Despite the job recovery that Latin American countries achieved in 2021 and the economic rebound they saw, real wages in the region fell by 6.8% last year compared to where they were in 2019, according to a recent report by the International Labor Organization (ILO) and the Economic Commission for Latin America and the Caribbean (ECLAC).
On average, the region’s economies grew by 6.6%, and employment recovered to 6.8% in 2021. Still, the rapid growth of inflation caused workers to lose purchasing power, especially those who only access a minimum wage.
Even today, inflation continues to hit pockets, even though different countries have made at least one minimum wage increase, and in others, it has been adjusted several times over the last year.
Bloomberg Línea contrasted the minimum wages in force in Latin American countries for January and August 2022 and calculated the real wage of each country against the accumulated inflation in the year up to August, that is, the present value of each minimum wage with the discount rate, which in this case is the CPI.
HOW REAL MINIMUM WAGES MOVED IN 2022
How inflation affects pockets differs from country to country, even though in countries such as Argentina and Venezuela, the pressure on prices is the strongest, with the highest inflation in the region and wages that have fallen between 30% and 50%.
Meanwhile, most Latin American countries have a less drastic fall in real wages, which is between 5% and 9%, when their cumulative inflation up to August is around the same.
Other countries, analyzed later, still retain almost all the purchasing power of their nominal minimum wage, as inflation has been controlled during the year, as in the case of Bolivia, Panama, and Ecuador.
ARGENTINA: WAGES CONSUMED BY HIGH INFLATION
Argentina has one of the highest inflation rates in the region, after Venezuela. The country reported cumulative inflation of 56.4% and year-on-year inflation of 78.5% through August.
There, salary adjustments have been continuous during the year. In January, the Minimum Living and Mobile Wage (SMVM) was ARS 31,938 (US$220 at the official exchange rate on September 21) and moved up during the year as inflation rose at high rates each month.
For August, for example, a further increase was defined, bringing the salary to ARS 47,850 (US$329), and increases have already been agreed upon for September (in effect), October, and November.
However, these adjustments “are still at very low levels in historical terms,” according to academic Luis Campos, who told Bloomberg Línea that by November, the minimum wage in Argentina is already expected to have an accumulated increase of 75.5% compared to January, “but by then the inflation projection will be close to 90%,” which will make further updates necessary so that the wage does not continue to deteriorate in real terms.
With accumulated inflation through August of 56.4%, Argentina’s real minimum wage is now US$210, 36.17% less than its nominal value of US$329. And if the increases had not been made during the year and the January wage remained in effect, the real minimum wage with inflation through August would be US$140 at the official exchange rate.
“Argentina has serious macroeconomic problems. The periodic updating of the SMVM is a consequence of such imbalances, not their cause.
“For several years now, salaries have been increasing in very high nominal magnitudes, and even then, they are not enough to match inflation,” Campos pointed out.
VENEZUELA, IN A COMPLEX SITUATION
The minimum wage in this country is the lowest in the region and one of the lowest in the world. At the beginning of the year, the minimum in force in the country was ten digital bolivars, about US$2.18 at the exchange rate on September 21.
In March, a 1,218% increase was made official, bringing the salary to half a petro, the country’s official cryptocurrency now equivalent to US$30.
It means that the minimum wage is not enough for a person to have the US$1.9 per day needed to overcome the extreme poverty line set by the World Bank.
With accumulated inflation of 90% up to August, according to the figures of the Venezuelan Observatory of Finance, the real minimum wage in Venezuela has fallen 50%. By August, it was worth US$15.
And if the wage at the beginning of the year were maintained, with the current inflation, it would be US$1.14 per month in real terms.
THOSE IN THE MIDDLE
In the rest of the region, there are also countries affected by the accelerated pace of inflation in 2022, mainly due to the increase in food and energy prices following Russia’s military operation in Ukraine.
Added to this is a supply chain that has yet to recover from the problems generated by the Covid-19 pandemic.
Chile has the highest inflation in the rest of the region, leaving aside Argentina and Venezuela. There, year-on-year inflation reached 14.1%, and cumulative inflation reached 9.9% up to August.
This country is also on the shortlist of those who have updated their salary during the year, going from a prevailing salary in January of CLP 337,000 (US$359) to CLP 400,000 (US$427) as of August.
