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The Portuguese social partners reacted immediately following publication of pay rise guidelines of 2.6% by the Minister of Finance in August 1997. However, the actual rate of increase will be determined by macroeconomic variables and the Government's economic objectives for 1998 in the context of the EU convergence criteria for Economic and Monetary Union.
In Portugal incomes policy - an instrument available to the government as a means of controlling inflation - is negotiated each year in the Council for Social Concertation (Conselho Permanente de Concertação Social). The meetings of this Council, attended by representatives of workers, employers and government, have no binding effect on the government but remain important because their results may reflect areas of possible labour tension. The significance of this is that, in the Portuguese economy, collective bargaining still plays a major role in determining rates of pay. In the middle of August 1997, the month when politicians are normally on holiday, a decision of the Minister of Finance on the level of pay increases for 1998 was made public. According to the press, pay guidelines of 2.6% have been set for negotiations to be held for the purposes of determining the state Budget for the forthcoming year.
The social partners reacted at once. The two trade union confederations - the General Confederation of Portuguese Workers (Confederação Geral dos Trabalhadores Portugueses, CGTP) and the General Workers' Union (União Geral de Trabalhadores, UGT) were indignant at the publication of this figure and described the decision as "launching upon public opinion a percentage figure which will function as a psychological target with the intention of pinning down discussion of the state Budget, as well as negotiations about the civil service and the national minimum wage, to a predetermined level". CCP and CIP, the confederations representing employers in commerce and industry respectively, warned that the guidelines to be fixed through social concertation ought not to be one percentage point higher than the expected inflation rate, because the current reduction in working hours from 44 to 40 without loss of pay meant a reduction in production by four hours a week.
Each social partner has now begun to publish the proposals that it will be presenting at the next meeting of the supervisory committee of the present Strategic Social Pact.
Although in the course of negotiations, trade unions lodge demands across a whole range of issues, the rate of growth of wages is undoubtedly seen as the most important both for the union leaders, because it is their job to protect their members, and for the workers, because what they consider most important is the psychological effect of gaining the high pay increases to which they had become accustomed under high rates of inflation. In a general sense, trade unions are concerned about pay guidelines, the minimum wage, retirement pensions and social pensions. In turn, the employers put pressure on the government to reduce the non-wage costs of companies by reducing or even abolishing the tax burden to which companies are liable, so that they can distribute increases in productivity in the form of wages.
The meeting of the convergence criteria defined in the Treaty on European Union and its protocols has been a necessary condition for the full integration of Portugal into the Economic and Monetary Union. These convergence criteria have influenced the main objectives of economic policy that have been introduced over the last few years. The criterion of price stability is met when the average rate of inflation, measured through the variation in the Retail Prices Index (Indíce de Preços no Consumidor- IPC) in the year prior to examination, is less than 1.5 percentage points higher than the inflation rate of the three member states with the best economic performances. In keeping with this criterion, the growth rate of the Retail Prices Index has been falling progressively, with the Portuguese inflation rate thus converging even closer towards Community averages for inflation. In 1997, the Portuguese Government forecast that by the end of the year the inflation rate would be between 2.25% and 2.5%. If to this is added a real gain of 0.1 percentage point, we are left with the figure of 2.6%, which corresponds to the guideline rate that has been announced.
It should be stressed that Portugal is on the verge of meeting all the criteria established by the Maastricht Treaty for inclusion in the European single currency. Inflation, which is considered to be the most difficult indicator to achieve, has behaved surprisingly well, which allows us to predict that the Government is not prepared to risk damaging the inflation figures so far achieved on account of wages.
The trade unions, for example the Common Front of the Unions of Public Employees (Frente Comum dos Sindicatos da Administração Pública), believe that determining pay increases exclusively on the basis of the rate of inflation is a factor that tends to increase social injustice, hinders an effective recovery of purchasing power, and fails to take into account the low level of pay of the overwhelming majority of Portuguese public employees. In addition to these points, the Portuguese trade unions further claim that the undertakings made in terms of nominal and real convergence, in respect of current wage levels, "require Portuguese real wages to continue to grow at a higher rate than the average real wages of the European Union, which is justified by a greater increase in productivity". It should be noted that in Portugal per capita Gross Domestic Product (Produto Interno Bruto- PIB) is approximately 70% of that for the average of the other European Union countries.
The Portuguese Government has, however, adopted a general policy of restraint in view of the overall macroeconomic framework, and the Minister for the Economy has even gone so far as to state that the growth in PIB may not result directly in an immediate increase in wages. In other words, pay increases must take into account the fact that, over the next few years, it will be necessary to make a series of structural adjustments and that, furthermore, the strategic variable that will be used for these adjustments is that of the investment made by absorbing part of the increases in productivity, so that the money that is spent on investment will be progressively reflected in increases in wages and consumption at a later date.
At this moment, there is a clear trade-off between the meeting of nominal and real convergence criteria. Both the state's financial position (the criterion of excess deficits and public debt) and monetary situation (in terms of price stability and the level of long-term interest rates) are in keeping with the level of performance required in comparison with the average figures for the European Union countries, although in real terms the difference is quite significant. The question is how to eliminate this difference.
The labour market in Portugal is very inflexible: workers are employed under the terms of national collective agreements which means that the central trade unions play a very important role in this field. Trade union leaders use re-election as a means of assessing their effectiveness, which means that they are committed to protecting the interests of their members - that is, those individuals who are already on the labour market - to the detriment of those who would like to enter but are unable to do so. Meanwhile, the dual role of the state requires it to act simultaneously as both regulator and employer, so it changes some of its strategies at election time. Discrepancies may therefore be observed in some of its areas of activity both in terms of labour and economic policy - and, of course, 1997 is an election year.
On the other hand, it must be borne in mind that improving the competitiveness of national product markets in an ever more integrated world economy is fundamental for bringing about a sustained real growth in workers' incomes. It is necessary to associate increases in productivity with higher earnings as a means to create better paid and more productive employment. And this is all the more true because an increase in competitiveness resulting from a reduction in internal costs will tend to be accompanied by a more favourable reaction on the supply side, since it is seen as something rather more permanent than an increase in competitiveness brought about merely by fluctuations in the nominal exchange rate.
This is the context within which the social partners will be acting in the forthcoming weeks. It is envisaged that wage growth will be moderate and that Portugal cannot afford to miss the road towards the real Europe. (Cristina Alexandra Rodrigues de Sousa)