“A permanent solution will have to involve improving productivity, and also attracting high-quality foreign investment.”
The minimum and average wages are increasingly closer, resulting in a phenomenon of wage compression, which could be avoided with a increased productivityconsider economists consulted by Lusa, who defend policies to stimulate activity.
According to an analysis by the Bank of Portugal (BdP) released this week, the Kaitz index, which measures the ratio between the minimum wage and the median wage, in 2025, which compares with 87% in 2019.
For economist Pedro Braz Teixeira, the “original sin” of this phenomenon was the fact that the minimum wage stopped being an index for social support in 2007, and the increase in this value no longer had such a high impact on public spending. Thus, from 2007 onwards, with the creation of the Social Support Index (IAS), governments began to accept “very significant salary increases”.
The economist argues that “minimum wage increases need to be more aligned with productivity increases”, while there must also be “policies to promote productivity, which has grown very little”.
“The increase in productivity would make it possible to increase the average salary, avoiding that compression”, he concludes.
Ricardo Amaro, from Oxford Economics, corroborates this idea, arguing that the solution to salary compression “will have to involve trying to get other salaries in the economy to follow this upward trend”.
“A job market with low levels of unemployment, like the current one, helps with this as shortages increase the bargaining power of workers”, he points out, but “A permanent solution will also have to involve improving productivity, and also attracting high-quality foreign investment”.
While rising education levels help with this issue, “instability and low fiscal competitiveness, slow justice and excessive bureaucracy are areas that reduce our attractiveness”, he argues.
Economist Ricardo Ferraz highlights that the remaining wages are not growing at as fast a pace as the minimum wagea reality that “is not exclusive to the private sector, but also occurs in the public sector”.
Ferraz considers that policymakers “have to be proactive and study measures that reward not only factors such as productivity (which is undoubtedly important), but also people’s academic training and experience”.
According to the BdP’s analysis, the distribution of salaries of employees in the private sector has registered a compression, particularly associated with the minimum wage, which has a “central role” in the formation of salaries.
According to these data, the highest salary increases occur at the lower levels associated with the minimum wage, through updating this value.
In 2025, workers in the first decile of the salary distribution (along with the minimum wage) recorded an average base salary growth of more than 8%, while in the last decile (slightly below 3,000 euros) this growth was close to 5%. This leads to a compression of wage distributionat the same time as it causes a reduction in wage inequality, in a context in which the minimum wage plays a “central role” in the formation of wages.
As companies use subsidies and supplements as a mechanism to “lessen” salary compressionwith a view to making salaries more attractive and less penalizing, according to economists interviewed by Lusa, who warn of the “difficulty of rewarding effort”.
Subsidies “beneficial to both parties”
The BdP analysis released this week concluded that the distribution of salaries of employees in the private sector has registered a compression, particularly associated with the national minimum wage, which has a “central role” in the formation of wages.
The central bank also states that “the concentration around updating the minimum wage is more evident in the case of the base salary than in the case of the total salary”.
The economists interviewed by Lusa point out that the increase in salaries through other remunerations such as “food, transport, accommodation allowances” among othersis one of the ways companies use to “lessen the problems of salary compression”, minimizing tax costs.
“The fact that we have a system where IRS levels rise very quickly probably means that it is beneficial for both parties to use a wide range of remuneration components in addition to the base salary”, says economist Ricardo Amaro.
On the other hand, and despite mentioning that This phenomenon “is almost 20 years old”Pedro Braz Teixeira points out that “one of the problems” of this compression is related to “the difficulty of rewarding effort”, so that “the other remuneration components help to alleviate this problem”.
“Although there is no concrete data, it is rational to admit the hypothesis that, in a context in which the minimum wage rises more quickly than other salaries, there may be a greater use of these remuneration components, as a way of making more qualified positions more attractive”, adds Ricardo Ferraz.
“The solution will have to be to try to ensure that other wages in the economy follow this upward trend”, highlights Ricardo Amaro, indicating that the current context of low unemployment “helps with this given that scarcity increases workers’ bargaining power”. However, “a permanent solution will also have to involve improving productivity, and also attracting high-quality foreign investment”, he adds.
