The evolution of real wages in Romania for the last 20 years: how bad was 2010

In 2010 there had been a lot of discussing about the decrease in the purchasing power of Romanian people, especially given the fact that prices had risen, the budgetary wages had been decreased and the pensions were frozen, and in this context there were countless remarks that after the Revolution we were never as bad as a condition as we are now.

In the last 15 years, Romanian economy passed through two major periods of correcting imbalances, the result being in both cases that of the lowering of the purchasing power of the population. The two periods have differed, however, in what concerns the way the adjustment had been made – in 1997 the correction had been made using the inflation, and in 2009 and 2010 was used the decrease of costs. Let’s take them one at which time.

The Adjustment in 1997

After the fall of the communism, the economy suffered a shock: the first 4 years of capitalism generating a continuum degrading of the state’s welfare. The descendent trend was stopped in 1994, the real wage acknowledging a significant growth in 1995 and 1996.

This stoppage of the decline was put under discussion however, being realized at the cost of keeping under strict control the administered prices, state companies being forced to sell products at a price that did not cover anymore the production costs. As follows, by the end of 1996, refineries had aggregated debts to the bank in amount of over half billion dollars, or the equivalent of 1.5% of GDP.

In that period, an appease of the inflation was also made possible, which had grown up to over 150% per year between 1991 and 1994, to less than 40% in 1995 and 1996. The cost of that was, however, huge.

At the beginning of 1997, after RDC (Romanian Democratic Convention) taking the power, prices of energy and food - prices, which, given social reasons, have been artificially kept below for some years – were liberalized, with the following consequences :

-          The inflation exploded, prices increasing  about 155% in 1997, the peak being reached in May-June, when prices were 180% higher than the year before. In other words, they almost tripled.

-          In January and February 1997, the Romanian currency had depreciated by 91% in comparison to the dollar, increasing from 4000 lei/$ in December 1996, to 7774 lei/$ in February 1997.

-          In that year, prices had risen by about 155%, and wages and pension by only 100%, which led to a strong decrease of purchasing power, 1997 being the year in which welfare reached its minimum in the last 21 years. The real wage was only 56% of the one in 1990.

-          The average wage decreased from 104$ in 1996, to 88$ in 1997, and the average pension decreased from 41$ to 36$. In 1990, the average wage was 156$, and the average pension 74.3$.

I wonder what had been the amount of hysteria created in 1997 if there had been 50 television channels and thousands of blogs. What would have been showed on every TV program and what would have been posted on the internet about the fact that the price of gas, of electricity or of house maintenance had almost tripled in one year, or that the Romanian currency had depreciated by about 90% in only two months? How long would it have been put under discussion the bankruptcy of Romania?

Let’s not forget that this drastic adjustment came at a moment when the standard of living was also at a bottom level after the dramatic adjustments at the start of the 90s.

As a curiosity: in 1997 there had been 15 strikes, that had a participation of 52000 workers; in 1998 there had been 54 strikes, that had a participation of 120000 workers; and in 1999 there had been 89 strikes, with a participation of 232000 workers.

Years 2009 and 2010

Unlike the adjustment in 1997, which was realized using the inflation, the one between 2009 and 2010 was done by raising taxes, cutting costs, firing, wage reductions and freezing pensions – I wrote a lot about this, no point in repeating.

In 2009 and 2010, there were economists that suggested an adjustment using inflation. This solution being easier to deal with, psychologically speaking, because the common citizen doesn’t get the feeling that the state “reaches into his pocket”. When you decrease the nominal salary, however, and the worker notices that at the end of the month he receives less money than usual, the psychological impact is greater.

Comparing to the 90s, the adjustment done in 2009-2010 comes after 9 years of continuous growth in what concerns the wages and pensions, the real wage increasing by about 120% between 1997 and 2010. In other words, using strictly numbers, the adjustment in 2010 is nothing like the one in 1997.

Even in the case of budgetary workers, the decrease by 18%-20% of the real wage, which took place in 2010 (the 25% cuts took place after the half of the year) occurred after the wages doubled between 2006 and 2009. In 1997, in the case of budgetary workers, the real wage went down by 23%, having in mind the fact that, in the past 6 years, the real wage decreased by another 28%.

Conclusion

Both in 1997 and the present time, adjustments were necessary. Both, then and now, these adjustments were wrongly and much too late implemented , making the population endure a number of sacrifices above the normal rate.

In comparison to 1990, the real wage is now approximately 24% bigger, the rate of growth being insignificant, taking into consideration the period of time and the progress that Romania could have had if the leading unions in the government had had better performances.

Radu Sarpe

[artigo de opinião desenvolvido no âmbito da unidade curricular “Economia Portuguesa e Europeia” do 3º ano do curso de Economia (1º ciclo) da EEG/UMinho]