Caution: Falling wages

Illustration by Manos Symeonakis

So this is what it’s come down to. The negotiations over wages in Greece due to take place over the next few days will be a defining moment of this crisis, not because a reduction in the minimum wage or cuts to private sector salaries will make a huge difference to the economy but because it is a test of whether those involved in the process – labor unions, employers, the government and the troika – are prepared to face the truth. It is test of whether someone is willing or able to step forward with some kind of coherent plan.

It doesn’t take long to think of several good reasons why reducing private sector wages during a deep recession seems a suicidal idea. They include the fact that it would further undermine withering domestic demand and likely precipitate the closure of more businesses on top of the 38,000 that have shut down over the last two years. The more fiscally minded might point out that lower wages means lower tax revenues, which has a heightened relevance at the moment given that recent figures showed Greece raised 50 billion euros in revenues in 2011 compared to 50.8 in 2010 despite imposing a raft of new taxes.

Also, the troika-inspired austerity measures and Greece’s ham-fisted handling of the crisis have done a good job of shrinking the Greek economy over the last couple of years, making the country’s external debt grow in comparison. A wage reduction would perpetuate this cycle.

However, proponents of wage cuts argue that a reduction in labor costs would help make Greek exports more attractive and profitable while helping draw investment to Greece. Through this prism, revenues would flow into the country, production would take off, jobs would be created and the state of public finances would improve.

It sounds idyllic but it’s based on the principle of everything else being equal. In Greece’s case, everything else is very much unequal.

Those who repeat the greater-competitiveness-through-lower-wages mantra focus on the country’s unit labor costs, which is the average cost of labor per unit of output. In its simplest terms, this theory argues that the cheaper your goods and services are to produce, the more competitive you will be. In Greece, unit labor costs rose for most of the previous decade. Although labor productivity grew as well – often outpacing the eurozone average – some Greek products and services were priced out of the market.

However, using just unit labor costs (ULCs) as our guide to Greek competitiveness, progress should have been made over the last two years as ULCs have been dropping dramatically – quarter after quarter – since the beginning of 2010. This is a reflection, in part, of the wage cuts that have already taken place in the private sector and the downsizing at thousands of businesses.

This suggests that those arguing for wage cuts are either unaware or choose to ignore what is actually going on in Greece’s private sector. They forget, for instance, that the government passed a law last year allowing companies to set aside the collective labor contracts and negotiate with their employees individually or in-house pay deals lasting up to three years. Many companies have availed themselves of this reform to reduce their workers’ salaries over the past few months. Wage cuts of 10 to 20 percent in the private sector have been the norm.

The only guide for these companies is that pay should not fall below the minimum wage of 751 euros (gross) per month and that full-time employees should have their wages split into 14 monthly payments. However, both of these rights are now on the chopping block despite Greece’s minimum wage being one of the lowest in the eurozone and its average annual salary (17,500 euros gross) being at the bottom end of the countries in Organization for Economic Cooperation and Development (OECD). The OECD also estimates that social security contributions account for almost 35 percent of the labor cost in Greece. This is roughly double the rate for the UK, three times the Danish percentage and a little higher than in Germany.

That’s why labor unions and some employers have suggested that labor costs should be brought down through a reduction to social security contributions. This is not an ideal solution either as social security funds also have serious financial problems, which will be exacerbated when the Greek bonds they hold suffer the haircut agreed as part of the Private Sector Involvement (PSI) deal needed to secure Greece’s next bailout.

However, unions are adamant that a wage freeze for the next few years and reductions to social security contributions are the only concessions they will make. They argue that even on issues such as the minimum wage, which unions are flatly refusing to negotiate, compromises have been made. Legislation passed last year allows employers to pay workers under 25 years of age 84 percent of the national minimum wage. This means young people can be paid salaries starting at 592 euros a month.

