Wage trends in Spain analysed

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In Spain, where wage costs have grown far less than productivity, pay restraint has been the trend. This feature examines trends in real unit labour costs, real pay and pay differentials across the Spanish economy over the last 15 years.

Statistical evidence on developments in real unit labour costs, real wages and pay differentials/distribution over the past 15 years throw some interesting light on a number of the key questions for the Spanish labour market and industrial relations. Has there been high wage growth, leading to high unemployment? And is the labour market really inflexible, also contributing to joblessness?

Real unit labour costs

Table 1 below shows the evolution of real unit labour costs (RULC) for the Spanish economy since 1980. The RULC compares the wage cost per worker with his or her productivity measured in terms of monetary added value (that is, the wage cost deflated by the average price of the goods and services that this individual contributes to production in relation to his or her productivity in physical units). It can be seen that there was an overall decrease of 13.3% between 1980 and 1995.

This decrease has not shown a regular pattern, because it has depended on factors such as the economic cycle and the wage policies of the government and trade unions. From 1980 to 1983 the RULC varied little, but over the period 1984-5 it decreased sharply (by 6.5%). This decrease was due to a simultaneous decrease in the real remuneration per wage earner (owing to wage adjustment policies) and a sharp increase in productivity (owing to the fall in employment). Despite the context of recovery of employment, wage growth was very moderate in most years between 1985 and 1989 and so the RULC fell slightly.

Table 1. Real unit labour costs, 1980-95
Year Indices Annual variation rates
. Total Industry Construction Services Total Industry Construction Services
1980 100.0 100.0 100.0 100.0 . . . .
1981 101.4 99.2 102.9 102.7 1.4 -0.8 2.9 2.7
1982 99.0 96.5 100.7 101.5 -2.3 -2.8 -2.1 -1.2
1983 99.4 94.1 103.6 103.0 0.4 -2.5 2.9 1.5
1984 94.8 88.8 101.6 98.4 -4.7 -5.6 -1.9 -4.5
1985 92.9 87.0 93.9 97.5 -2.0 -2.1 -7.6 -0.9
1986 92.7 81.4 93.0 103.2 -0.3 -6.3 -0.9 5.9
1987 92.5 82.5 93.8 102.5 -0.2 1.3 0.9 -0.6
1988 91.9 81.5 91.4 104.0 -0.6 -1.3 -2.6 1.5
1989 90.8 82.3 88.3 100.7 -1.2 1.0 -3.5 -3.2
1990 92.3 87.5 87.8 100.9 1.7 6.3 -0.6 0.2
1991 93.1 89.6 91.1 101.7 0.9 2.4 3.8 0.8
1992 94.7 94.1 97.0 99.1 1.7 5.0 6.5 -2.5
1993 93.7 97.2 98.1 97.2 -1.0 3.3 1.1 -2.0
1994 90.2 93.0 93.8 93.4 -3.8 -4.3 -4.4 -3.9
1995 86.7 86.7 90.7 90.3 -3.8 -6.8 -3.3 -3.3

Source: Authors based on "Contabilidad nacional de España", Instituto Nacional de Estadística, Madrid (several years) .

The declining trend of the RULC observed since 1983 was broken in 1990, the last year of the expansive phase of the cycle that started in 1985. Between 1985 and 1990 there was a net increase in employment of 1.9 million people ( 17%), practically all of whom were wage earners. Also, after the second half of the 1980s in which some people became rich quickly (because of the high rates of profit and above all the revaluation of assets), wage earners also wanted to share the prosperity and so demanded greater wage increases in collective bargaining. This greater growth in wages led to a 2.4% increase in the RULC between 1990 and 1992. However, in 1992 it was still 5.3% lower than in 1980.

The recessive phase of the cycle began in 1992. Employment reached its maximum in 1991, but then between 1991 and 1994 the number of employed people fell by 657,000 (down 5%), of whom 512,800 were in industry and construction and 525,000 were wage earners. This significant fall in employment explains the 4.7% reduction in real pay between 1993 and 1995 (see Table 2 below) and a sharp increase in productivity, as in the previous cycle. As a final result, the RULC fell by 8.4% between 1992 and 1995.

