has been that specialised forecasting organisations have not come up with accurate forecasts, and have changed and corrected them a number of times. It is difficult to carry out wage bargaining, state UGT, on the basis of two-year forecasts of this nature. In UGT's opinion, the situation has not worked out in the workers' favour.

UGT also believes that it is necessary swiftly to institute effective measures to combat Portugal's current highly rate of inflation whose effect is being felt in some of the most visible consumer items such as agricultural produce, clothing and footwear. UGT asserts that the next wage revision should strive to compensate workers, especially those on the minimum wage and on minimal pensions, for rising inflation. It also calls for lower income taxes for workers. The average wage increase for 2001 has been set at 2.8%, but UGT is demanding an interim increase, given that bargaining was based on inaccurate government inflation predictions of 2.8%. According to UGT, the cost of inflation should be borne not only by the workers but by society as a whole. Workers cannot be made to pay for a mistake in inflation forecasting.

Employers's position

The suggestions on wage bargaining reform made by the Bank of Portugal were well received by employers and prompted public statements us support by the Confederation of Portuguese Commerce (Confederação do Comércio e Serviços de Portugal, CCP) and the Confederation of Portuguese Industry (Confederação da Industria Portuguesa, CIP).

CIP has stated that it will suggest two-yearly pay bargaining to members. It also revealed that such negotiations have already been introduced in some companies, CIP believes that this is the only solution to improving productivity. CIP officials have suggested meetings with the government to adopt a programme of short- and medium-term measures to instil greater competitiveness in the country's productive sector. These measures could include adjustments to existing tax policy.

Commentary

The issue of low productivity and low pay is currently high on the political agenda in Portugal, and is being discussed by the social partners in the Standing Commission for Social Concertation (Comissão Permanente de Concertação Social, CPCS) of the Economic and Social Council (Concelho Económico e Social, CES) (PT0001179F). However, it is notable that there is a lack of statistical data and a lack of articulation among the content of the various notions used, as is the case with productivity, and also a lack of research to support the discussion. (Maria Luisa Cristovam, UAL)