These facts seem to have eluded those who argue that lower wages would act as an incentive to Greek businesses to hire people. Were this the case, surely firms would be snapping up young, able, educated Greeks for the bargain price of less than 600 euros per month. Instead, youth unemployment has passed the 40 percent-mark.

The reason these salary reforms did not have a discernable impact is that Greece will not find the growth, jobs and competitiveness it seeks at the bottom of the wage barrel. Just as proponents of lower wages take little notice of the realities of the Greek private sector, so they disregard the way the Greek economy is structured and what’s really holding competitiveness back.

There is no doubt that Greek wages have risen over the past decade and that this has played a part in eroding competitiveness. In an experience shared by other eurozone periphery countries, euro membership sparked a drive to catch up with salaries and living standards in core members. This meant that between 2001 and 2009, real wages per employee increased by 26 percent whereas labour productivity went up by 22 percent, according to Eurostat figures. As a result, nominal unit labour costs in Greece compared to 35 of its trading partners went up 20 percent.

However, unit labor costs only tell part of the story because comparing Greek ULCs against Germany, for example, serves little purpose given that the two countries are not direct competitors. Germany does not compete with Greece in its major industry – tourism – and Greece cannot compete with Germany in, say, car manufacturing. When compared with its direct competitors, Greece’s loss of competitiveness as a result of wage rises is actually fairly low. A study conducted by Eurobank EFG’s research unit in 2010 found that when measured against its six major competitors in tourism, wage competitiveness in Greece’s service sector declined by only 5 percent since 2000, compared to a deterioration of 19 percent when compared against Greece’s 12 major trading partners in manufacturing goods.

The Eurobank team made another interesting discovery, which was that the loss of competitiveness was greatest in industry and agriculture but not solely as a result of wage increases. They found that when the evolution of prices and unit labour costs in the industrial sector were compared, it suggested that Greek industries – taking advantage of the fact that oligopolies dominate a number of markets – had increased their profit margins by 4 percent since 2000, as prices of their goods had increase by 24 percent and wages by 20 percent. In the meantime, industrial profit margins in Greece’s main trading partners had fallen by 16 percent.

During the same period, prices for Greece’s agricultural products rose by 30 percent relative to the country’s 12 major trading partners. European Union subsidies and pampering from successive governments fuelled a dramatic drop in productivity and competitiveness in this sector.

It is also worth noting that – paradoxically – the crisis has to some extent helped Greek competitiveness. About half of the country’s exports and its tourism services are provided to customers outside the eurozone. The fact that the euro has descended to an 18-month low against the US dollar has helped Greece’s price competitiveness.

When Prime Minister Lucas Papademos broached the subject with unions and employers earlier this month, he was careful to identify wages as just one of several factors that define Greece’s competitiveness. Others included corruption, a fair tax system and the inefficiencies of the country’s public administration and justice system. Even this does not tell the whole story.

It does not begin to explain the insularism and amateurism of much of Greek business and what part this has played in undermining competitiveness. For instance, the European Commission’s 2011 Innovation Union Competitiveness Report found that Greek private sector investment in research and development and innovation was one of the lowest in the eurozone. It also highlighted that despite having a growing number of researchers and doctoral graduates, Greece only employs 4.2 researchers per thousand, compared to the EU average of 6.3.

The areas of the Greek economy that displayed growth over the last decade were services (mainly tourism and shipping) and some low-tech production. Greece is paying the price for failing to organize its production and invest in the future of its economy. Innovation and entrepreneurship were shunned in favor of the fast, or borrowed, buck. Only 22 percent of Greek businesses innovate, while only 45 percent of the country’s largest corporations export, according to the Foundation for Economic and Industrial Research (IOBE), an economic think-tank. Too often, Greek business was unable to envisage tomorrow’s world and discover profitable forms of production or unearth promising synergies with other local producers. It was every man for himself but in the end we all fell down.