Sectoral developments

The evolution of the RULC for the economy as a whole is quite different from that followed by the various individual sectors (see Table 1 above). In industry there was a continual sharp fall between 1980 and 1986 (-18%), with the bottoming out taking place in 1986. In other words, wage costs, deflated in line with industrial prices, rose far less than productivity. In construction there was a slight increase in the RULC at the beginning of the same period, but later it fell significantly. In private services, the variations ended in an increase in 1986 ( 3.2% in comparison with 1980).

Between 1986 and 1993 the differences in the behaviour of sectors were greater, particularly with respect to the contrasts between the RULC in industry and in private services. In industry by 1993 the RULC was considerably higher than that of 1986 ( 19.4%), owing to the sharp increase in the early 1990s, while in private services the RULC was lower than that of 1986 (-5.8%). Finally, the RULC in the construction sector fell from 1987 to 1990 (-6.5%), and then rose sharply until 1993 ( 11.8%). Since 1993, all the sectors have shown a sharp decrease, and in 1995 they all showed a clearly lower RULC than in 1980 (-10.8% in industry, -7.5% in construction, -7.1% in services).

Such differences in the behaviour of the RULC across sectors in particular years are not due to varying trends in sectoral wages, which are very similar (see next section), but principally to the varying trends in final prices in each sector. In the late 1980s and early 1990s the term "dual inflation" was used to refer to the different trends in prices in industry and services (which revealed a far greater difference from that which could be attributed to varying trends in sectoral productivity). The growing openness of the Spanish economy to foreign trade on entry into the EEC in 1986 and the creation of the single market in 1992 had an immediate effect on industry, whose prices had been much more constrained by foreign competition. To this was added a policy of maintaining the overvalued effective exchange rate (formalised by Spain's joining the European Monetary System in 1989). On the other hand, the effects of foreign trade on the prices of services were very low, so a greater growth rate was maintained. However, at the same time the nominal wages of all sectors grew in line with the consumer prices index (CPI), of which services are an important component. Thus, in the industrial sector nominal labour costs grew more quickly than industrial prices, and between 1986 and 1993 the growth in productivity was insufficient to compensate for this. On the other hand, in a context of strong internal demand, prices of services could grow as much as necessary to absorb the higher nominal pay and even to generate an increase in profit margins.

In short, the industrial RULC grew between 1986 and 1993 despite the increases in productivity because final prices were subject to foreign competition, whereas in the service sector the RULC decreased even though productivity showed almost no variation, because it was possible to increase prices.

Trends in real per capita wages, 1980-95

As indicated above, labour costs per person reflected fairly similar trends across the different sectors, with the exception of public administration, where workers fell back in comparison. This is a symptom of the fact that de facto centralisation in wage bargaining is greater than would be suggested by the large number of collective agreements that are signed each year. This is because collective bargaining is carried out principally by two large organisations that act at a national level and have a majority in all regions, with the exception of the Basque Country.

Table 2. Real per capita pay, 1980-95
Year Indices Annual variation rates
Total Industry Construction Private services Public services Total Industry Construction Private services Public services
1980 100.0 100.0 100.0 100.0 100.0 . . . . .
1981 100.7 102.0 100.3 101.0 98.2 0.7 2.0 0.3 1.0 -1.8
1982 100.0 102.5 99.4 100.6 96.3 -0.6 0.6 -0.9 -0.4 -1.9
1983 101.5 102.6 99.3 102.6 98.7 1.4 0.1 -0.1 2.0 2.5
1984 100.3 100.6 98.6 102.1 95.8 -1.2 -2.0 -0.7 -0.5 -3.0
1985 100.8 101.7 97.3 103.4 95.6 0.6 1.1 -1.3 1.3 -0.2
1986 101.5 102.0 97.8 104.5 95.3 0.7 0.3 0.5 1.1 -0.3
1987 103.1 103.5 99.8 105.7 95.8 1.5 1.5 2.0 1.1 0.5
1988 105.6 104.3 102.2 110.1 97.6 2.5 0.8 2.4 4.2 1.9
1989 105.9 105.0 104.3 107.7 98.1 0.3 0.6 2.1 -2.2 0.5
1990 108.7 107.8 107.8 109.4 100.4 2.6 2.7 3.4 1.6 2.4
1991 112.4 111.8 112.0 112.5 103.7 3.4 3.8 3.9 2.8 3.3
1992 117.2 117.5 118.4 114.1 109.9 4.3 5.0 5.7 1.4 6.0
1993 119.6 121.1 123.3 117.7 108.7 2.0 3.1 4.1 3.1 -1.2
1994 116.7 119.2 120.2 113.8 106.4 -2.4 -1.6 -2.5 -3.3 -2.0
1995 114.0 115.8 117.2 110.9 104.5 -2.4 -2.9 -2.5 -2.6 -1.8

