The Bank of Spain warns about the harmful effects of raising the minimum wage

The Bank of Spain warns about the harmful effects of raising the minimum wage

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The Bank of Spain warns about the harmful effects of raising the minimum wage

On December 21 last year, the Spanish government issued an executive order whereby it increased the national minimum wage by an astonishing 22.3 percent for fiscal year 2019. Despite the potentially harmful effects that such a drastic measure could have on Spain’s ailing labor market (the unemployment rate is still over 14 percent), Sánchez’s government didn’t hesitate to approve the largest increase since 1977.

Even though it’s still too early to assess the impact of this measure, we can extrapolate the effects of past increases in the minimum wage. This is exactly what a new report released by the Bank of Spain does using data from 2017, year in which Rajoy’s government increased the national minimum wage by 8 percent.

Here are some numbers from the report. According to the Bank of Spain, the probability of job loss among the affected by this increase went up by 6 percentage points. For 45-plus workers, the impact was higher: the probability moved from 14.1 to 40.9 percent. This means that a 50-year-old person living on the minimum wage was substantially more likely to be fired after the 2017 rise.

The Bank of Spain estimates that 12,000 workers (a 3.4 percent of all affected) lost their jobs due to the increase. In aggregate terms, this means a decrease in total employment of around 0.1 percent. As expected, older workers bore the brunt of Rajoy’s government misguided economic policies: 10.7 percent of all workers between 45 and 64 affected by the minimum wage increase were left jobless.

Unlike the 2017 increase, where the incidence was relatively low (2.4 percent of the total full-time employed population), the number of people impacted by the 2019 minimum wage increase is considerably higher: between 6.2 and 7.6 percent of all full-time workers. This percentage shoots up to 22.5 percent if we only take into account the new entrants to the labor force. What is the estimated impact based on the 2017 experience?

According to Spain’s national banking authority, 12.7 percent of those affected by the 2019 minimum wage increase will lose their jobs. This means that 125,000 workers will be laid off, pushing employment down by around 0.8 percent. Again, the impact will be more severe for older workers: 28 percent of minimum-wage earners over 45 will become unemployed. In addition, the 22.3 increase in the minimum wage is likely to push inequality up: whereas those workers who are lucky enough to keep their jobs will see their wages increase substantially, a large fraction of minimum-wage earners will lose their jobs, with the subsequent impact on income inequality.

The Bank of Spain isn’t the only institution that is warning against the harmful effects of such a large increase in the minimum wage. Spanish bank BBVA estimates that between 75,000 and 195,000 fewer jobs will be created in the next two years as a result of the 2019 minimum wage rise approved by Sanchez’s government.

Of course, these are just estimates. It’s impossible to predict with precision what will be impact of this populist measure. Yet it’s not unreasonable to think that the largest increase in the minimum wage in the last 40 years will have a significant negative impact on Spain’s labor market. 

 

 

Luis Pablo de la Horra

Luis Pablo de la Horra
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