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By Eliana Raszewski and Maximiliano Rizzi

BUENOS AIRES (Reuters) - Argentina President Mauricio Macri is racing to cut the country's famously high labour costs in a bid to increase foreign investment, risking a confrontation with powerful unions before congressional elections later this year.

Businesses say labour costs must come down before they make investments that Macri needs to restore economic growth and improve his party's clout in congress in an October vote. But trying to make labour cheaper has brought the centre-right president eye-to-eye with tough union bosses allied with the opposition Peronist party.

"Argentina has the highest number of retired people receiving pensions in the region. And it has the best healthcare coverage. If they want to take that from us they're in for a fight," said Hector Daer, one of the three top leaders of the CGT General Labour Confederation, the country's biggest union.

Without a majority in Congress, Macri has had to rely on moderate factions of a divided Peronism to implement market-friendly reforms like reducing the budget deficit and settling with hold-out creditors in his first year in office.

To try to avoid conflict and losing votes over labor reform yet still attract investment, the government is seeking the approval of the CGT on a range of measures likely to be announced in February, two government officials said.

Unions in Argentina are used to tough negotiations and they are not shy about picketing, blocking roads or going on strike in the pursuit of pay packages that workers rely on to keep up with inflation clocked at around 40 percent last year.

One such measure is a subsidy for companies that hire new workers or register informal employees, who make up some 30 percent of Argentina's labour force.

Macri's government is also aiming to limit the number of salaried employees who do not actually work for the company but act as full-time union representatives, a goal that could lead to opposition from unions.

"Just as last year the government focused on normalizing macroeconomic policy, negotiating a deal with holders of unpaid bonds, eliminating foreign exchange controls etcetera, this year it will focus on how to generate employment and increase productivity without lowering real salaries," a government official told Reuters on condition of anonymity in order to discuss a sensitive issue.


Macri had some early success, clinching a deal last month to reduce benefits for workers in the Vaca Muerta shale oil formation. Now, two government officials said he hopes to replicate those negotiations with other sectors, including construction, car manufacturing, electronics and shipping, all key to taking Argentina out of recession.

"We have to find a balance between defending workers' rights and avoiding labor litigation," said a high-ranking Labour Ministry source who asked not to be named, emphasizing the impact lawsuits generally won by workers have on company costs.

A late 2016 International Monetary Fund report said Argentina's unit labour cost was 50 percent higher than the country's neighbours Chile and Brazil. Salaries in Argentina are relatively high, as are tax and social security payments its employers are required to pay.

Change will not be easy, considering Peronism, a broad movement named after former president Juan Peron, has been a major force in Argentina for 70 years. The party prides itself on caring for the poor and protecting workers even if it means clashing with businesses.

Previous President Cristina Fernandez, herself part of a more radical Peronist faction, was hounded by labour disruptions toward the end of her second term in 2015.

"We have an important discussion ahead of us. It's not just about lowering labour costs. It's also about preparing workers," said CGT spokesman Jorge Sola.

"The great challenge is to know how we compensate with other tasks the workers who are going to be replaced by technology."

(Writing by Hugh Bronstein and Caroline Stauffer; Editing by Christian Plumb and Bill Rigby)

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