How the rising cost of living is deepening inequality in Spain

Victor Javier Cavia, 51, has been on the same salary for more than two years after the collective bargaining agreement that regulates his working conditions expired. What in previous years – when prices were still being contained – would have been a minor problem, is proving a major blow to his family’s finances. “I’ve always loved reading and I’ve had to cut back on books and newspapers,” he says. “I used to go to a lot more shows. Now even eating out at the weekend seems to have become an activity for millionaires.”

Cavia has the support of a labor association that has been negotiating with the company’s management for the past two years in a bid to reach a new agreement. However, so far there has been very little progress: meetings, he says, have been held, but the company’s management is digging in its heels. “They hide behind the fact there is no agreement and, until there is one, no increase will be applied,” he explains. “It has proposed a pay increase of 1.5% for this year, but the unions have rejected it. It is an insult that they intend to raise wages so little when inflation is so high.”

Cavia’s experience as a marketing operator coordinator in a multinational services company exemplifies what is happening across Spain, where millions of employees are currently struggling with the loss of purchasing power. After years of sluggish prices, the abrupt rise in inflation is further exacerbating an already chronic inequality: the gap opened by the 2008 economic crisis has been exacerbated by the coronavirus crisis. As professors Olga Cantó from the University of Alcalá de Henares and Luis Ayala from the National Distance Education University (UNED) state in a study recently published by the Caixa Foundation, since 2008, “the lowest incomes have recorded the worst evolution, and the highest, the best.”

This is backed by the salary structure survey by Spain’s National Institute of Statistics (INE). In 2007, the lowest average annual salary was in hospitality at €14,000 a year, 31% below the average. In 2019, the latest year for which there is available data, it had barely risen to €14,561 per year, 40% below the average salary. Over the same period, the highest-paid workers had enjoyed a considerable wage hike: jobs in finance have gone from €38,870 per year in 2007 to €44,302. And the wages of employees working in electricity, gas and air conditioning have risen on average from €34,100 to €52,162.

Although inflation is showing signs of approaching its ceiling in Europe, the rising cost of living and the loss of purchasing power are among the public’s biggest concerns. Inflation in Spain came in in December at 6.7%, its highest in almost 30 years, and average price rises in 2021 were 3.1%, the highest in a decade.

Since 2007, there have been five years with falling average prices, four years with inflation below the 2% target of the European Central Bank (ECB), and six years with levels equal to or above those sought by Frankfurt. Wages, however, have lagged behind. The Tax Agency puts their average growth between 2007 and 2020 at 10.2%, regarding both public and private workers, as well as managers and ordinary employees who are more vulnerable to dismissal in times of crisis. In the same period, inflation rose, according to the INE, by 20.3%, practically double the rise in wages. The soaring energy prices and bottlenecks in global trade wreaking havoc last year will only widen the gap: wages last year rose by 1.5%, half the average inflation for the whole year.

Increasingly polarized incomes

Naturally, the impact of the coronavirus on the economy has not helped: the available simulations – the only working tool until reliable statistics are available – show that inequality not only widened in Spain during the pandemic, it also did so at a faster rate than in other European countries. In other words, more inequality in one of the most unequal nations in the European Union.

In the decade prior to 2019 (as far as the data from the National Institute of Statistics go), the average hourly wage went from almost €14 to around €16, with a significant and persistent gap between those on a full-time employment contract and those on a part-time one. The recent accelerated increase in the minimum wage, which has risen from €655 to €965 in less than five years, has improved things for those at the bottom of the ladder.

At the same time, the money made on investments has been on a steady upward trajectory and the wealthiest have seen how capital plowed into both property and the stock market – international stock exchanges are already worth twice as much as at the worst moment of the pandemic – has grown.

This unequal distribution of income is, as Cantó and Ayala emphasize in the study, “one of the most important social and economic problems in Spain.” It is, they add, “a situation that persists over time and makes us more vulnerable to possible adverse economic shocks.” Economic growth is not capable of tackling it per se, “given that the productive structure and the characteristics of jobs and the labor market tend to generate low-wage jobs, not to mention widespread unemployment.”

Economic growth will also make little difference as long as the redistributive capacity of the tax system – which is also worse than in other EU countries – is not improved. “These structural characteristics mean that when the economy shrinks, inequality increases enormously, normally by way of a rapid increase in the number of low-income households and a fall in the relative weight of the number of middle-income households,” according to the report. This is exactly what happened during the worst months of the health crisis.

The return of inflation

The economy has shown itself capable of jumping from one type of risk to another without missing a beat. A year ago, the threat was deflation after 2020 saw falling prices in Spain. The question then was whether the pandemic was going to provoke a downward spiral that would reduce corporate profits and push companies to cut wages. The unusual nature of the virus and the lockdowns made it difficult for economists to find precedents. Some forecast deflation; others extreme inflation.

“The greatest risk is that the pandemic will cause deflation in the global economy,” concluded Peter Bofinger, professor at the University of Würzburg and former member of the committee of experts advising the German government back in the summer of 2020. Time has proven him wrong. Now there are two camps proposing two very different responses.

The unions in the United States have been chanting the slogan “pay them more!” a phrase US President Joe Biden put to employers complaining they were unable to find workers to fill their vacancies. Meanwhile, Spain’s CC OO union calculates that purchasing power has fallen by 6.2% in the last 11 years, a setback it blames largely on the labor reforms approved by the conservative Popular Party (PP) in 2012. Chema Martínez, secretary-general of the services division of the union, believes that, with regard to low wages, “it has been very noticeable that they have been evolving below the rate of inflation.” Martínez does, however, agree that it is not necessary to match pay hikes to the rise in inflation at a time when the latter is soaring, “though it is necessary to ensure that wages recover purchasing power in two or three years’ time,” he points out.

Meanwhile, Spain’s largest employers’ association CEOE argues that an excessive wage increase would generate unemployment and make a phenomenon such as inflation permanent, when it is currently considered to be temporary. In this head-to-head, the latter are winning a landslide victory, at least for now.