Source: Authors based on"Contabilidad nacional de España". The deflator used is the CPI.

In 1985, gross per capita pay (including the social contributions paid by employers) deflated in line with the CPI was practically the same as in 1980 for the economy as a whole, and varied by sector between a 3% increase in private services and a 4% decrease in public administration (Table 2). In 1985 the expansive phase of the economy and of employment began, and the gross real pay increased until 1993 when, with the new recession, it fell once again. For the economy as a whole, gross real pay in 1995 grew by 14% in comparison with 1980 (far lower than the increase in per capita productivity), with very few sectoral differences. It should be pointed out, however, that the real pay of the public sector suffered serious cuts in the 1980s and did not return to the 1980 level until a decade later. In 1995 pay was only 4.5% higher than the 1980 level, that is, 10 points below the level of the economy as a whole.

Table 3. Real per capita pay including and excluding social contributions, 1980-94
Indices Annual variation rates
Year Real per capita pay Net real per capita pay Gross real per capita pay Net real per capita pay
1980 100.0 100.0 . .
1981 100.7 99.9 0.7 -0.1
1982 100.0 98.8 -0.6 -1.1
1983 101.5 99.5 1.4 0.7
1984 100.3 98.3 -1.2 -1.2
1985 100.8 97.5 0.6 -0.8
1986 101.5 97.6 0.7 0.0
1987 103.1 99.3 1.5 1.8
1988 105.6 101.2 2.5 2.0
1989 105.9 102.2 0.3 1.0
1990 108.7 104.4 2.6 2.1
1991 112.4 107.8 3.4 3.3
1992 117.2 110.9 4.3 2.9
1993 119.6 111.2 2.0 0.2
1994 116.7 109.8 -2.4 -1.2

Source: Authors based on"Contabilidad nacional de España". The deflator used is the CPI.

The evolution of real pay excluding social contributions for the economy as a whole is shown in Table 3 above. The importance of social contributions increases over time, though very moderately, so wages excluding social contributions grew more slowly than total labour costs and in 1994 were only 10% higher than the 1980 level. From the point of view of workers' purchasing power, it is more relevant to consider wages excluding not only social contributions but also direct taxes. Fiscal pressures in the period under analysis increased significantly, principally for better paid workers, so take-home pay increased at a substantially lower rate.

Pay differentials by occupational grades, 1980-92

Two sources may be used to determine the evolution of wage differentials by occupational grades (categorías profesionales) in the private sector: the wage survey, or WS, which provided this information until 1988 ("Encuesta de salarios", Instituto Nacional de Estadística, Madrid (several years)); and the wage distribution survey, or WDS, covering the years 1988 and 1992 ("Encuesta de distribución salarial", Instituto Nacional de Estadística, Madrid (several years)). (The National Statistics Institute no longer draws up the WDS, which has been replaced by the wage structure survey with detailed information on wage differences. The first one, covering 1995, is about to be published.)

Both the WS and WDS cover industry, construction and most private services. The former excluded firms with fewer than 10 workers and all temporary workers, while the latter covered firms with over five workers and included workers with all types of full-time contract, whether permanent or temporary. Neither took into account part-time workers. The breakdown by occupational grades was similar: the former survey divided workers into 12 categories and the latter into 11 categories, though for the present analysis we leave aside the category "workers under 18 years old".

