Figure 2 GDP and final demand (annual change, percent) 20  20  15  15  10  10  5  5  0  0  -5  -5  -10  -10  -15  -15 04  05  06 GDP  07 08 09 Domestic demand  10  11 12 Final demand  13  Source: Central Bank of Chile. BIS central bankers’ speeches  7  Figure 3 Inflation indicators (annual change, percent) 10  10  8  8  6  6  4  4  2  2  0  0  -2  -2  -4  -4  -6  -6 06  07  08  09  10  11  CPI  12  13  CPIEFE  Source: National Statistics Institute (INE). Figure 4 Real exchange rate (*) (index, 1986=100) 120  120  110  110  100  100  90  90  80  80  70  70  ( )  88 g  90y  92  94  RER  96  98  00  02  1998-2012 average  04  06  08  10  12  1993-2012 average  (*) Includes information up to 27 August. Source: Central Bank of Chile.
Clearly the wage bill cannot be expanded by major pay rises, since this eventually leads to a higher relative cost of labour and, consequently, less job creation, higher unemployment, loss of household confidence and fresh falls in demand, which would mean still lower growth and more unemployment. Therefore, it is crucial to adapt wages to the specific situation of firms, to their activity, productivity gains, profits, etc. The current wage bargaining system does not take into account the large differences in individual firms’ specific situations, so it is not the most suitable one to prevent the bout of weak demand from generating a sharp fall in employment. Further, the predominance of indexation clauses in collective labour agreements is a problem that becomes particularly harmful when, as in the current circumstances, inflation has risen due to an external shock, like oil prices, at a time of cyclical weakness. It is naive to believe that automatic wage adjustment to reflect past consumer price increases provides any protection to household disposable income. On the contrary, these clauses (which have now been done away with in most European countries) lessen the ability of firms to compete and keep creating jobs, generate inflation (which affects those not protected by similar provisions) and, in short, hinder adaptation to the external shock. In general, these characteristics of the Spanish labour market have meant that employment has so far been the economy’s main adjustment variable in periods of crisis, since it is the quantities (i.e.