You Wouldn't Work a Whole Day for Five Cents Either

With hyperinflation raging, wage-rises in Venezuela now lag so far behind normal people can't afford to turn up to work. At what point does that turn from curiosity to system-threatening crisis?

Original art by @modográfico

I’m obsessed with these stories about Metro de Caracas workers who can no longer afford to work. They’re fascinating as human interest stories, yes. But that’s not why I’m obsessed. I’m obsessed by their strategic implications. Because, these aren’t stories about the Metro de Caracas at all; they’re the tip of an iceberg. Absenteeism is the big Venezuela story of 2018.

If Metro workers can’t afford to work, workers throughout the economy can’t either. But what happens in a country where no one can afford to work anymore? That’s the early challenge hyperinflation poses, and it’s one whose answer is far from clear.

To grasp why, you need to understand what’s different about the Venezuelan hyperinflation, what sets it apart from the classic Latin American hyperinflations of the 1970s and 80s.

It’s not the run-up: like all hyperinflations, Venezuela’s took hold after a long period of persistent high inflation. Price rise in the 5-50% range per month has been with us for some time, and that’s the usual pattern: countries don’t tip from low inflation to hyperinflation at once they do so after high inflation has become “normal”.

Absenteeism isn’t an annoyance. It’s workers’ only rational reaction.

Now, the typical pattern in Latin America was that countries tipped from persistent high inflation to hyperinflation in large part due to wage indexing. To compensate for fast rising prices, labor unions bargained successfully for automatic cost-of-living adjustments indexed to the monthly inflation rate. If last month’s inflation was 15%, you need to hike up my salary 15% this month to make up for it.

It’s easy to see how wage indexing can tip a persistent-high-inflation situation into hyperinflation: it creates a positive feedback loop between prices and salaries that naturally tends to spiral out of control. Under wage indexing, rational expectations are that governments will be forced to print ever larger sums of money to cover automatically upward wages a situation that defeats the original purpose. Wages always lag behind the rate of price rise. It’s a terrible idea.

What’s bizarre about the Venezuelan case is that the economy has tipped into hyperinflation without any plan of wage indexing at all. In fact, with the Consumer Price Index no longer officially published, it’s not even clear what a labor union would ask for wages to be indexed against. There’s no index.

So now prices are doubling every 30-odd days and salaries aren’t even pretending to keep pace. That’s what makes the Venezuelan hyperinflation so corrosive there isn’t the pretense of an attempt to protect purchasing power over time. This is most visible in the parallel-exchange rate value of wages, which has crashed to now laughable levels. Who can work for 5 cents a day? But that’s what the minimum wage amounts to these days.

What happens in a country where no one can afford to work anymore? That’s the early challenge hyperinflation poses.

That being the case, absenteeism isn’t an annoyance. It’s workers’ only rational reaction. It’s the only way to cope with a situation where the cost of actually turning up to work exceeds any imaginable measure of the benefit received. That’s why you need to pay attention to the Metro worker no longer able to afford laundry for his uniform.

Those Metro stories are about the Venezuelan economy writ-large. Amid hyperinflation, without wage indexing, rational workers won’t turn up to work. They can’t. They know that under the firing freeze (inamovilidad laboral) they can’t be fired even if they don’t show up. And they need to spend that time hustling for side-income. There’s no other way to feed the kids.

Now where exactly is the threshold where absenteeism causes the public sector – and much of the private – to stop operating, even marginally? And what happens inside the Armed Forces, where it’s a crime for soldiers to go absent without leave, but where remaining in service means condemning your family to hunger?

I don’t know the answers to those questions. But they are the big riddles facing Venezuela in 2018.