Saturday, June 13, 2009

The Age Of The Mileurista

I usually read the salmon coloured economic supplement that comes with El País on a Sunday fairly quickly, just skimming to see if there is anything particularly special. This article (entitled Adiós clase media, adiós), published a couple of weeks ago, makes interesting but not very encouraging reading. The article describes how what might be called the Spanish Dream has evolved into a much starker reality where almost 50% of the country’s workforce belongs to that new social category popularly known as the mileuristas, those who earn less than €1000 a month.

As the writer points out, the phenomenon of the mileurista is not just a Spanish issue, it’s something that has emerged in several economies. It forms part of the trend towards greater inequality and insecurity as many well qualified members of the workforce come face to face with a reality that leaves them both poorly rewarded and in permanent fear of not having a job at all. This is not something that is a product of the economic crisis, but the situation as we emerge from that crisis will be even worse if those who enjoy the benefits of it get their way.

One of the most shocking statistics in the paper version of the article came from a table showing the evolution of average salaries in Spain. You would have thought, following several years of economic boom, that at least some of the benefits of that boom would have reached the people who actually do the work. Not so, there was some increase in the average salary between 1995 and 2002 (from €16,416 to €19,808). Since then the average has declined slightly to €19,680 in 2006, even though it would need to be around €24,000 a year if it had kept pace with prices since 1995. Forget the tired mythology of the trickle down effect, if it works at all it goes in the opposite direction. You have to remember that the average salary calculation includes those at the top end who have of course not done quite so badly over the last few years. Then they tell us that the problem is that workers have too many rights in Spain.


Tom said...

Cristiano Ronaldo is to become a mileurista too. €1,000 a minute, apparently. Makes you sick, really, doesn't it?

Troy said...

This is something that has baffled me for a long time. If I convert Pesetas to Euros, I now earn approximately one Euro an hour more now than I did teaching here 10 years ago. How's that for keeping up with inflation!?

True, the cities were different, Guadalajara 10 years ago and Caceres now, but for my wage to have remained so static is really and truly amazing.

Rab said...

To me the “trickle down” effect advocated by the Austrian school of economists is like the “Immaculate Conception” in the Catholic Church: the dogma endures through blind faith rather than any empirical evidence.

In the Scandinavian countries however, they have used tax policy to try managing income distribution, or the Lorenz curve as it is known in the trade. Maybe nations with a Lutheran/Calvinist background are better equipped to deal with the inherent greater income inequality that a free-market economy with free movement of labour entails.

I think the article is a bit defeatist: it argues that the masses left behind by the system will just accept it as they are narcotised by the luxuries of our era: internet, low cost travel, crap TV, etc.

That would be a first: the masses of the XIX and early XX centuries were also said to be “hypnotised” by the relative luxuries they had recently acquired –and still they rebelled and organised to change the system.

I think that sooner or later, as the banking crisis works its way through the economy, and goverments keep pumping money into insolvent and morally "bankrupt" banks, organised political movements will emerge that will seek to change the status quo in a meaningful way. The danger is that instead of a return to the old politics of left/right, something more sinister emerges as the article hints at.

On the Ronaldo transfer: is it being reported by the Spanish press that Ronaldo and Kaka will only pay 25% income tax?
If you are a foreigner moving to Spain for a job, you only pay a maximum of 25% income tax in the first 5 years. Again, the system skewed towards high earners and a Labour government unable to do anything about it. If Zapatero had any balls, they would abolish this loophole for ultra-high salaries with immediate effect and Real Madrid would be left with a huge wage bill for these two...

Rab said...

I think you will like this:

Tom said...

I should perhaps point out that CR will be getting around €1,000 per hour, not per minute. Still sickening, mind.

Andrew said...

Spain's record on productivity has been one of the worst in Europe in recent years. It's manufacturing sector relies, to a considerable extent, on making things that can be made cheaper and better elswhere in the world. It has a highly protected agricultural and afisheries industry. It's recent boom resulted in a 10 year stock of new house.
I love your photos of mountains but your economic analysis is on a par wioth Michael Foot!

Graeme said...

@ Andrew

If you're going to criticise other peoples knowledge of economics then you should at least address the question. None of the claims you make explain why, in the midst of the best years of the boom, the average Spanish salary should decline the way it did. As for Michael Foot, he was a decent representative of an age whose economic performance stands up well against the generally indifferent, and occasionally catastrophic, results of the successor model. If we start talking about those oh so passé concepts of social cohesion and justice then the gap is even clearer. Never mind, I hope to have some nice pics of Heidelberg ready for later in the week.


Bear in mind that Ronnie the dive will spend even more of his time on the ground writhing in mock agony now that he only has to pull the wool over the eyes of Spanish referees. A performance worth every penny.

@Rab - Thanks for the link, I'll give it a listen. You're right about the analysis being pessimistic, and I don't rule out changes from new political movements happening. The problem is that everything seems to have to happen at least twice before we realise what a bad idea it is. I read about a new wave of speculative pressure pushing up food and fuel prices in the midst of a recession, and I see nothing happening at the moment to suggest that we won't get another casino driven crisis just as most people have recovered from the current one.

