US embassy cable - 05MADRID170

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. 
 
------------------------------------- 
GOS Indexes Minimum Wage to Inflation 
------------------------------------- 
 
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. 
 
--------------------------------------- 
Inflationary Spiral and Social Dialogue 
--------------------------------------- 
 
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. 
 
------------------- 
Compromise Expected 
------------------- 
 
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