Table 4 below shows two indicators of wage differentials for the years 1980, 1984, 1988 and 1992. The first indicator is the quotient between the average wage of workers in the best paid occupational grade, "engineers and university graduates", and that of the worst paid one, "unskilled". The second indicator comprises the wages of all the grades considered and shows average differentials in the pay of each occupational grade expressed as a percentage of the average wage of all grades taken together.

Table 4. Indicators of pay differentials between occupational grades, 1980-92
4.1 Relationship between highest and lowest grades
. Gross pay Net pay
. . . (a) (b)
Year WS WDS WS WDS WS WDS
1980 3.1 . 2.9 . 2.8 .
1984 3.5 . 3.2 . 3.0 .
1988 3.7 3.7 3.1 3.1 3.0 3,0
1992 . 3.8 . 3.2 . 3,2
4.2 Coefficient of variation of all grades (unweighted and in %)
. Gross pay Net pay
. . . (a) (b)
Year WS WDS WS WDS WS WDS
1980 36.7 . 34.4 . 32.7 .
1984 38.4 . 35.3 . 33.6 .
1988 40.4 40.5 35.2 35.3 33.6 33,8
1992 . 42.4 . 37.5 . 37,0

(a) Single worker without children and with the average pay of his/her occupational grade as sole income.

(b) Married worker with two children and with the average pay of his/her occupational grade as sole family income.

Note: Gross wage includes the social contributions paid by workers but not those paid by employers.

Source: Authors based on"Encuesta de salarios"(wage survey, WS) and": Encuesta de distribución salarial"(wage distribution survey, WDS).

In gross terms, wage differentials grew steadily according to both indicators. We have also drawn up our own estimates of the evolution of take-home pay differentials, that is, after deducting employees' social contributions and income tax (but also including family allowances if eligible). The results are included in Table 4 under the net pay columns. The impact of the fiscal system is of course progressive, because pay inequalities are not so large in net terms as in gross terms. However, it is also observable that the inequality of net pay increased between 1980 and 1992, though to a lesser extent than the inequality before tax. This is because effective taxation in 1992 was more progressive than that in 1980 due to the fiscal reforms of 1985 and 1988, which favoured mainly the lower incomes. According to our estimates, in 1980 the effective taxation rate for the typical "engineer and university graduate" was 15.9% (single without children) and 14.3% (married with two children) while in 1992 it had risen to 22.6% and 18.6% respectively. For a typical worker of the "unskilled" category the effective rate fell from 9.8% (single without children) and 4.6% (married with two children) to 8.1% and 1.4% respectively.

Personal distribution of pay, 1989-94

In the previous section, we analysed developments in pay differentials according to occupational grade. Though this variable is essential to explain the personal distribution of income, the relationship between personal inequality and inequality by occupational grade is far more complex, for several reasons: inequalities also depend on other variables such as gender or economic sector; the statistical sources used in the previous section exclude groups such as agricultural workers, part-time workers and - far more importantly - workers employed in public administration; and trends in the final personal distribution of pay also depend on changes in the structure of employment between different groups.

Analysis of the personal distribution of pay could refer to both hourly pay and annual pay. In Spain, no data are available that permit us to analyse the evolution of inequalities in hourly wages for the economy as a whole, so here we consider annual pay. In this case, inequalities depend not only on how much is earned per day or month (which are the basic data of the surveys) but also on the continuity of the employment situation over the year, an element that adds yet more complexity to wage inequality. For the last few years we can carry out this analysis thanks to the information gathered together by theFiscal Studies Institute and obtained from the deductions that firms make to the payroll as an advance on contributions to personal income tax (IRPF) (see "La distribución personal de salarios y pensiones en las fuentes tributarias", F Melis and C Díaz, in "Il simposio sobre igualdad y distribución de la renta y la riqueza", Vol. II, Fundación Argentaria, Madrid (1993)., "La distribución personal del salario anual en 1992", F Melis and C Díaz, in "La desigualdad de recursos" (II simposio sobre igualdad y distribución de la renta y la riqueza), Fundación Argentaria/Visor, Madrid (1996). and "Empleo, salarios y pensiones en las fuentes tributarias", Instituto de Estudios Fiscales /Agencia Tributaria, Madrid (several years).)

