Itaú BBA - Argentina: Wage negotiations and their implications for monetary policy

Macro Vision

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Argentina: Wage negotiations and their implications for monetary policy

octubre 19, 2016

To reach the 2017 inflation target will depend heavily on the next round of wage negotiations.

Argentina’s central bank recently announced that the inflation range target for 2017 is 12%-17%. To monitor inflation, the central bank will track the consumer price index published by INDEC, the national statistics office. Market inflation expectations for next year currently stand at 20% (Itaú’s estimate is also 20%). Whether or not the central bank will reach this target will depend heavily on the next round of wage negotiations – so the outcome of the 2017 negotiations will be important for monetary policy.

Wage negotiations take place throughout the year in Argentina, but the process usually starts in January with bilateral negotiations between the teachers union and the government of the province of Buenos Aires – whose current governor, Maria Eugenia Vidal, is an ally of president Macri’s and hence someone likely to take macroeconomic outcomes into consideration. The result of these bilateral negotiations have traditionally set the bar for broader wage negotiations across the country (the teacher wage negotiations are typically concluded by February, shortly before the beginning of the school year).

Unions have long been very powerful in Argentina, and their role has become even more important over the last 10 years due to the country’s high inflation rates (which have exceeded 10% since 2005). There are various types of wage agreements: the most important are those which terminate after six or 12 months, with adjustments paid in one, two or three tranches.

According to the labor ministry, around 2,000 wage agreements are signed every year, involving the participation of more than 300 different unions. According to INDEC, 67% of wage earners (6.6 million workers) are registered in the social security system, and 43% of these have their wages set through bargaining agreements.

All of Argentina’s major unions have completed their wage negotiations for this year. The negotiations announced to date have resulted in average increases of 21% for six-month agreements and 34% for annual agreements, compared with an annual inflation rate of 41% estimated for 2016.

According to our estimates, real wages in the private sector fell by 9.3% year over year in June. For public-sector wages, we estimate a bigger drop (-12.3% yoy). However, it is likely that the final drop in real wages will be smaller by December 2016, due to the recent deceleration in inflation

Regarding the wage agreements set for one year, the highest adjustments were received by workers from the vegetable-oil sector (38%), truckers (37%) and teachers (35%). In the case of the six-month agreements, the most important were those in retail commerce (20%), construction (22%) and the car industry (19%). Most of these agreements are expiring and being renegotiated now to some extent, the potential new deals will act as precedents for the negotiations to take place early next year. The more the new agreements internalize the 12%-17% inflation target, the better for the central bank. There is a serious risk that if the agreements are based on backward-looking inflation rates, the central bank will face more challenges in terms of monetary policy.

Wages in the construction sector, retail commerce and the car industry were the most affected by inflation this year. We estimate that between December 2015 and June 2016, real wages dropped by 6% in the construction sector, 7% in retail commerce and-8% in the car industry. Negotiations in those sectors will be tough, due to the decline in economic activity that has been seen over the course of this year. According to private estimates, construction activity have fallen by 14% yoy, retail sales by 6.4% yoy and car production by 15% yoy in 2016 to date.

We do not expect the government to allow the reopening of wage negotiations that previously led to one-year agreements before the end of 2016, even though the unions are already pressing for this, given the high inflation registered in the first half of this year. As compensation, the government has offered a special bonus in December and some income tax exemptions. Another factor in the government’s decision-making process is the midterm elections in 2017. According to a survey published by Consensus Economics, analysts expect a 24.7% nominal wage increase in 2017. According to our estimates, a 22% increase in nominal wages is consistent with a 20% inflation rate assuming a 17% depreciation of the Argentine peso. The larger the upward adjustment in wages, the tighter monetary policy would need to be (and likely the slower the depreciation of the peso).

While the negotiations are taking place, the central bank might usefully take a more conservative monetary policy stance, so as to induce unions to bargain in a forward-looking way. The stance of President Macri and his allies will also need to be monitored, as it could make the central bank’s task either easier or harder.

For several years, market participants and analysts have been accustomed, for good reason, to expect the central bank to focus its actions on developments in the foreign exchange market. In our view, as the inflation targeting regime matures, and as intended by the innovative new central bank board, monetary policy will increasingly become more sensitive to and focused on domestic economic developments and prospects. In this context, the ongoing pause in monetary policy may be an attempt (one with which we concur) to encourage business and labor to internalize the 12%-17% inflation target. The central bank is not blinking.


Mario Mesquita
Juan Carlos Barboza
Diego Ciongo



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