Wage Negotiations to Reduce Inequality and Sustain Growth

If all the burden of the adjustment needed to reduce inequality were put on a wage negotiation, the very dynamics of a country’s development could be affected. Other variables, besides wages, also impact and need to be adjusted as part of a comprehensive action aimed to reduce inequality and sustain national growth. Which are those variables and which are the limits and possibilities of wage negotiations?If all the burden of the adjustment needed to reduce inequality were put on a wage negotiation, the very dynamics of a country’s development could be affected. At the same time, a wage negotiation that appropriately compensates those who take part in the production process is essential and legitimate. What we are saying is that it is not possible to demand from only one variable—in this case, wage adjustment—all the effort required to significantly reduce inequality and poverty.

Later on we will consider the elements that are inherent to a wage negotiation. But first it is worth identifying other variables that, in addition to wages, also have a bearing and need to be adjusted in order to materialize a reduction in inequality and poverty; in other words, place wage negotiations within the context of a comprehensive action aimed to reduce inequality. By doing so we enrich, with a systemic vision, the natural and realistic space of a wage negotiation bringing the parties closer to reach agreements that may contribute to reduce inequality and sustain the country’s growth.

(i) Macroeconomic Policies to Reduce Inequality and Sustain Growth

Practically any public policy impacts directly or indirectly both on inequality and growth. Hence, one first comment is that every public policy should be instrumental in fighting inequality and promoting growth. To illustrate this we will mention two major examples of public policy: fiscal policy and public spending policy.

Tax systems in Latin America are outrageously regressive. To say it in one phrase: proportionally, the poor pay more taxes than the rich. Several reasons explain this nonsense.1 To get development to be economically and socially sustainable, fiscal policy should eliminate its regressive nature.

For its part, government spending is usually the main source of funding of the educational system, the health system, security, road and energy infrastructure, among many other sectors and activities that sustain growth and are a part of the non-wage income of sectors at the bottom of the social pyramid. To the extent that priority is given to government spending oriented towards meeting the social and productive requirements of these sectors, a contribution will be made to the reduction of inequality in a sustainable manner.

(ii) Mesoeconomic Initiatives Aimed to Reduce Inequality and Sustain Growth

Firms operate within productive networks that make up value chains and clusters of similar or complementary companies. This is the space of the mesoeconomy. Within this space the spotlight is shared by all productive units participating in the networks, yet the leading firms play a very special role. These leading firms have the mesoeconomic responsibility of contributing from their position to reducing inequality and sustaining growth. Not only by generating more jobs to reduce unemployment and creating better income for their workers, but also by adopting technologies, ways of structuring their businesses and relating to suppliers, distributors and customers that may best favour the sectors located at the bottom of the pyramid. Each corporate decision, each new investment, will have primary and secondary effects. The primary effects are those impacting on the operation and results of the company itself; the secondary ones are the effects on the remaining players in their value chain and the community where they operate. On few occasions are these effects explicitly considered and included in a company’s decision matrix, which sterilizes potentially beneficial effects or, what is even worse, may cause negative impacts that might be avoided without affecting, or affecting only marginally, results. The private sector is not excluded from the national effort to reduce inequality and sustain growth; contrarily, it plays a major role.

(iii) Small and Micro Producers Support Programs

A good portion of the population at the bottom of the social pyramid secure their subsistence by working on their own or on a salaried basis, generally as informal workers, in small or micro production ventures. Hence, small and micro producer support programs constitute a central component of any effort aimed to reduce inequality and poverty. This includes micro credit and SMB credit programs, as well as the whole range of technological and business management assistance. Opinión Sur has dealt extensively with this subject and, thus, in the following lines we only wish to highlight two fundamental aspects.

The first one has to do with the excellence and up scaling that should characterize support programs. The income gap becomes even wider when we include the knowledge, contact and information gap that affects all sectors at the bottom of the social pyramid. We need to, and can, close that gap. Today the economy is knowledge-dependent and there is no point in deepening any further the already precarious situation of small and micro producers by depriving them of access to the modern business engineering available at the market, skimping on information about business opportunities and how to take advantage of them, refusing to lend them assistance to properly manage their endeavours. In addition, we cannot stay at the threshold of demonstrations, of pilot projects. These efforts are, and will continue to be, valid as trial fields for new technologies and work approaches, but the current challenge is to assist large majorities (not only small poverty pockets) through far-reaching, highly meaningful programs.

