Inflation is a major tax that weighs particularly heavily on fixed income from employment. Let’s take a bartender and a worker. With the same price increase, the barista can increase his income by increasing the price of coffee, at least partially offsetting the increase in costs. It is more difficult for the employee. Because if everything goes well, employment contracts are renewed every three years (but it often takes longer, so that today over 50% of contracts have expired). Hence the wage emergency against which the CGIL is taking to the streets with a nationwide demonstration on Saturday October 7th.
The true indicator
The true measure of how much people earn is what is known in economics as the real wage, i.e. the wage in relation to prices. According to OECD data, Italy is the country where real wages fell the most last year among major economies. Down 7.3%. The problem is that it rains when it is wet. In the sense that real wages in Italy, again according to the OECD, had already fallen by 2.9% from 1990 to 2020. In short, high inflation caused by the war in Ukraine and the rapid post-Covid recovery is exacerbating a problem we already had. If there are two protagonists in the story up to this point – wages and prices – to understand what is happening we need to introduce a third actor: productivity. Productivity is the amount of product that can be produced in a unit of time. Let’s take two factories that produce identical glasses of the same quality. If in the first case each worker produces two per hour and in the second three per hour, it is clear that the second reality is decidedly more productive. Fewer employees are needed to produce the same amount of glasses. This means you have lower costs and can also afford higher wages.
The nineties: the turning point
Italy’s problem is that our productivity has stopped growing for some time. Precisely since the mid-1990s, and since then it has actually been the case that real wages have stopped growing. From 2000 to 2020, average productivity in Italy increased by 0.33% per year, compared to 1% in Germany and 0.94% in France, according to Eurostat. All of this was a problem before inflation hit, but it’s an even bigger problem now. If productivity increases, wages could be increased, which would at least partially offset the increase in prices, and at the same time the economy would not be in trouble. This last note is fundamental. In fact, wages could rise even without productivity growth. But then a counterproductive price-wage spiral would be set in motion. Let’s go back to the barista in the previous example: if his employee asks for a raise because the basket of goods has increased, then, with the same productivity, the barista could respond by, in turn, increasing the price of the coffee in order to recoup the additional quantity spent. But if everyone behaves like this, all prices will rise. And the employee will ask for a second raise. The usual dog chasing its tail. If productivity were increased instead, paychecks could be increased without having to immediately increase prices. In short, without retaliation against the consumer.
The spiral remains at the box
In reality, there is a standstill in productivity in our country, but the feared wage-price spiral has never begun. This happened largely thanks to a collective bargaining system designed and introduced in 1993 also with the aim of stabilizing prices and avoiding a spiral. As mentioned at the beginning, in Italy contracts are updated every three years if all goes well. And then the negotiations take place at two levels: national and company level. But at the corporate level, negotiations are only practiced by 26% of companies. And then it has to be said that negotiations are generally more difficult in sectors with low productivity. The chemical industry produces wealth, has invested, is at the forefront, and contracts are actually renewed as soon as they expire, and usually with decent increases. The same applies to metalworking. However, limited increases have been recorded in low productivity sectors, particularly services. Just think of supervision, where the nationwide collective agreement was recently renewed and workers earn 5.37 euros per hour, well below the nine euros that the opposition wants as a minimum wage.
A committee at CNEL
Is everything settled then? Not exactly. If the “tax” created by inflation is paid almost entirely by workers, then the entire country has a problem. We must not forget that over 60% of our gross domestic product is linked to the internal consumption of the people living in our territory. When the real value of wages falls so sharply and so quickly, the entire economy suffers. And that is a risk, especially today, because the weakening of domestic consumption cannot be compensated for by an increase in exports, as the German locomotive, with which we are closely linked, is slowing down and the Chinese economy is also faltering. It’s time to focus on productivity. We should have done it sooner, but now we can’t put it off any longer. Since 2016, many EU countries have set up productivity committees following the recommendation of the European Council. Today there are around twenty productivity committees operating in the OECD area. The Cnel is a candidate for Italy to become the headquarters for drawing up proposals. It could be a starting point as long as it is serious.