Saving private wages: heroic act or con trick?

Illustration by Manos Symeonakis

If you walk along Adrianou Street, which runs alongside the Acropolis, in Athens you can brighten up your stroll by taking in one of the games of three card monte that often takes place there. It’s entertaining to watch the dealers work with their shills to display wonderful sleight of hand and mesmerizing misdirection as they fool punters. But if confidence tricks are your thing, you might be better off walking a few hundred meters up the road and visiting Parliament because the street hustlers have nothing on Greece’s politicians

Within minutes of PASOK’s George Papandreou, New Democracy’s Antonis Samaras and Popular Orthodox Rally’s  (LAOS) Giorgos Karatzaferis completing their make-or-break talks with Prime Minister Lucas Papademos on Sunday night, statements about battles being fought and rights being salvaged were launched into the Athens night.

Samaras and Karatzaferis led the charge of the white knights who claimed to have ridden to the rescue of the embattled Greek citizen. Their argument was that through “tough negotiations” they had saved, or were on the way to saving, the 13th and 14th monthly salaries in the private sector. Papandreou, whose credibility has already been shot to pieces, maintained a lower profile, while Papademos – to his credit – refrained altogether from engaging in this poppycock.

In the more sobering light of a wintry Athens morning and if reports are accurate, claims that red lines were drawn and wages ringfenced are worth no more than claims by card dealers on Adrianou that their games are not rigged.

While the leaders of Greece’s three coalition parties did not agree to the scrapping of 13th and 14th monthly salaries in the private sector, it seems they did accept a substantial reduction to the minimum wage. According to reports, the minimum wage – which currently stands at 751 euros per month (gross) – is to be slashed by 20 to 22 percent.

The first thing to note is that this will lead to the minimum wage dropping to between 585 and 600 euros per month before tax, meaning that someone in work could be earning as little as 470 euros per month after tax. In cities like Athens and Thessaloniki, unless there is a shift in the cost of living, it’s highly questionable whether these will even be subsistence wages.

Beyond that, the reduction would mean that the minimum wage will drop close to the level of the monthly unemployment benefit of 461 euros that Greeks receive for the first year they are out of work. This means unemployment pay will also have to be reduced; otherwise there will be no incentive for those out of work to take jobs on or just above minimum pay. Some reports have suggested it will fall to 369 euros.

Then, there’s the issue of pensions. A downward shift in salary levels means that social security contributions will also decline and there’s little doubt that pension payments will also have to be adjusted to sustainable levels.

However, perhaps we could excuse all this for the sake of snatching those 13th and 14th monthly salaries from the jaws of the troika.  The fact they are paid in Easter, summer and Christmas does not make them holiday bonuses: these are about 15 percent of regular private sector salaries. So, surely safeguarding this chunk of Greeks’ wages and therefore preventing further damage to aggregate demand and exacerbating the recession is a true victory?

Here’s the problem, though. Private sector wages are regulated by the national collective contract agreed by labor unions and employers, or by sector-specific deals negotiated in the same way. Apart from the fact that the minimum wage provides the basis for the pay structure in these contracts (if the base drops by 20 percent, it stands to reason that everything else will drop by 20 percent as well), the deals remain in force even after they expire (metenergeia (continued effect) in Greek). So, if employers and unions fail to agree a new contract within six months of the previous one running out, the terms of the expired deal continue to apply.

What the party leaders are about to sign up to – again, if reports are correct – is the substantial reduction of the minimum wage and the abolition of the principle of metenergeia, or nachwirkung as its known in German law. In other words, if employers and unions manage to agree on new collective contracts, the baseline will be 20 percent lower than before, thereby affecting all the wage brackets above it. If the two sides don’t agree on new deals, employers will be free to negotiate individual deals with their employees. The basis for these agreements? The new, 20-percent-reduced, minimum wage.

While some of the political leaders will proclaim their role as saviors of Greeks’ hard-earned crusts by protecting the 13th and 14th salaries, it seems that all they have managed to achieve is swap a 15 percent reduction, which would have occurred if those monthly wages were lost, with a 20 percent one that will come with the slashing of the minimum wage and the terms under which collective contracts apply. Rather than two monthly salaries, Greek private sector workers are set to lose three.

The fact that some people are portraying this as a victory for their negotiating technique means that either they are woefully misinformed or, as is more likely, they are being intentionally duplicitous.

It’s too late for Greeks to do anything about this now. They are bound to pay for quite some time for the mistakes that they and the politicians they elected have made. The only thing they can do is make a mental record of the deception and recall that moment from the memory banks when they walk into voting booths at the next elections.

It was interesting, therefore, that Papandreou and Karatzaferis should both suggest that the term of Papademos’s administration, scheduled to end in April, might be extended even until 2013. After all, who out of the current crop of politicians would want to put themselves before the Greek public in the wake of such a cheap case of misdirection? Denying the public the chance to express its opinion on recent events would really complete the confidence trick.

Nick Malkoutzis

8 responses to “Saving private wages: heroic act or con trick?

