by | 2023 - 27 - Jan | News

Inflation and its consequences in latin america’s minimum wages

Last year brought new economic problems for the states, the employers, employees, and people in general. Annual Inflation grew up more than in the last decade and all had to react.

Prices affect everybody. Inflation numbers are one of the most important economic figures that care for everyone because they directly affect consumption. The necessities became more expensive and the salaries yielded less. That’s why it is important to propose and make solutions by thinking about all economic actors.

Last year, in 2022, the annual world inflation rate was around 8.8%, according to the IMF. After the pandemic and with a war in the course, the prices grew on all continents. The Euro inflation was 9.2% (Eurostat, 2022) and the United States was 6.5, according to its Labor Department. The Latin American and Caribbean countries passed 11%. The governments had to apply general politics related to salaries.

What does the data say?

According to datosmacro for inflation and local laws of each country for salaries, in South America, all the countries adjusted base wages, even more than inflation. Bolivia and Ecuador had the lower numbers in inflation with 3.1% and 3.7% and their minimum salaries grew by 4% and 5.9% respectively. Brazil, Paraguay, Peru, and Uruguay had inflation numbers between 6% and 10% and their governments increased base salaries more than inflation too. Chile and Colombia had more than 12% annual inflation and their reaction was the same: increased the minimum wages at a higher rate.

Venezuela and Argentina showed higher inflation in the continent and their reactions were similar to the other countries. In their cases, nevertheless, the phenomenon has other causes and much more time. These two countries have lower salaries and higher inflation regionally.

If we only see 2022, Mexico had similar inflation (7.8%) numbers than the other countries. Its case is different because they don’t only want to react to international changes. Only in 2022, they increased (22%) the base salary by more than twice the inflation rate and that was not an exception. In 2019, 2020, and 2021, they had similar salary increases. For 2023, their projection is still increasing the minimum wage by 20% more. If we consider its new annual leave law too, it is possible to see a political trend for the worker’s benefit. As we saw, it is a decision that goes far away than inflation numbers.

We have to say this is not always happening. Peru, for example, has inflation all year and they don’t change their minimum wage all the time. In Argentina, in 2016, the inflation rate was around 34.5 % and the salaries grew by less than 33.4%.

What do the experts say?

All these changes in the costs affect the economy in different ways. Employers have to pay more to their workers and for their goods and services. In consequence, the prices could be higher in the future or they could fire workers to reduce these costs. Thinking of employees, the increase in the minimum wage doesn’t mean a general increase in salaries. Only the people who earn lower salaries saw their real wages growing up. What’s happening with the other ones?

According to the United Nations, even with the increase in minimum wages, real salaries were reduced. “In Latin America and the Caribbean, real wage growth declined to minus 1.4% in 2021 and minus 1.7% during the first half of 2022”, writes the International Labour Organization (ILO) in Global Salary Report 2022-2023: The Impact of Inflation and COVID-19.

International Monetary Fund sees another problem. The solution of most of the government could generate more inflation. “Analysts warn that prices and wages could begin to interact with each other, with wage and price inflation rising permanently as a result of a sustained wage-price spiral”, they wrote in one of their last reports about the global economy. 

For 2023, the scenario doesn’t change too much. The inflation projection is similar. Probably, it will be less, but there are a lot of variables to consider. How the war continues, US and China plans, commodities prices, and the general growth or recession are very important for everyone. Employers will have to be attentive to their costs and prices because people’s purchasing power is getting down. For their part, employees must be confident that policies will not leave their jobs in limbo. As for governments, they must avoid an inflation loop by taking effective fiscal and monetary policy measures.