But then again, who would be a producer in Greece? Why put up with an obstructive public administration when you can have a much smoother ride elsewhere? No amount of wage cuts can make up for the fact that doing business in Greece is an inexcusably hard task. As long as this remains the case, Greece will not be able to establish a production base or generate the kind of investment that would make it competitive. The World Economic Forum’s 2011-2012 Global Competitiveness Report (which ranks Greece 90th out of 139 countries) found that the biggest obstacle to doing business in Greece is the inefficient government bureaucracy. Just over one in five respondents identified this as the biggest problem, while 11.8 percent cited tax regulations as an obstacle.

In both cases, the state’s failure to address its own weaknesses has acted as a disincentive to business and dealt a blow to the country’s competitiveness. The World Bank’s 2012 Doing Business Report ranks Greece as 100th out of 183 countries in terms of ease of doing business. Despite reforms to speed up the process of starting a business, Greece still performs poorly. It also loses marks for the lengthy and complicated processes involved in getting electricity and registering property. Meanwhile, attempts to open up closed professions, where newcomers face inexplicable barriers to entry, have dragged on interminably. For example, almost two years after the process began, road haulage and taxis, have yet to be fully liberalized. The lack of genuine competition can be nothing but a barrier to greater productivity and competitiveness.

What really lies behind Greece’s lack of competitiveness is partly a failure of its private sector but mostly a dereliction of responsibility on the part of its public sector. So, in effect, what Papademos is proposing is that private sector workers make sacrifices to account for the government’s inability to address public administration shortcomings. This would be galling at the best of times but the fact that it comes on the back of two years during which these same private sector workers have been paying – either through job losses or higher taxes – for public sector deficiencies and decision makers’ failure to address them is potentially inflammatory.

The government has threatened to pass a law reducing the minimum wage and private sector salaries if the unions and employers fail to reach an agreement or if the deal is not the one policymakers are looking for. This would compound the clumsy handling of the issue and would be a red rag to an already enraged sector of society. In Greece, unions and employers have only had the freedom to negotiate collective contracts since the early 1990s, before which the government set wages. To undermine them now would take Greece much further back than just a couple of decades.

If the government or the troika wants to talk about wages and competitiveness, fine, let’s talk about it. But they’d also better talk about exactly how much they think wages should be reduced to increase competitiveness. And they’d better have a realistic plan for how this will contribute to growth and job creation in Greece. The onus is also on them to define competitiveness – for example, compared to whom and in which sectors? Also, if we’re going to talk about wages, let’s also talk about production, profit margins, innovation, social security contributions, public administration and economic policy because that is where the key to Greek competitiveness really lies.

If labor rights and wages, which have been repeatedly eroded for the past two years, are to be compromised further then it had better be for something more than a gesture. Anything less than a coherent, substantiated plan will stink of an attempt to disperse the responsibility for failure to tackle this crisis among as many people as possible. Without a clear vision of how lower wages would help Greece and improve the lot of its citizens, this move would simply be collective punishment for an unidentified crime.

Nick Malkoutzis

12 responses to “Caution: Falling wages

  1. Let me make the following, unorthodox point: with such a large part of the Greek economy not flowing through official books and statistics, is it really smart to completely rely on statistics for policy decisions? If the basis is wrong, any actions based on that basis will be wrong, too!

    Let’s take the example of “Euros under matrasses”. That could theoretically be a zero amount (in which case statistics would be a better base for decision-making). Or it could be a huge amount, in which case one should forget any official statistics.

    Another example would be the scheme of post-dated checks. If the amounts involved were zero, no problem. If they amounted to large sums (which they probably do), they could be game changers. And so forth.

    This is why I have tirelessly promoted a trial-and-error strategy: try something and if it works, do more of it. If it doesn’t work, try something else.

    My favorite example is to establish Special Economic Zones where you let free market forces play to the tilt. If you don’t trust SEZs, just start with a very small one and see how it works out. If you make only 0,01% of the Greek territory an SEZ, the risk of negative repercussions on the entire country can’t be all that great.

