Falling Wages in Southern EU Vex Draghi as Youth Punished

Aug. 1 (Bloomberg) -- Joseba Prieto de las Heras thought a master’s degree would enable him to earn more. Spain’s labor market decided otherwise, forcing him to accept a position that pays half as much as a student job he had a few years earlier.

He’s been managing digital marketing and Web design since January for an online medical information and training company in Barakaldo, close to Bilbao, the economic capital of Spain’s richest region, for 1,000 euros a month ($1,338). Prieto says he took home twice that amount sorting paperwork for a bank four years ago.

“I’ve managed to get a job that matches my qualifications but not the right pay,” said the 30-year-old. “I know I’m worth more but there were two positions available in the whole Basque country for hundreds of applicants.”

Across much of the euro area, young adults are worst hit by wage deflation or stagnation, which increasingly is seen as a threat to the 18-member bloc’s nascent economic recovery.

Economic weakness is a mounting concern for the European Central Bank, which took unprecedented action in June, becoming the first major central bank to take one of its main rates negative. Threats to price stability are real, President Mario Draghi said last month, citing high unemployment, weak demand and low inflation.

Italian manufacturing grew at the slowest pace in eight months in July, Markit’s survey of purchasing managers showed today, indicating that the euro region’s third-biggest economy is struggling to build momentum. In Spain, its fourth-largest economy, Markit’s survey also showed some easing.

Falling Salaries

Spaniards under 30 have had the sharpest drop in wages, reflecting their 42 percent jobless rate compared with 25 percent unemployment for the total population.

The average gross annual salary earned by 20-to-24-year-olds was 15 percent lower in 2012 than in 2010, while it declined 0.3 percent across all age groups. It dropped by 8 percent for people as much as five years older, according to data from Spain’s statistics agency INE.

In Portugal, the average monthly wage for 18-to-24-year-olds fell 25 percent between 2011 and 2012, whereas it rose 1 percent for the whole population, the most recent data published by the national statistics agency show. The decline was 17 percent for people as much as 10 years older.

While few European countries offer recent wage statistics by age group, a similar pattern is probable in most of the European Union’s 28 members, said Zsolt Darvas, an economist at the Bruegel research institute in Brussels.

Living Standards

“It makes sense for wages to decline to share the few jobs available, but young people are bearing the brunt of the adjustment,” Darvas said. “That’s neither fair nor positive for the economy. Older people earn more and their standards of living wouldn’t be as hurt by a pay cut.”

Young people tend to be hired with lower wages, and on work contracts that are easier to end or temporary, compared with more stable positions held by older people, he said.

In Spain, 52 percent of under 30-year-olds had short-term employment in the second quarter versus a general rate of 24 percent for all employees, INE data showed last month. Those different labor market conditions are widening the income gap between generations, leading 20-to-24-year-olds to earn 50 percent less than the average wage in 2012, compared with a 33 percent difference eight years earlier.

As companies renegotiate labor agreements, new hires have to accept lower pay. Japanese carmaker Nissan Motor Co. last year signed a deal cutting wages for new workers at its Barcelona plant in return for guarantees another model would be manufactured there, creating 1,000 jobs. Pilots and cabin crew joining Airline Iberia, the Spanish unit of British Airways owner International Consolidated Airlines Group SA, will be paid less starting this year.

Market Conditions

“Iberia, as all airlines and most companies, is adapting to new market conditions,” said a spokeswoman in an e-mailed response to questions, declining to be identified in line with company policy. “The arrival of low-cost companies and increasing competition on all the routes we operate on were squeezing us out of the market.”

People under 30 aren’t better off in Italy, where a 30 percent jobless rate and difficulties finding steady positions drove about 94,000 early-career workers to leave the nation through 2012. Daniela Ottobre can’t get over having resigned from a job as a cashier in a supermarket in Rome seven years ago, when she was 20.

“I was young, I wanted to have fun, I wanted to have free time on Sundays,” she said. “Now that I’m 27, I regret it. I would never leave that job, it was gold.”

No Security

Ottobre, who has a high school diploma in art, says she never found another position that enabled her to earn as much -- about 1,200 euros a month. Since then, she has worked as an assistant in an animal shop six days a week for about 500 euros a month, and more recently, as a secretary in a real estate agency at a similar rate. Both jobs were informal arrangements, not staff positions, and she says she can’t seem to land a more secure job.

“As of now, I would do anything, I just want a salary,” she says after a year-and-a-half of sending about 200 resumes and living with her parents to survive. “If you need money, you adapt. You go there, with a smile every day, and keep quiet. You always hope you’ll get a contract, or a salary raise.”

“A basic economic-adjustment mechanism is taking place that has pushed southern Europe close to a deflationary zone,” said Robert Hancke, associate professor at the London School of Economics and Political Science. “The limit to a deflationary strategy is that it only helps competitiveness as long as your competitors aren’t doing the same.”

Prices Dropping

Prices have dropped in countries where wages have stagnated or fallen, such as Portugal, where hourly labor costs have fallen by 6 percent since 2008, and Greece, where they’ve dropped 17 percent, according to the EU’s statistics office Eurostat.

Germany has one of the lowest unemployment rates in the region at 5.1 percent, less than half the euro region average, and a 7.3 percent rate for young adults. Even so, a slump in inflation has prompted the national central bank to encourage unions to ask for higher pay after years of preaching wage moderation.

Back in Spain, Elena Tamames, 29, says it’s hard to adjust to a reality she’d never imagined. After graduating in biomedical physics in Madrid, the capital, she took a 755-euro-a-month job as a receptionist in an accounting and legal advising company last year. More than 12 months of job hunting made her realize she wouldn’t find work in a medical-imaging clinic as she had hoped.

‘Feel Ashamed’

“Sometimes I feel ashamed,” she said. “Even my family finds it hard to believe I can’t do better.” Far from settling down to have children as she’d expected, she and her partner were able only to move in together when they got jobs a few months ago, his situation being no better than hers.

“When the labor market is compressed, people compete for whatever job there is,” said Guillermo Montt, an analyst at the Paris-based Organization for Economic Cooperation and Development. “That contributes to skills mismatching or over-qualification in many countries, and it’s acute in Spain.”

Further north, in Bilbao -- the nation’s richest region in terms of gross domestic product per person -- Prieto says he’s ready to seize any opportunity to improve his situation. He’s bought a flat pre-construction and hopes that his salary situation will improve by the time it’s built at the end of next year. In the meantime, he’s living with his parents as the down payment left him squeezed.

“All these efforts I’ve made at least mean I’m in a better position than others,” he said. “There are very few people who are qualified and experienced both in Web marketing and design - - sooner or later it should pay off.”

To contact the reporters on this story: Angeline Benoit in Madrid at abenoit4@bloomberg.net; Chiara Vasarri in Rome at cvasarri@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net; Jerrold Colten at jcolten@bloomberg.net

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