The second aspect has to do with the great effort that is necessary to make to register the informal labour that abounds in small and micro ventures. In these cases the objective situation of a small unit renders the registration of informal workers very difficult and sometimes impracticable. If they had to meet all fiscal, social security and regulatory requirements imposed by current regulations, the viability of the ventures that happened to be operating at subsistence level would be jeopardized.

In those conditions it is ineffective or counterproductive to merely chase small and micro ventures that do not register their workers. It is rather a must to create a special regime for small and micro ventures (as several countries have already established) to gradually but steadily complete a transition into the registration of the unregistered workforce.

(iv) Limits and Possibilities of Wage Negotiations

Having made the above-mentioned explicit, it becomes clear that it is very different to tackle wage negotiations in a context where the “every man for himself” prevails than in one where negotiations develop while a series of actions to abate inequality are being implemented. By addressing a serious fiscal reform and assigning enough priority to public spending aimed at the base of the social pyramid, the pocket salary of workers (who would be paying less taxes) would improve, and non-wage income would be added (popular sectors’ needs would be covered through better education, health and energy services, etc.).

The negotiation context would improve even further if the productive chains’ leading companies became in charge of a well-conceived effort to fully exercise their mesoeconomic responsibility. That effort would generate more jobs –and probably better paid- along the productive chain, coupled with non financial added value as is to enable small producers to acquire modern knowledge, access to markets, commercial information and management assistance.

Also, small and micro producers support programs have a strong bearing because, although wage negotiations revolve around registered workers, some of them carry out informal activities -on their own or through relatives- with which they complement their income.

In any case, it is clear that both unions and business associations will face wage negotiations in a different way if these are part of a comprehensive effort to support the base of the social pyramid than if they are not.

Regarding wage negotiations themselves, it is necessary to consider several aspects that will affect them, the following among others:

(a) Assessing the way in which results are distributed among workers, executives and asset owners. Although the basic criterion is that salary rises should accompany productivity increases, it is also worth considering the current distributive structure and how those proportions have evolved in the course of time, so as not to validate eventual distributive injustices or force the productive units’ limits of economic viability.

(b) Analyzing how much of the return on capital goes out of the company and how much of it is reinvested. Workers could eventually postpone part of their present aspirations on the basis of a well-founded expectation of having better future results if the company was being capitalized through a firm reinvestment of results. In those cases the negotiation should include salary adjustment clauses associated with better future results in each venture. However, the union stance would be quite different if a good portion of the results exited the business via dividends or other mechanisms (ie: sub-invoicing between subsidiaries of one single economic group). In these cases the salary struggle would entirely fall on the corporate present and would aspire at sharing the greatest possible proportion of the distribution of results.

(c) There exists a variety of ways –some very creative- to align the interests of all parties of a business. Without creativity the spaces to find constructive agreements narrow down and the risk of slipping into confrontations that end up affecting all increases. The greed of some, the frustration of others, the ignorance and bad faith of many, can only be fought with transparency, clear information, good arguments and solid credibility in the different parties. Mutual trust -that intangible of huge value that is many times ignored and other times affected by irresponsible behavior- is truly the best facilitator of a good negotiation. Corruption, crassness, meanness, ignorance or indifference towards the circumstances of the other, can derail any negotiation. By contrast, a good dose of pragmatism, creativity and a real effort of the parties to understand the margins of what is possible are a necessary condition to remain as partners in the effort to create wealth.

In a world where selfishness and taking advantage of the other are not scarce, it will appear weird to close these lines reminding us that the economy, beyond the historic and technological parameters that condition it, is essentially made up of relationships among persons and groups. Those relationships are guided by interests but also by values. Hence the reason why there exists a critical work space not only for learning how to constructively align the diversity of interests that strive to prevail, but also for us workers, executives or assets owners to reflect in the face of our values on the significance of our acts and the consequences and responsibilities that derive from them.

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