10 diciembre 2020

The trap of raises based on inflation, published in El Cronista

Versión en español

A free market economy now has rules that are typical of socialist and interventionist economies (Populism); take for instance the minimum wage, which in Argentina has three bulletproof price floors below which workers may not sell their labor.

Article by Julián A. de Diego published in El Cronista on December 7, 2020

As a matter of fact, they are the Adjustable Minimum Living Wage, the base salary for categories under collective bargaining agreements, and the salary agreed under individual employment contracts. These three floors cannot be waived or changed to the detriment of workers (Section 12 of the Employment Contract Act).

First, there is the minimum wage, which is supposed to cover essential needs; second there is the minimum admissible wage for workers in an industrial sector, art, craft, trade or profession; and third there is the salary agreed by the parties freely above the first two floors.

Unions’ only motivation to get better income has failed miserably when they link wages for categories under collective bargaining agreements to inflation rate based on the Consumer Price Index. Evidence shows INDEC indices are rough approximations based on indicators that cause distortions.

We have reached a point of incoherence where those who barely exceeds the price of the Market Basket of consumer goods and services pay Income Tax, with the respective withholdings; a gross salary that is above the poverty line, when it is netted out, it falls into poverty, which today affects more than half of Argentine population.

However, in a dual-income household, a family can exceed 25% of the market basket in average. We are subject to the tyranny of what the INDEC reports, and use the CPI to measure whether or not our wages are enough.

In countries with low inflation, zero inflation, and even deflation, collective bargaining agreements and wages for each activity do not increase or decline according to a non-existent factor; rather they rely on other two fundamental historical factors: business profitability and enhanced productivity, to which we must add the across-the-board effect of new technologies today.

None of these components are part of the measurements, estimates or expectations when the parties negotiate activity-wide collective agreements.

In an era like the one we are living in 2020, we must take into account the economic factors that are linked to the market, the impact of the lockdown that has paralyzed our economy since March 20, 2020 and that still affects many activities, although we have now entered the phase of Social Distancing.

Going back to the issue of collective bargaining and salary floors, inflation hikes only maintain the purchasing power of the currency, which, as we have already said, is theoretical and approximate.

The emergence of remote work arrangements has also affected work in relation to the time worked or working hours, performance based on results. Strictly speaking, the longer the time computed, the greater the distortion.

If we take the microeconomic model of collective bargaining in an economy without inflation, i.e. the central European countries, wages under collective agreements are a minimum amount for reference and any increase comes from variable pay for productivity based on the policies implemented by each company.

In the microeconomic model of a negotiation in an economy with inflation, collective agreements struggle to maintain the purchasing power of the currency that has lost value, while variable pay has nothing to do with inflation and comes from the plans and programs implemented by each company. It is a race between prices and wages, and vice versa.

We will not be free from the inflation trap if we continue to nurture a system that contributes to it, and that adds to other factors to promote it.

This offers three alternatives.

First, the possibility of changing the law while observing certain parameters under collective bargaining agreements. This mechanism is called “disponibilidad colectiva”, which already exists under the Employment Contract Act, and is partly contained in Act 27555 on Remote Work.

Second, the possibility of using company-wide collective bargaining agreements to ignore base wages under collective agreements and implement mechanisms where productivity and company results are a priority and a common goal for employers and workers alike. In these cases, lower-level agreements prevail over higher-level agreements.

Third, the possibility of including a provision whereby the base salary under collective agreement is a step above the Adjustable Minimum Living Wage, but the variable pay agreed collectively or at the Employer’s discretion includes the final gross amount to all legal intents and purposes. So items under collective bargaining agreements are now part of variable pay, always increased amounts.

These mechanisms include an eventual promotional hiring formula (without severance pay) to mitigate the emergency and reduce costs without affecting income, for a minimum period of six months, without employees’ or employers’ contributions, for a predetermined period and the commitment that if the contract continues a novation contract occurs upon expiration and it is automatically transformed into a contract for an indefinite period of time, with an additional incentive, for example, no employers’ contributions for at least twelve additional months. This mechanism can only be used to create new jobs.

A ban on layoffs was imposed to deal with the crisis, and to overcome it, the adequate tools should be created focusing on job creation and the revival of companies that have been devastated by the economy deeply hit by the pandemic.

Por Julián A. de Diego
Por Julián A. de Diego

Fundador y Titular del estudio “de Diego & Asociados”.  Abogado, Doctor en Ciencias Jurídicas.