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Wages and the Distribution of Income

Two approaches are used to determine how income is divided among citizens of a country. The first approach, involving the size of distribution of income, compares the household income shares received by the richest 20 percent of the population, the poorest 20 percent, and the three quintiles between these extremes. This approach yields an income concentration, or Gini ratio: the higher the ratio, the greater the degree of inequality. Gini ratios can be useful in comparing the degree of income inequality within a country over time or among countries during the same time frame. The International Labour Organisation estimates for Portugal indicate that the Gini ratio changed little between 1967-68 (0.423) and 1973-74 (0.431), corresponding to the end of the Salazar and Caetano administrations, respectively. By comparison, in the early 1970s, France's Gini ratio was 0.416, Germany's 0.376, and Sweden's 0.346. It may also be useful to compare the household income share received by the poorest 40 percent of the population with the share received by the richest 20 percent. According to this indicator (richest 20 percent and poorest 40 percent), Portugal's income distribution profile at the end of the Caetano period (3.5) reveals by comparison relatively greater equality in Spain (2.4) and Italy (3.0) but greater relative inequality in Costa Rica (4.6), Mexico (5.3), and Brazil (9.5). Portugal's income concentration profile, on the other hand, was similar to that of France (3.3) and Argentina (3.6) during the early 1970s.

The second, or functional, approach to income distribution measures the shares going to the various productive factors--entrepreneurship, land, capital, and labor. Wages and salaries or compensation of employees are concepts that normally show the proportion of national income or national product going to labor. In the aftermath of the 1974 military coup, the newly formed labor unions within the General Confederation of Portuguese Workers-National Intersindical (Confederação Geral dos Trabalhadores Portugueses-Intersindical Nacional--CGTP-IN) greatly increased their strength from mid-1974 to November 1975. The unions focused on expansion of the public sector, employment guarantees, and income redistribution. In response to labor's demands, the government instituted income-leveling policies that included a large increase in the minimum wage for a substantial proportion of the work force, a freeze on rents, a highly graduated income tax, and a ceiling on salaries. As a consequence of official measures affecting wages and salaries (including the US$800 a month ceiling on the maximum salary), the average pay gap between unskilled workers and managers shrank from 1:7 in 1973 to 1:4 in 1975. To protect increases in nominal wages, prices of essential commodities, particularly food, were fixed at below market levels. Real wages increased 25 percent between 1973 and 1975, and the share of the wage bill in national income rose explosively from 52 percent in 1973 to 69 percent in 1975. At the same time, the proportion of national income flowing to capital and entrepreneurship (including income of artisans and other self-employed workers) was sharply eroded.

Official policies were also reflected in the distribution of income. Average wage income of the lowest quintile almost doubled in real terms between 1972 and 1976; the second and third quintiles obtained an increase of 59 percent and 45 percent, respectively; but the real remuneration of the top 5 percent declined by 19 percent from 1972 to 1976.

In January 1979, the General Union of Workers (União Geral dos Trabalhadores--UGT) was organized. The UGT was viewed as a viable, democratic alternative to the CGTP-IN, which, as of the beginning of the 1990s, continued to be communist dominated, as it had been since its formation. By 1990 these two union confederations were roughly equal in size, and 30 percent of the labor force was unionized.

How had the working class fared since the revolution? Following the short-lived, government-induced wage explosion in 1975-76, the share of employee compensation in national income (52.9 percent in 1979) was again much the same as in 1973 (51.6 percent), and from 1979 to 1989 that share was on a downward trend. Real wages per capita increased only 10 percent between 1973 and 1989, a reflection both of slow labor productivity growth (20 percent) during this sixteen-year postrevolutionary period and the widening "tax wedge," i.e., the higher social security taxes contributed by both the employer and the employee. Real wages per capita moved on a downward trend between their peak level in 1976 to their lowest point (below their level in 1973) in 1984. From 1984 to 1990, real wages rose each year in response to the brisk demand for labor associated with Portugal's economic recovery. The rate of unemployment fell to 4.7 percent in 1990, the lowest level since the mid-1970s. This rate brought the cumulative decline since the unemployment peak of 1985 (8.5 percent) to 3.8 percentage points. An estimated 250,000 new jobs were added between 1985 and 1990.

The Portuguese government submitted legislation in 1988 to abolish the restrictive individual and collective dismissal regulations that had been in effect since 1976. Although approved by parliament, the law was declared unconstitutional by the courts. In the following year, however, the government gained court approval of less sweeping labor reforms: dismissal procedures were simplified and the conditions eased regarding both the termination of individual contracts and collective layoffs. Under this law, older unemployed workers were permitted reduction of the early retirement age from sixty-two to sixty. Until the 1989 labor reform, unemployment rigidity was coupled with a high degree of real wage flexibility. Consequently, adjustment to external shocks, such as the sudden price explosion of imported oil between 1979 and 1980, was effected by reducing real wages rather than the numbers of employed.

As a result of its EC membership, Portugal received transfers from the European Social Fund in support of training programs managed by private firms. The fund's contribution to the Portuguese labor market amounted to 1 percent of GDP in both 1987 and 1988, of which two-thirds was invested in training an estimated 160,000 young persons.

Data as of January 1993

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