The economic well-being of citizens depends mainly on the dynamics of their real wages. In public discussion, this issue arose mainly about the establishment of a minimum wage and a sharp increase in the cost of essential goods. Salary prospects are also an important part of the pre-election debate. Can they be increased and how? Maybe they are higher? But sometimes positions are expressed about wages that ignore the fact that wages are determined not independently, but in relation to the rest of the economy.

Let’s look at the big picture. At the beginning of its recent history, after joining the EEC in 1981, the Greek economy generated higher incomes than other European countries such as Spain or Ireland. But while we sought further convergence with stronger economies, over the next four decades, our economy underperformed many others, with lower productivity, GDP per capita and competitiveness. Not all periods have been the same, but today most European economies are ahead of us.

Although nominal wages rose sharply in the 1980s, high inflation kept them from rising in real terms. Real wages have risen strongly since 2000 and the entry into the eurozone, but with a sharp expansion in external borrowing and the trade balance. The growth of the average wage in the country was much higher than in other countries, as was productivity. During the years of the memorandum, the fall in GDP washed away almost all real income, although the level of average prices was stable.

More recently, the average real wage has been on an upward trend, but then the pandemic and high inflation put strong pressure on incomes. The growth of the economy today is supporting strong wage growth for skilled labor market segments as well as for large segments of the unskilled labor force where there is a shortage of supply. But for other workers, the increase in wages does not cover the rise in prices.

On average, the wage trajectory in an economy cannot systematically deviate from labor productivity. The main reason that wages in the country have not risen in recent decades, as in others, is precisely that productivity is declining. This, in turn, depends mainly on investment and the performance of production institutions and markets. Comparing average real wages with productivity, based on 100 units in 1995, Greece was already 281 in 2021, slightly above Spain (280) and Portugal (271) and well above Germany (219). Well, there is only the prospect of a significant increase in real wages to the extent that labor productivity also grows. On the other hand, when production is not carried out using modern technologies and is not targeted at elite markets, significant value is not created.

There are other aspects of the problem as well. The tax and insurance burden on wages obviously affects net income. Despite recent positive measures, wage labor is placing a heavy burden on average and higher wages. As a result, much of the work is done informally, hurting not only government revenues but overall productivity. The highest proportion of self-employed people in Europe (26% of the total in 2022) is typical, as is the fact that most of them declare very low net incomes (69% below 10 thousand euros and only 14% above 20 thousand euros). in 2020). – respectively for employed 51% and 18%). But when there is a large gap between the costs of enterprises and the net wages of workers, creating high-value jobs is not easy.

The recent increase in the standard minimum wage by about 10% protects those working at that level significantly. At the same time, however, they exacerbate the problem of wage compression, since further wage increases cannot and should not be carried out by administrative measures. In order to increase the wage scale as a whole, at will, it will be necessary to create new higher value jobs. Such a systematic increase in wages would also change the course of immigration, Greeks and foreigners, who would find the country more attractive.

Chronically low levels of investment also affect the level of competition, with a dual effect on real wages. When there is no incentive to attract or retain workers in a competitive position, the wages offered will inevitably be lower. At the same time, when competition is low, higher prices for goods and services reduce the purchasing power of wages. It is characteristic that in 1996-2011. the cumulative increase in prices in Greece exceeded 67%, compared with 40-50% in Italy, Spain, Portugal and only 26% in Germany. The shadow economy exacerbates the problem as undeclared income increases demand and raises prices for everyone.

The welfare of citizens in an economy depends to a large extent on the jobs and wages it offers. To the extent that the shift in the production model intensifies in the coming years, real wage growth could be significant and systematic. But this implies an increase in innovative and extrovert production, thus creating high value, and a relative reduction in what moves inward and informally. If this shift is not accelerated immediately, a significant increase in real wages cannot occur.

Mr. Nikos Vettas is the CEO of IOBE and a professor at the Athens University of Economics.