Low wages: a major challenge for the Portuguese economy

Portugal needs to find a solution for the low wages that continue to prevail in the country, according to professor Susana Peralta.

This week, Statistics Portugal released the provisional figures of the 2019 wave of the Survey on Income and Living Conditions, with data for income in 2018. Poverty in Portugal is stable at 17.1%, down from 17.2% in the previous year. While this modest decrease in poverty can be considered good news, it is important to bear in mind that the poverty threshold is 501 euros a month. Therefore, many non-poor people live on very low incomes indeed.

The figures now released by Statistics Portugal also show that in-work poverty has increased from 9.7 to 10.8%. This stems partly from the higher poverty threshold, which went up from 467 to 503 euros a month. More importantly, it implies that employment has been growing in Portugal through poorly paid jobs, despite the steady increase in the minimum wage. The minimum wage which was frozen at a value of 565.8 euros between 2011 and 2014, and has increased to 589.2 euros in 2015, having reached 700 euros in 2019. The Government has set a minimum wage for 2020 of 740.8 euros, with the objective of reaching 875 euros by the end of the four-year term. I am reporting the monthly equivalent of the statutory minimum wage, which is paid in 14 installments.

The minimum wage is above the poverty threshold, but it is not by itself a cushion against poverty, for several reasons. An individual is considered a worker, for the purposes of computing the official in-work poverty rate, if she works for more than seven months in a given calendar year. Therefore, job seasonality can cause poverty. Some workers are legally independent, although they may work de facto for a company; in that case, the minimum wage does not apply. Finally, the minimum wage is enough to make a single individual escape poverty, but family composition – most often, the presence of dependent children – can easily make a minimum wage earner fall into poverty.

Low pay is a big problem in Portugal. According to the International Labour Institute, the labour income share has decreased from 65.8 percent of the GDP in 2004 to 54.5% in 2017. Portugal stands out, in the international context, for a particularly rapid erosion of labour income. The EU-28 average labour income share for the same period is 59.4 in 2004 and 57.6 in 2017. In face of this worrisome evolution, the government is currently negotiating the so-called “income and competitiveness agreement” with the social partners, with the objective of reaching an increase in the average private sector wage above inflation and productivity growth. As of now, the details of this negotiation are unclear and we do not know how, and whether, the government is going to incentivize these wage increases and how they are going to be monitored, in practice.

While increasing labour income is an absolute priority in view of the social cohesion of the country, it is important to keep in mind that the road ahead is tough. The European Commission has recently revised downwards its 2020 growth projections for the Euro Zone, which it now expects to grow 1.1%. Portugal concentrates three fourths of its exports in EU countries, with Spain, France, the UK, and Germany as its main partners, all with very modest growth projections. Germany, as we know, has just avoided a technical recession when it managed to grow 0.1% in the last quarter. Even if the European Commission is fairly optimistic about the 2020 GDP growth of Portugal, which is currently forecasted at 1.7%, the international context is risky for the Portuguese small open economy.

  • Associate Professor of Economics at Nova School of Business and Economics