Why Spain’s inflation-linked wages are better than Germany’s

VALENCIA | Contrary to how collective bargaining agreements and pensions work in Germany, in Spain it was usual to set inflation as reference for any deal so purchasing power stayed virtually protected from price rises. But inflation having increased during the last years until 2010 in Spain, it was argued that this link actually represented a barrier for the country’s companies improving their competitiveness because wages went up regardless the economic environment.

Those who asked for a way to cap salaries in times of crises did give the Germany-inspired change a warm welcome. Companies and employees would have a clear incentive now to better their productivity, as it had lagged behind the European Union’s and the US’ average rates since 1995.

The rule was not included in the latest labour market reform, though, as merely linking wages and productivity would have had the opposite effect.

In Germany, Finland and Italy, the GDP per employee rate has fallen. They have salvaged their employment rate at a cost of a lower production. Productivity has expanded precisely in countries with high levels of unemployment like Ireland, Portugal, Spain and Greece, where the job destruction rate has been higher than production decrease.

Spain’s productivity is counter-cyclical and hasn’t stopped growing since 2007, only surpassed by Ireland, according to BBVA data.

Had wages been linked to productivity, they would have gone up further than inflation has. And let’s not forget that productivity is a very much heterogeneous measure depending on industrial sector behaviour: for example, productivity in construction in the last years has recorded the highest increases. Workers in that sector should have seen their salaries raise by 13 percentage points, while core inflation has barely touched positive territory.

At the beginning of the credit crunch, many thought Spain should just follow Germany to correct divergences. Yet, however well-meaning those advices were, Spain does not need rush reforms that would endanger even more its possibilities of fighting back against economic recession.