Greek-EU inflation differential should count in pay pact talks

The General Confederation of Greek Labor (GSEE) and the most prominent members of the Federation of Greek Industries (SEV) have been at each other’s throats in the last few weeks or so as the former senses an attempt by the latter to undermine the collective bargaining process and push for wage increases which lag behind inflation. They are absolutely right. However, some of the points made by the head of the industrialists make sense and should be taken very seriously because sooner or later they will come back and haunt part of the working population. In this context, both sides ought to re-examine their positions and reach a compromise which should promote both job security and employment on one hand and higher living standards on the other. The president of the Federation of Greek Industries, Odysseas Kyriakopoulos, caused an uproar again last week by stating that the offered pay raises in the order of 2.8 percent were generous. To justify his position, Kyriakopoulos cited more modest increases for low wage earners in the order of 2.2 percent in the the rest of the eurozone. He also said that local wage agreements did not amount to doing away with the national collective wage agreement while the issue of high unemployment among the young below the age of 26 should be looked upon very closely, and seemed to endorse the French government’s recent proposals on the issue. Parity needed Putting aside the fact that Kyriakopoulos fights for the interests of the industrialists, one does not need a PhD to understand that his position to link the Greek wage increases with the rest of our trading partners in the eurozone makes sense. Up to now, collective bargaining resulted in wage agreements tied to developments in Greek inflation. The central wage deal, which served as a floor for other deals at company levels, used to included an extra percentage increase to account for gains in productivity. The typical one-year or two-year wage deal helped compensate workers for the loss of purchasing power but admittedly had some negative side effects. With Greek inflation surpassing the average EU inflation, the deal contributed to the erosion of international competitiveness. Nowhere else was this felt so much than in labor intensive industries which had to compete with goods produced in other countries with a fraction of the Greek labor cost. It is should be clear that the accumulated loss of competitiveness resulted in tens of thousands of layoffs and small and medium-sized companies closing down over the last 15 years in textiles and other industries. It is noted that Greece’s EU harmonized inflation averaged 3.0 percent in 2004 compared to 2.1 percent in the eurozone and 2.0 percent in the EU-15. It also exceeded the average change in the general price level in the eurozone and the EU-15 last week and is likely to do the same this year. Greek harmonized inflation firmed to 3.5 percent in 2005, widening the gap from average eurozone inflation, which inched up to 2.2 percent. Things got even worse with core inflation, which does not take into account volatile energy and fresh produce prices, since the gap widened to 1.7 percentage points against Greece last year from 1.3 points the year before. Unit labor costs higher Even if productivity gains were taken into account the general picture would not change much. Growth in unit labor costs, which incorporate both nominal wage increase and productivity changes, have outpaced the EU and eurozone average for years. Unit labor costs in the whole Greek economy eased to 2.5 percent in 2005 from 4.0 percent in 2004 and 3.6 percent in 2003 compared to an estimated 1.5 percent in the eurozone in 2005. The increases were much higher in manufacturing and the business sector, comprising banks and state-controlled and private corporations last year. According to the forecast of the Bank of Greece, the country’s central bank, Greek unit labor growth in the entire economy should range between 3.5 and 3.8 percent in 2006 and be even higher in the business sector. Undoubtedly, sticking to a process which sets the minimum wage on the basis of Greek inflation rather than taking into account EU or eurozone inflation would not be wise for both the representatives of employees and the employers alike. Especially when applied to labor intensive sectors of the economy and companies facing stiff competition from abroad. However, one should not generalize that growth in unit labor costs is the sole determinant of inflation and therefore the main villain to be blamed for the continuing loss of international competitiveness. Indirect tax hikes, such as the VAT (valued-added tax) hike last year, the steep rise in the price of oil and other raw materials, the slide of the euro against other major currencies last year also contributed to the spike in Greek inflation. Moreover, it should be pointed out that the calculation of inflation takes into account both the prices of tradeable and non-tradeable goods and services. Data show that the prices of non-tradeables, such as medical services and hospital costs, which are not fully exposed to international competition, rise much faster than the prices of tradeables, pulling Greek inflation to much higher levels than it would have been otherwise. This reflects both an increase in unit labor costs but even more so the oligopolistic structure of certain product markets, which brings to the fore front the issues of liberalization and deregulation. In this respect, Greek-EU inflation rate differential does not provide an accurate picture of the competitiveness of the Greek economy. Nevertheless, non-tradeable goods and services account for about half of the inflation differential and therefore inflation should continues to be regarded as an important determinant of the economy’s international competitiveness. All-in-all, the situation is more complex than it shows. Undoubtedly, bringing down inflation should be a top priority for all social partners if they want to boost employment and preserve jobs in hard-hit industries. Since wage deals help partially determine inflation, showing restraint serves the interests of both sides. So, having both sides – trade unions and employers – agree on a common measure of Greek-EU inflation differential and taking it into account when setting the size of wage increases along with other related factors may be a way out of the currentdead lock.