  1. Great post Nick. I am not sure I understand the exact legal/market mechanism that would reduce overall wages (if one exists), but I certainly agree we will see a gradual reduction in the overall wage bill. And it definitely is a con job to portray any of this as a victory. But that’s because people here have a psychological attachment to the “dora” and don’t see tnem as annual wage installments redivided. If you have managed a payroll here, as I have, its clear that the bottom line wage bill matters, not how its paid out. I do wonder, however, if there are substantial administrative savings avaialable to the Greek government by realigning the wage payment system into 12 installemnts without direct pay cuts. I think the IMF has proposed this in other countries, for just that reason.

    • I don’t see any problem with including them in the 12 monthly installments if you do it in a transparent way. The fear at the moment is that the switchover would lead to “collateral damage” to people’s wages. They used to have 14 salaries in Germany and switched to 12 as well. It can be done pretty simply.

  2. “further damage to aggregate demand”

    You can’t be serious? The Greek current account is still deep in deficit, the debt/GDP ratio is approaching 160 percent and the economy remain largely uncompetitive. The Keynesian approach of stimulating demand will not work under these circumstances and especially not for an economy like Greece where there’s little domestic production. In fact, a stimulus would just boost imports to even greater unsustainable levels. And it’s utterly absurd to believe that the current account deficit (i.e. Greek imports) can be financed much longer by other countries.

    if Greece wants to remain part of the euro zone, lowering salaries might even be a good thing. Especially when the willingness to reform is so limited. It might hurt to begin with, but it will increase Greece’s competitiveness and perhaps be a first step in the return to economic growth.

    • Glad to see that someone else is mindful of what I consider the greatest problem of the Greek economy – the enormous structural current account deficit which will require ongoing capital imports in order to sustain the standard of living, or else…

      http://klauskastner.blogspot.com/2011/12/finally-importance-of-current-account.html

    • Thanks for your contribution, Anders. I certainly would not advocate stimulating demand to maintain the current account deficit where it is. On several occasions, I’ve written about the failure to address this issue. Also, if we set macroeconomic theory aside (I’m sure there are other people who could argue either way much more eloquently than I could), there is a n issue of common sense here.
      The Greek program has two aspects: structural reforms and austerity measures. On structural reforms, Greece has been far too slow. Despite having the public’s backing, the government has dragged its feet over changes to public administration and wider public sector. There have been some mitigating factors (after all, who will buy loss-making public companies in a country whose future is unclear) but the failure to get to grips with inefficiencies and unbearable costs has been inexcusable.
      On the second plank of the program, the austerity has simply not worked. Greece has been through three full years of deep recession (more than the US in the Great Depression) and money is still being taken out of the economy at an alarming rate. This means there is no investment that would allow an economic shift towards production and exports. The idea that wages can be cut and suddenly this will have a positive impact is wisful thinking when the economy is in such a downward slide. Wages have been falling consistently for the last two years. What major benefits have resulted from this?
      Meanwhile, a cut to wages will mean lower tax revenues and social security contributions. In fact, a 20% reduction to the minimum wage will lead to Greece having to find another €3.7 billion in savings. That’s almost 2% of GDP. Where is that going to come from?
      Here’s a scenario for you. The troika and Greece will agree the current package and in a few months time, the EU and IMF will come back and say that the fiscal targets will be missed so more cuts have to be made. In the meantime, unemployment will rise, more businesses will close and revenues will dry up. The new cuts will hit pensions, etc again, and the fiscal hamster wheel will turn again.
      I have yet to be convinced this is not a dead-end process.

  3. Great blog. You didn’t write about this in your last post but I’m curious: do you think PASOK can recover from their low poll numbers if ND forces a new election this year? one article I read suggested they would get around 8% if the vote was today. incredible! will syriza or synapsismos pick up the extra votes? i also saw golden dawn is polling at around 3%….very scary. does this mean the election is in the bag for ND?

    any answers you can give would be very much appreciated! thanks…

    • Thanks Nick. ND will poll first in the election but won’t have an outright majority. A “grand coalition” with PASOK, which will probably be lead by Venizelos, is possible but at its current levels, PASOK won’t have enough seats in Parliament to produce a majority with ND. Democratic Left in particular is on the left. It fills the gap for those who can’t countenance support PASOK and who feel SYRIZA goes to far with its rhetoric. But, again, the problem is who do they work with? A leftist alliance is out of the question, coalition with ND unlikely and partnering with PASOK will not be enough.
      Politically, things are as unclear and confusing as ever. But this is a period of political transition for Greece and it will take some time for pieces to fall into their places.

  4. Prejudice against Greece has taken on grotesque proportions. Seriously, the Greeks work harder than anyone else — stop blaming them!

    Written by Ingeborg Beugel for NRC Handelsblad, translation by Jérôme Roos

    There’s only one word that adequately describes the majority of Dutch media reports on Greece right now: a witch hunt. Of all the arrogant stupidity, full of gut feelings of Dutch superiority, De Telegraaf takes the cake. ”Boom, kick them out of the eurozone. Our citizens no longer want to pay for these wasteful Greeks,” was this newspaper’s headline on May 19, following the results of a Telegraaf survey of over 11,000 participants. Or what about the following headline, on May 13th: “Again, billions of euros thrown into a bottomless pit.” Apparently this kind of nonsense works. By now, 58 percent of Dutch people are opposed to ‘giving’ even a penny to Greece.

    http://www.mrwonkish.nl/de-media-griekenland-als-zondebok

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