Rab said...

@Andrew: Agreed, productivity in Spain has been woeful but this is not only in “recent years”.

Neither this government nor the previous government have done anything at all to change the economic model in Spain. This is something that goes back a long time ago, back to the early ‘80s when politicians realised that it was easier to massage GDP numbers and employment figures by outbuilding the rest of Europe.

You criticise Graeme’s economic analysis, but he was not providing any analysis. He is just highlighting a fact: there has been salary deflation at a time with inflation figures (RPI or CPI) and GDP growth have been consistently above 3% for years.

If I had been impacted by it, I too would wonder what the hell has happened.

Politicians say that if they raise salaries, that triggers inflation.
But in Spain there has been inflation anyway whilst salaries kept static.

This has resulted in over-indebted consumers with hardly any disposable income available as everything goes to pay the mortgage. (That is those lucky to hold onto a job and a house).
Not a good recipe for economic, or social, stability.

The evidence from other economies suggests that it is not protected industries or international competition that keeps salaries low. Scandinavian nations are very protective of some of their indigenous industries too and not all of their companies are competitive in world markets, yet they do not seem to have suffered the widening of income distribution that can be seen in Spain.

In my view, there is a key issue that nobody dares to talk as it is taboo.
Given the massive influx of unqualified labour into the Spanish job market, an influx encouraged by current and previous governments, it was inevitable that wages increases would be capped. Employers know that the laws of supply and demand apply to the job market as it does to any other market:
over supply of labour=lower price of labour.
lower price of labour = lower cost = higher profit.

Since private capital ownership in Spain is either wholly institutional for the listed companies or familiar for most SME, the trickle down effect of higher return on capital never reached the masses. Not even the self-employed benefited as they are in effect agency workers without any bargaining power.

A few years ago whilst meeting a Spanish company executive during a work meeting, I dared to ask what turned out to be a silly question:

- What is your company’s approach to training and development of employees?
The man replied:
- We don’t train our employees: it costs money and if they know too much, they would leave for another job or set up their own business.

This was and still is an IBEX35 company.

Politicians and the foreign media talk a lot about making the Spanish job market more flexible –as if it was not flexible enough. But they never talk about employers in Spain being “flexible” when it comes to hiring, training and retaining employees.
And even if this was possible, the trade unions would be the first to oppose it.
And that refractive behaviour between employers and unions, and the inability of any government to do anything about it, is in my view the main cause of the underperformance of the Spanish economy.

And finally, Moody's has downgraded a few financial institutions in Spain, and quite savagely too.

And one of the few who can tell it like it is:
Sunday Herald
@Graeme: it won't take long for the next one.

Andrew said...

At least a debate - though Foot's economics was terrible.
Yes the scandanavian model is worth considering and the Austrian school was otherworldly. However the basic capitalist global model ain't broke and has benefitted large numbers globally whereas the socialist model has impoverished many and polluted widely.
Rab demonstrates the problem of attitude of Spanish senior management. And I didn't even go into the public sector. Corruption et al.

Look at the make up of the IBEX35 over the last 20 years and, apart from Iberdrola, you will see Spain's underlying problems.

Western European countries with poor education and training cultures will be in long term decline interrupted by financial services, construction or internet booms.

As for the wages question, this is not a phenonem unique to Spain. Real wages fell in recent years in Germany, blue collar workers in the US are no better off than they were 30 years ago. BUT a lot of chinese, indian, korean etc. workers are a lot better off.

Is that a bad thing?

Graeme said...

Andrew, if it was the case that the decline in the average salary was equivalent to a corresponding decline in overall national wealth you might possibly have a case for arguing that there has been some kind of wealth transfer to countries like China or India. It's not the case - we're talking about a period when Spain has become significantly wealthier, yet salaries have not benefitted from this.

Your description of the speculative booms just being the preserve of a few badly run countries simply doesn't match the reality of the current crisis - which incidentally is far from being a Western European affair. Indeed, some of those countries who did most to follow the dogmas of neo liberal economics are amongst those worst hit - Eastern Europe.

Meanwhile the success of some Asian countries has more to do with them ignoring the advice of the West, levels of state intervention which the West has probably not even seen in wartime coupled with protection of domestic industry are both important factors.

Finally, your assertion that capitalism does not pollute will come as a great comfort to those around the world who live surrounded by toxic sludge.

Andrew said...

I did NOT state that capitalism does not pollute but I assert that other economic models pollute more.Though a contributory causal factor may be the political system. Anyone who visit east european countries shortly after the collapse of the Berlin war will understand my point.

Rab's point about the scandanavian model is that it is possible to have a capitalist model in tandem with good social support systems, a minimum of wage disaparity and a reasonable control over corruption and polution. Interestingly scandanavian countries tend to top leagues on education provision.