    In such an SEZ, you simply ask investors what they would like to have — and you give it to them. And then you wait to see whether investors come and create new jobs; whether the new jobs pay income taxes; whether the new businesses pay corporate taxes; whether the owners of the new businesses pay taxes on dividends; etc., etc.

    If that works well for individuals, for communities and for the country on a miniature scale, you won’t have to make plans to expand the concept. People will be screaming to have it expanded.

    My personal impression of the Greek psyche is that Greeks tend to be resisting to anyone telling them what to do (particularly if it is a foreigner who is doing the telling). At the same time, I have seen Greeks extremely swift at picking up things from others if they see a benefit in that.

    If a small SEZ works well for all parties involved, I think there would be a lot of SEZs very quickly. And who knows, if the SEZs work really well, maybe the whole country will be an SEZ within one generation…

  2. Glad to see that you are still on the job when most of your colleagues are striking. Although, I must say, it were two very relaxing days without news…
    Think you are spot on with this analysis about the causes of the decline of competitiveness of Greece and what should be tackled.
    Alas, we closed our business as of January 2012 and have opened it in another EU-country. Thing are going great. But we can not see any light at the end of the tunnel here in Greece. So we will be doing what we successfully started, but from abroad.
    And yes, I will keep on following your more than interesting blog…

    • Anton, it was great to hear from you. I am sorry to hear that things have not worked out here. You are in the same boat as thousands of others. These are such tough circumstances. Does this mean you are leaving Greece?

  3. Interesting and quite thought provoking piece and much of it is quite familiar, maybe from the Eurobank study itself which was widely quoted or might it be similar to other things you have published? You have basically listed most of the impediments to improving Greece’s competitiveness and covered some extensively. Seems to me you needed to put much more emphasis on public administration shortcomings which feed back into almost everything else. I am extremely sorry to say it is only Troika pressure and not Greek citizens’ demands that drives change here. My view is that the Indignados at Syntagma this summer missed this point by a million miles. I hope you can keep on hitting it, otherwise the concept will not be adequately appreciated. Until the public sector begins performing its designated functions somewhere close to the EU average level, and things begin to work at reasonable price and efficiency levels, the world is telling Greece,that competition on the basis of the price of Greek labor is the primary lever Greece has. It is going to be up to Greece to prove (not through rebranding, through reform) that it might someday be considered ready for prime time.

  4. Alec, d’accord as regards the public sector but I would need some education regarding the private sector. I remember the 1960s/70s, the age of the guest-workers in Central Europe. I would venture to say that Greek guest-workers probably had the best reputation of all (the singer Udo Juergens composed a Hymn to the Greek Guest-Worker). Now these were people who probably didn’t know a word of German when they came. To what extent they were educated and skilled I don’t know.

    And yet: they became important contributors to the German economy and through hard work and clean (and very, very cheap!) living, they could sent lots of money back home.

    Here is my question: if Greeks could do that in Germany, why can the Greek economy not be structured in such a way that they can do this at home? That way, the money would already be in Greece…

  5. Klaus, Interesting question. There is no reason I see other than bad policy/inertia on the part of successive Greek governments combined with a catastrophic failure to prioritize the most important part of the EMU arrangement – that is REAL CONVERGENCE of institutions, not just monetary (and theoretically fiscal) policy convergence.

