Economics: New Wage Dynamics and Inflation
The disproportionate rise in formal sector employment since 2013 that has served as one of the main drivers of the internal market has not been matched by a similar rise in payroll compensation, which when deflated has registered a mere annual 0.5% increase since 2013. It fell 0.9% during the first half of 2017 as the low consumer inflation of 2015-2016 was overtaken by a series of unforeseen developments. Contract wage negotiations between January and May produced nominal increases of 4.4%, and as inflation climbed above 6.0% such adjustments continued to lag as late as June and July. According to the central bank, negotiated settlements so far this year have produced an average 1.3% real ex-post contraction in wages.
Looking forward, however, there are concerns that efforts to make up for that lag both on the level of future wage contract negotiations and the minimum wage could pressure company costs and emerge as a new source of pricing pressures even as the central bank forecasts inflation will reach a point of inflection by year’s end and head back toward a 3% target over the course of 2018.
The available data shows that growth in payroll compensation and annual negotiated wage settlements have not only failed to emerge as a source of price pressure so far, but by failing to match expected inflation they have implied a loss in real disposable wages. However, if those shortfalls lead wage earners to greatly increase their demands in 2018 out of proportion to expected price growth, such settlements could begin to act as an inflation driver.
The 9.6% rise the government authorized to the minimum wage in 2017 implied only a 4.1% real increase through the first half of the year, though the main concern is how much that adjustment might fan wage expectations throughout the economy. Those worries are magnified by 2018 being a presidential election year in which there could be added pressures for another major minimum wage hike.
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