Protection doesn't work long term but is a justifiable policy for new industries. Remember Spain's economic success before democracy??
Opening the Spanish economy has done wonders - but it is time to start on the next stage.

As presently structure one could argue that wage levels in Spain are still too high - as Rab says. Unemployment going towards 20% says something.

Anyway thankyou to yourself and Rab for stimulating an OAP!

Tom said...


Rab said...

@Andrew: there is nothing about “Spanish economic success before democracy”. The success you mention was the foundations of the current model: tourism and construction. Just the mild opening of a previously closed, underdeveloped and pre-industrial (for the most part) economy. We should not be fooled by GDP growth at times of high inflation in pre-industrial economies.

I am afraid I don't agree with the causal link that because inflation is high, wages should come down. I will leave that battle for the CEOE (Spanish CBI) to fight. This is what the Austrian school would say but, again, they may be wrong, particularly in the case of Spain.

If there is any kind of wholesale wage deflation in Spain, even something minor around the 5-10% levels, it will only compound the problem: over-indebted consumers will see how their disposable income falls in nominal terms, which means less money to pay the mortgage or spend on something else. It is bad enough for households to see their real income eroded by inflation rising faster than wages, but to see a fall in nominal terms would be earthquake-like.

Not only would it kill off any chance of a consumer-led recovery, but it will result in the banking sector becoming, well, bankrupt, as the % of NPL (non-performing loans) shoots up.
Wage deflation will result in people defaulting in their mortgages en masse and it will push Spanish banks over the cliff. The consequences, economic and social, of such a scenario are too scary.

In my opinion, what is required in Spain is price deflation while wages are static.
This will allow households to recoup some of the real disposable income lost during the early years of the Euro, when things that used to cost about 100 pesetas suddenly cost 166 pesetas (1 euro) and everything was rounded up indiscriminately.

The establishment, particularly banks and politicians, do not like price deflation. Banks rely on inflation to beef up margins when performing the maturity transformation function of money.

Example: assume that 100 EUR today would equal 105 EUR in a year’s time in a basket of prices. The bank would charge borrowers 106 and would pay savers maybe 104.

But if inflation is just 1% or even negative, which would be consistent with a wage deflation scenario, then suddenly margins become very tight and it is very difficult to earn a decent spread between money lent and money borrowed when interest rates are so low.
This is why the financial establishment is always scaremongering the public about the supposed dangers of deflation. In deflation it is mostly the banks and big corporates who lose.

For politicians, deflation is like a weight in their shoulders. In the same way that asset price inflation massages GDP numbers up, price deflation does the opposite by keeping GDP growth numbers down, unless there are significant improvements in –here it is again- productivity. So politicians do not like deflation because it makes their job (persuading us their policies are good for the economy) extremely difficult.

Obviously, someone has to take the pain but who should it be? Well, I hope it is the owners of capital who suffer a “deflation correction”.
This is only fair enough since it is the owners of capital who are primarily responsible for the flawed economic model and lack of training, development and innovation in the Spanish economy.
Yes, the government will also suffer as tax receipts from corporations decline. But again this is only fair since it has been successive governments who have encouraged and kept an underperforming economic model; and to compound the problem, they introduced an unknown little piece of accounting whereby, in a case unique in Europe, operating profits from current operations can be offset against acquisitions’ goodwill for the purposes of reducing a tax liability.

Andrew said...

Rab - Sorry, I was being ironic about Spain's pre democracy and pre EU economy so I actually agree with your comments.
I also agree that higher wages are not necessarily a cause of inflation but may be a reult. I remember the arguements about wage push and wage pull!BUT better lower wages than no job - here in Almeria we already have 24% unemployment.

Your arguement on deflation is interesting. Because the usual measures of inflation do not reflect asset price inflation we are now in a period of deflation - what ever the poloticians tell us. And the owners of capital are suffering - look at house prices and share prices. The problem to this is most Spaniards are owners of capital. Personally I think a shake out on asset prices is a good thing but I'm not sure about goods and services as this lead to even more downward pressure on real wages. Though your comments on Banks and Governments are well taken. Governments will want inflation as soon as we come out of the recession to pay back the public debt.

However, I still return to my thesis that Spain needs a wake up call and needs better education and more competition.

I back this with 2 examples.
1- From the Economist 6/6/09 - House price inflation 1997 -2009
Spain 175% UK 158%
Price inflatio 2008 2009 Q1
Spain -6.8% UK -11.3%
Which country has the highest number of unsold, underconstruction etc houses?

2-in Almeria market gardeners are protesting about imports of tomatoes from Morocco (EU quotas apply and a minimum price of 46c per kilo)
In the last 20 years many North African immigrants (legal and illegal) have come to pick tomatoes.
In the same period knowledge based companies selling expertise on tomato growing have developed selling to North Africa, US and many countries providing increasing employment for trained Spaniards.
Spanish (and EU) consumers are denied cheaper tomatoes, Morocco is denied more employment opportunitie and, possible less migration.
Is this sensible?