    As far as the Greek worker is concerned, I am appalled by the amount of demonization that has gone on. As a manager of Greek staffs of various sizes and structural complexities during my years as a US diplomat here, I can honestly say that Greek workers are among the best I have seen globally. This was of course in the framework of the US State Department’s personnel system, not the world’s best but designed to mix global flexibility with local requirements, which is quite hard. Whether in my capacity as Vice-Consul, Political Officer, Economic Officer or Consul General, I had the chance to work with really top-notch people in all areas that I would gladly try to move to the next posting if it were possible (in some cases a few staffers won the jackpot and went off to help staff our massive new Iraq Embassy for short tours). Our Greek staff routinely got global and regional performance awards. So it comes down to the local labor regulations to generate or destroy performance and productivity incentives. Those entitlements the Troika is looking to adjust are identified as problems not only for the cost implications but for the corrosive effect these regulations have on overall workforce initiative and.performance. Bottom line is that nothing in Greece can’t be fixed,once various groups decide that their “red-line” constructs can be removed and performance/efficiency/enterprise survival are set as the true goals — not job retention. I know that is heresy to some, so be it.

  6. The American bank I was with (never in Greece, though) had 3 branches in Greece until 1986. With some of the then local staff I am still in contact today, 30 years later. I do not recall any incident where there were problems with local staff and with the exception of a couple of token expats at the top, the staff was local. The upper hierarchy were pretty polished and classy people! (made some of our local staff in Germany and Austria look like farmers…). I have heard similar reports from other foreign companies in Greece.

    My take is that it all depends who one works for. At our bank, everyone knew they were working for serious managements and serious owners, so they were serious, too.

  7. Whereas Klaus K makes an interesting point about statistics above, as well as regarding the superior level of many senior executives in Greece (I am in the recruiting business myself) I would like to shed light on the “minimum salary in Greece” conundrum.
    Let’s take the LEGAL some such for a zero experience – straight out of school recruit, university graduate, working at an office presumably with a PC, is Euro: 1170.92 / month or 14,051/ annum. If said employee is married, add Euro: 132 to the above bringing the total to 1302.98 or ~15,636 per annum.
    By comparison the minimum salary in France is ~1365 / month and Euro 1000/ month in Austria — but then, living in Vienna is cheaper than living in Athens.

    In Greece, (complaining) Unions and (self-aggrandising) administrations seem to have a knack of forgetting to specify that 751.40 (or % thereof) constitutes the BASE for calculation. Then, we must add 2.06 extra salaries which come as a “bonus” for Xmas Easter & summer hols, AND, as applicable: marriage bonus 15%, university degree bonus 18%, post-graduate degree bonus, COMPUTER SCREEN bonus 15%.
    Yup, you read right, a bonus for using a “Computer screen” at your job.
    Three years working experience earns you a compulsory +8%.

    Ones pales at the thought of the rightful bonus for the small, eye-trying smart-phone screens!
    Regards Greg.

    • As an Austrian, I caught your side comment that “living in Vienna is cheaper than living in Athens”. Now isn’t that part of today’s problem that Greece – as long as you a in larger cities and/or tourist regions – is really quite expensive when she should actually be very economical (not to use the word “cheap”)? We spend about half the year in Thessaloniki, admittedly in the more well-to-do part of Thessaloniki. There are few things (notable exception: the laiki) which are less expensive there than in Austria and a lot of things which are more expensive. Now let me add this: I spent the last 8 years or so in Munich and compared with Munich, Austria – and particularly Vienna – is quite expensive. And Munich isn’t really considered to be cheap.

      Now, whichever way you slice is, Greece in many areas is still quite expensive and that doesn’t make sense in today’s situation where Greece ought to be very competitive.

      • Klaus, if this problem could be addressed, I think you would find more people willing to accept the idea of lower wages in return for a more competitive and productive economy and greater job security.

  8. “It is going to be up to Greece to prove (not through rebranding, through reform) that it might someday be considered ready for prime time.”

    “As far as the Greek worker is concerned, I am appalled by the amount of demonization that has gone on. As a manager of Greek staffs of various sizes and structural complexities during my years as a US diplomat here, I can honestly say that Greek workers are among the best I have seen globally. ”

    ———

    I want to jump on these 2 particular excerpts from Alec’s comments, excerpts with which I completely agree with, and hijack the discussion in another direction.

