The Council of General Economists (CGE) calculates that companies will maintain their profit margins (the ability to convert money from sales into profits) with average wage growth of 12.8% from 2021 to 2024. Although under the same model, wages would have had to increase by 19.2% over those four years to compensate workers for the damage caused by inflation.
For a typical company, CGE’s theoretical exercise and assuming 0.7% growth in 2021 would not hurt profits by 4% in wages in 2022, 5% in 2023 and 3% in 2024. companies. This calculation recognizes that corporate profits improve with inflation due to the ability of some sectors to pass on cost increases (energy, raw materials, intermediate goods…) to sales prices.
The same conclusion was recently confirmed by the Bank of Spain in its latest sample of quarterly balance sheets (which collects data from 920 non-financial companies). The institute confirmed that in the first half of 2022, “the company’s turnover increased at a very high rate, reflecting both the recovery of activity and the increase in sales prices.” And that this evolution has “translated into improved profitability for companies”.
That is, turnover has increased in recent months due to inflation and continues to increase. The ability to convert gross revenue after meeting expenses has been maintained or improved in most business sectors. So much so that “despite the marked increase in production costs, the business surplus [los beneficios] They expanded at a high pace and levels were already registered that were very similar to or slightly higher than those before the COVID-19 crisis,” the Bank of Spain said.
The wages agreed in the revised collective agreements increased by only 2.6% this year. With the aggravating circumstance that 20% fewer contracts will be renewed in 2022 than in 2019, employers are refusing to sign up to CPI-linked wage increases, as demanded by unions to prevent a loss of purchasing power.
The “negotiating group” presented by the CGE this Wednesday, with representatives of the companies, also included a proposal for an “income agreement”, as can be seen in the last lines of the graph. This “pact” is defined as an agreement to share the shock of inflation. The proposal of this group of experts is a 6.4% wage increase between 2021 and 2024.
A framework that would stay on top of the 9.5% increase over three years signed by the government with officials, and which contrasts with the 13% “without damaged margins” calculation revealed in the same presentation.
No control over profit margin
What is indisputable is that there were differences in the numbers of companies coming out of the CGE Act. Jesús Soto, CFO of Grupo Dia, explained that “we are negotiating a collective agreement with the unions”; And admitted that “there is high pressure to increase wages.” Although “you have to understand that the situation of the company is difficult”, he continued.
“We have to admit that the reduction in purchasing power is very significant, with some families suffering a 25% loss in addition to inflation and mortgage growth,” laments Alfonso Porro, president of the Catalan Aggregates Guild. Instead, CGE economists maintained that “business margins are not at a high level compared to 2019 levels.”
“Business investments have stagnated in recent years, and investments will depend on profitability,” they argue. “Companies’ margins have already shrunk, we are at survival level,” they added. “And from there the negotiations should start,” they continued.
In the revenue agreement proposal, they do not include measures to guarantee a reduction in profit margins. “The market is going to organize itself, through pure competition,” they trusted. “I’m afraid according to the concepts at the edge of the margins, eventually companies want to grow and create employment,” specifically Alfonso Porro said.
This debate has paralyzed Vice President Yolanda Díaz’s proposal to limit food prices in supermarkets, even though the basket of basic products has not stopped growing. The food component of the CPI (Consumer Price Index) accelerated by 15% in October compared to the same month in 2021.
At the same time, the same indicator reflects the effectiveness of hats. The energy component in our country increased to 53.6% in March compared to September 2021 (as the reporting month of the beginning of the energy crisis). This peak was the result of the most severe disruption of the oil and gas market due to the Russian invasion of Ukraine. And it happened again in August.
Prices for these and other important raw materials for industry and agriculture have been rising since last summer due to geopolitical tensions and imbalances caused by the pandemic itself. They have not given up since March. They have only been eased in recent months by the government’s shock measures, such as electricity tax cuts, fuel discounts and, above all, gas restrictions.
Other executive branch measures included extraordinary levies on banks and energy companies. However, they are in the parliament and are softening. In the case of a tax on the profits of financial institutions, he received a refusal from the European Central Bank (ECB). Targeted for electric, gas or oil companies, the companies’ regulated and international businesses were exempted from taxation in Congress this Thursday.
Employers vs. wage revision clauses
Finally, employers also struggle with salary review clauses. This type of guarantee of restoration of purchasing power at the end of the period may be agreed in contracts or wage increase agreements and may or may not refer to the CPI.
“The unions have introduced the requirement of discussion points and it is very difficult to plan with these points,” emphasized the president of the Catalan Aggregates Guild. There will be some struggle, but agreements will be reached without too much conflict,” he concluded.
Both consumption and employment data confirm that activity in Spain is holding up despite slowing recovery due to international uncertainty, inflation and the ECB interest rate hike. But unions and many experts are calling for a wage deal that prevents choking families and economic growth.
A big barrier to this price crisis is the labor market due to labor reform. Although the number of unemployed is still approaching 3 million, the International Monetary Fund pegs the unemployment rate at 12.6% in 2023. The government is talking about 21 million employees and that the unemployment rate will drop to an average of 12.2%. next year. It is also very relevant that temporary employment has dropped to a minimum after the labor reform.
“A good note on the unemployment rate, which should not be missed, because it is known: for the first time in more than four decades, a severe crisis did not lead to the destruction of employment”, note the economists who sign the latest Fedea. Economic Observatory.
Source: El Diario