SPAIN'S BUSINESSES REJECT MINIMUM WAGE INFLATION

UNCLAS SECTION 01 OF 02 MADRID 000170

SIPDIS

TREASURY PASS TRACI PHILLIPS

E.O. 12958: N/A
TAGS: ECON ELAB EFIN SP
SUBJECT: SPAIN'S BUSINESSES REJECT MINIMUM WAGE INFLATION
INDEXING



1. Summary: Spain's largest business organization (CEOE)
publicly rejected January 13 the governments new minimum wage
decree because it includes a clause that indexes future wage
increases to inflation. The decree was passed on December 29
after an agreement between the Ministry of Labor and Spain's
major unions. CEOE argues that wage indexing will cause an
inflationary spiral as prices rise and other wage earners
demand equal increases in their wage negotiations. CEOE
expects the government to either revise the statute, or risk
failure of the coming &social dialogue8 on labor reform
crucial to maintaining Spain's economic competitiveness.


2. Econ Counselor met January 13 with CEOE Director for
International Relations Jose Antonio Lacasa Aso and
representatives of CEOE's labor relations department to
discuss CEOE's rejection of the government's new minimum wage
decree. They offered well-argued economic and political
objections to the government's December 29 minimum wage
decree that included an article that would index the minimum
to inflation beginning in 2008.

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GOS Indexes Minimum Wage to Inflation
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3. Each year, the GOS sets the new minimum wage after
negotiation and consensus with CEOE and Spain's two largest
unions, UGT and CCOO. On December 29 the GOS approved a 4.5%
minimum wage increase from EUR 490 (USD 642) to EUR 513 (USD
672) per month. This is in line with the Socialist party's
electoral platform to elevate the minimum wage to EUR 600
(USD 786) per month by the end of the legislature in 2008.
The December 29 decree includes an article that will
automatically raise the minimum wage if inflation is higher
than predicted after 2008. This article is causing
substantial argument within the Socialist government's
cabinet. The Minister of Economy objected strongly, and the
Ministers of Labor the measure. Though the decree has
already been passed, various ministers continue to make
public statements in this debate. Most recently, EU
Commissioner Almunia, spoke out against minimum wage indexing
for economic reasons.


4. CEOE has made strong public objections to the minimum
wage indexing and accused the government of making
regulations without the traditional consultation and
consensus. CEOE's executive committee met December 12 in an
emergency session to develop an official statement and has
requested a meeting with President Zapatero to discuss this
issue. In their official statement, the executive committee
strongly rejects the government's indexing of the minimum
wage automatically to actual inflation after 2008, but not
the Socialist government's goal of raising the minimum wage
to EUR 600 (USD 786) per month.

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Inflationary Spiral and Social Dialogue
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5. CEOE is concerned with the inflationary spiral that could
occur with minimum wage-inflation indexing. They noted that
Spain already has higher inflation than its major trading
partners, and argued that indexing would compound the
situation. They also predict that wage earners in other
industrial sectors will demand equal increases in their
salaries causing wage inflation to ripple through Spain's
economy. CEOE is concerned with the reduced competitiveness
the higher inflation would cause and argues that indexing the
minimum wage to inflation will actually reduce employment in
Spain.


6. CEOE's second concern with the government's minimum wage
decision is its repercussion for the &social dialogue8.
Last July the GOS called for long-term negotiations on labor
reform between CEOE, the unions and the government. The goal
is to improve Spain's labor productivity, labor quality and
international competitiveness. CEOE believes the
government's decision to allow indexing without their
approval indicates that the GOS and the unions may not be
trustworthy partners in the coming negotiations.
Furthermore, CEOE believes the government's willingness to
move ahead on a labor issue without consent of all interested
parties may derail the entire &social dialogue8 process and
ruin chances for effective labor reform in Spain.

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Compromise Expected
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4. Lacasa and the labor experts expressed confidence that the
government would address CEOE's concerns. They believe the
government must find a compromise to salvage the social
dialogue. CEOE strongly supports the dialogue and labor
consensus. Our contacts proudly noted that Spain has had
minimal labor unrest in the past decade compared to
neighboring European countries. CEOE is determined to
maintain positive labor and government relations while
working to reform Spain's labor market.


5. Comment. CEOE is deeply concerned with the minimum wage
indexing decree, and certain it can convince the government
to change the decision. Our interlocutors were well briefed
and professional and gave the strong impression that their
organization must be consulted and give its consent on any
changes in labor and wage policy. Recent press reports
indicate the Ministry of Labor may be considering other
minimum wage options, but the unions state they will not
accept any changes to an agreement they already made with the
government. For CEOE's part, they have made clear the
critical &social dialogue8 on labor reform between
business, government and labor will be more complicated if
the minimum wage-indexing issue is not solved to its
satisfaction.

MANZANARES