    Mr Malkoutzis, your coverage of the crisis, both personally in this blog, and in your twitter account, has been of very high quality. Your newspaper, both in Greek and English, has also done great work.

    But it’s not sufficient, and I am (immodestly🙂 ) suggesting an explanation: this whole time, like the rest of the nation, you have been like “deers caught in a headlight”, stupefied by what was happening. You were looking for leadership where there was none, in the political establishment. It took a speech at a conference about branding to somewhat wake you, and you oriented your efforts towards what was suggested: rebranding. In the desert, Mr. Economides’ voice was heard, it made sense, and you acted on it; your newspaper now reports on some more positive news, including some fascinating business stories, others have launched rebranding efforts,no doubt inspired by the Economides talk. He is basically the only person so far in the country that has on a national scale said: “we can and must take control of some of this, let’s do this, here’s how”, and been heard. That says a lot about the complete lack of leadership in the country.

    Quite frankly, you can and must take it further, much further. Our country is in a dire need of reform, from top to bottom. There are very capable people in the country, but in certain ways, there is a form of “omerta” in Greece that prevents them from expressing themselves. It’s time for yourselves, as Kathimerini, to show leadership.

    Instead of looking for leadership into the political class, or waiting to see what the Troika will tell the country to do, and wondering about things that are out of the population’s control, you should be pointing out what is in our control, what we can change, what we can improve, how we can help each other. This is not a time to be quiet and wait, this is a time to speak up.

    Ask why the administration is dysfunctional, how it can be improved (go service by service, office by office if necessary), what checks and balances were we missing, how can we set them in place, and so on… Let the people speak and say what does not work. There is also a very rich discussion to be had on what is our democracy, and how it got corrupted. What are we missing, what are we not missing? There has to be a discussion on what we want our State to be going forward. Enable it. But please, when you do that, don’t ask the people that put the country in this mess for their input.

    Give a platform to prominent business leaders, academics, etc… They have a story to tell too, heck, they might have ideas worth exploring.

    Similarly, give voice to the Diaspora. There are prominent politicians, businessmen, academics all over the world, in countries with very different systems.They could contribute to a debate on the State, the economy. Some of them know Greece much better than you would think, especially its flaws. Their input is precious.

    Finally, this nation is not any nation, it is the oldest European nation. It was at the forefront of intellectual endeavors for most of its existence, from Ancient Greece to Byzantium, in many ways it was the “leading nation” of the world for a substantial part of its existence. Its rebirth, at the end of the Ottoman Empire was also intellectually very rich and extremely eventful. There is so much that you can discuss from that rich past, and so many lessons to learn. What was the Greek State, from Ancient Greece to Byzantium? How did Greeks think of their State? How did they build their economies? How did they confront economic crises? How did they confront corrupt leaderships? How did they “fix” their societies in situations similar to ours? You can have a similar discussion for other countries as well, with examples from the past as well as contemporary, if relevant. The point is to give references, change this in a didactic opportunity. We need to look inward to move forward.

    This crisis is an opportunity for us as a nation to look into the mirror and ask ourselves who we are and what we want. As far as I am concerned, this is who we are,

    http://news.kathimerini.gr/4dcgi/_w_articles_columns_193_24/01/2012_469946

    http://news.kathimerini.gr/4dcgi/_w_articles_columns_2_24/01/2012_469930

    http://news.kathimerini.gr/4dcgi/_w_articles_columns_2_24/01/2012_469992

    And these are the people that should be able to speak up. Give them the means to do so. The others are simply not worthy of coverage anymore. Enough ink has been wasted on them already! It would be a great sin if all this suffering goes for naught; let the sane people speak!

  9. George, Interesting observations on recent developments, Please take a look at an initiative/site I am working with, Repower Greece, actually in the works before the Economides talk was given. I do think Greek civil society is beginning to attack the lack of progress on reform, not sure if it will succeed.

    http://www.repowergreece.com

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