In real terms and with the accumulated inflation rate, Chile’s salary has fallen by 9.13%. It stands at a real value of US$388 as of August, while if the salary in effect in January were maintained, the real salary would be US$326.
The countries in the middle of the table are joined by Costa Rica and Colombia, whose real wages have fallen by 8.77% and 8.37%, respectively.
In the former, the minimum wage in August was US$513, and its real value was US$468; in the latter, the nominal wage was US$227, and discounting inflation, it would be US$208.
In Colombia and most other countries in the region, the minimum wage is adjusted only once a year, normally taking effect in January. For the chief economist of Banco Agrario, Fabio Nieto, this mechanism is not “necessarily bad”.
“Taking out food and goods, the prices of many private and public services, which represent a good part of the consumption basket for low-income people, also change only once a year.
That is due to the natural rigidity of these prices in the economy and the indexation to the CPI of the immediately preceding year. From that point of view, the deterioration of purchasing power is not as marked as it would seem,” Nieto explained to Bloomberg Línea.
Other relevant cases are those of Uruguay, Guatemala, Honduras, and Paraguay, countries where cumulative inflation reached a little over 7% in August.
In Uruguay, the real minimum wage was US$433 in August after deducting inflation, while the nominal minimum wage was US$467 at the September 21 exchange rate.
In Guatemala, wages have fallen by 7.12% this year, following a cumulative CPI of 7.55%, with real wages up to August of US$352, compared to a nominal of US$379.
Honduras has also seen its real wage fall by 6.97% (US$280 after discounting inflation), and Paraguay has a nominal wage of US$368 and a real wage of US$343.
In the latter, the salary was also updated in 2022, since in January, the current minimum wage was US$330.
If this amount had been maintained during the year and with the increase in inflation, the real salary would be US$307.
These are the real minimum wages as of August in other Latin American countries:
- Brazil: a nominal minimum wage of US$234 with a real value of US$224 after cumulative inflation of 4.39%.
- El Salvador: a nominal minimum wage of US$243 with a real value of US$230 after cumulative inflation of 5.46%.
- Mexico: a nominal minimum wage of US$262 with a real value of US$248 after cumulative inflation of 5.54%.
- Dominican Republic: a nominal minimum wage of US$178 with a real value of US$168 after cumulative inflation of 5.7%.
- Peru: a nominal minimum wage of US$262 with a real value of US$246 after cumulative inflation of 6.13%.
Discussions on new minimum wage adjustments in most countries will begin in a matter of weeks, with a view to their revision before the beginning of 2023.
Given this juncture, Nieto, the chief economist at Banco Agrario de Colombia, pointed out that in the current scenario, it is not advisable to increase wages at rates higher than inflation and the country’s productivity.
“Numerous studies show how these measures, intended to help the consumer, end up affecting him since increases that exceed this equilibrium restriction generate proportionally higher increases in the unit costs of companies compared to their income.
“Therefore, these imbalances end up, on the one hand, being passed on to the sale prices of goods and services (that is, to final consumer prices, creating inflation), and on the other hand, discouraging the demand for labor, which affects the rise in unemployment”, he added.
WHERE PURCHASING POWER IS MAINTAINED
Three countries in the region maintain close levels between the nominal and real minimum wages. These are Bolivia, Ecuador, and Panama, which maintain low inflation rates – yearly and cumulative.
In Bolivia, for example, the real wage has only fallen 1.84% through August, after cumulative inflation of 1.62% (US$326 vs. US$320, respectively). In Panama, the nominal wage is also US$326, and its real value is US$320, after accumulated inflation of 1.72%.
In the case of Ecuador, the variation is also low, as the minimum wage is US$425, and after discounting inflation so far in 2022, it stands at US$412.
WHAT WILL HAPPEN AT THE END OF 2022?
Taking up what the ILO and ECLAC said in the middle of the year in their document ‘Labor Situation in Latin America and the Caribbean’, both organizations expect a “slowdown in the pace of job creation” for the last months of the year.
And in the face of slower recovery of employment, they specified that it is essential for governments to consider the possibility of “making nominal adjustments to minimum wages to compensate for the losses caused by the increase in inflation”.
Note: The formula used to calculate the real minimum wage for each country is the present value formula: VP = VF / (1+r).
PV: present value. VF: future value. r: discount rate (in this case, cumulative CPI through August).
With information from Bloomberg