These fiscal data allow us to determine with great reliability the (legal) annual gross wage incomes of all wage earners regardless of the amount of their income (with the exception of wage earners in the Basque Country and Navarre). Results are available for the years 1989, 1992, 1993 and 1994. Three important facts appear from these results.

1. Annual income below minimum wage

A huge - and increasing - proportion of workers have an annual income lower than the statutory minimum wage: more than a quarter of workers contracted legally - 27.1% in 1992; 27.4% in 1993; and 28.7% in 1994. (The minimum wage has a very low value: in 1997 it was ESP 66,630 per month for full-time workers.)

Which workers fall into this category? In some instances they are workers who have retired from working before the end of the year or who have entered the labour market during the course of the year. But most of them are part-time workers or, above all, workers on temporary contracts who work for only a few months of the year. According to the Survey of the Active Population (Encuesta de Población Activa), more than 35% of the wage-earning population works on temporary contracts, which began to be widely used in Spain following changes to the relevant labour legislation in 1984.

Therefore, though we lack the information on previous years that would allow us to prove this statement, one of the most significant recent changes to the Spanish labour market seems to be the emergence of this important proportion of workers whose annual wage income is insufficient for survival and who depend on public benefits, and above all on family support (in 1994, a quarter of workers who received a wage lower than the annual equivalent of the minimum wage also received unemployment benefit, though on average the sum of the wage income plus the benefits received was still lower than the minimum wage).

2. Increasing inequality

The data show a significant increase in inequality in the early 1990s (see Table 5 below). The source, however, does not allow us to distinguish whether this increase is due only to a greater proportion of workers who work solely for a few months per year or who work part time, or whether it is also due to greater inequality in hourly or monthly pay.

Table 5. Individual inequality of gross annual pay, 1989-94
Year Gini index* Ratio of pay of the top 10% and the bottom 10% on the income scale
1989 0.439 50.8
1992 0.451 58.4
1993 0.458 68.8
1994 0.460 69.8

* The Gini index is a means of measuring income inequality, developed by economists. A Gini index of 0 would represent perfect equality and 1 would represent absolute inequality (all wealth held by just one household).

Source: Melis and Díaz (1993 and 1996) and Instituto de Estudios Fiscales/Agencia Tributaria (several years).

3. Women affected more than men

Job insecurity and inequality affect women more than men. Thus, in 1994 the proportion of female workers with an annual income lower than the minimum annual wage was 36.4%, while for men it was 24.4%. The respective Gini indices (see note to Table 5) were 0.463 (women) and 0.450 (men). Some results of the pay structure survey for 1995 released by the National Statistics Institute (INE) but not yet published point in the same direction. In 1995 women held 67% of the part-time contracts. Also, for equal qualifications the remuneration of women is systematically at least 30% lower across all occupational grades.

Commentary

For decades, analysts of the Spanish labour market have referred to excessive wage growth, which was presented as one of the main causes of the high unemployment in Spain. In this feature we have provided evidence on wage trends since the early 1980s that suggests that this view is unfounded. Over the last 15 years, wage costs have in general grown far less than productivity, despite the fact that in some periods and sectors firms have found it difficult to transfer these higher costs into prices. More detailed analyses allow us to see that pay restraint has been even greater if we take into account take-home pay, excluding social contributions and income tax, and that the workers who have suffered most have been those on the lowest incomes (an element that has only partially been compensated by the fiscal system) and those in the public sector. The available data on wage income for the last few years show the great and increasing extent of precarious or insecure employment that gives firms great "flexibility". This is also a powerful argument against another of the usual explanations for unemployment in Spain, the supposed "inflexibility" of the labour market. (Josep González Calvet and Jordi Roca Jusmet, Department of Economics, University of Barcelona)

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