Minimum wage increase in Spain caused job losses

by Lorraine Williamson
minimum wage
del canto chambers 2

MADRID – In 2019, the Spanish government raised the statutory minimum wage (SMI) by 22%. That was the largest increase made by the government since 1978. According to the Banco de España, this resulted in a negative impact on employment. 

With the 2019 increase, the minimum wage in Spain went up from €736 to €900 gross per month. Employment minister Díaz refuses to describe the fact that employment has not increased since then as ‘job destruction’. “A decline in growth is not the same as making existing jobs disappear,” said the minister. 

Good analysis necessary 

According to Díaz, the government will provide a report analysing the impact of the increase in the SMI on employment. Her ministry will show the 22% pay increase, the political showpiece from 2019, is not to blame. However, experts believe the effects of such a large salary increase should be carefully considered. 

The Banco de España report shows employment growth in 2019 was the lowest among the workers with the smallest salaries. The increase in the SMI may have resulted in 190,000 fewer jobs being created. That number is significantly higher than predicted by the Banco de España, BBVA and the independent tax authority AIReF. From 1 January 2019, the number of employment contracts with salaries below €1,050 decreased significantly. In 2018 there were still between 1.2 and 1.4 million, a year later there were only 800 thousand. 

Cumbre Villas

Abrupt decrease in number of contracts 

The question is whether this decrease can only be attributed to the 22% increase in the SMI. That is not the case, according to the report of the Banco de España. Even before the start of 2019, job growth was declining. Although, the abrupt decline in 2019 is nowhere as great as in the jobs with the lower salaries. 

It is mainly the low-skilled young workers with temporary employment contracts who are affected by the reduction in employment. The probability that the wage increase would terminate the employment contract increased by between 2 and 3 percentage points. Most young people with an SMI kept their contract, but the working time was shortened. 

Reduced growth due to minimum wage?

The point of discussion remains whether or not the reduced job growth is too great a sacrifice for the increase in the minimum salary. The Banco de España is only looking at the effect on the number of labour contracts. However the increase in the SMI is of course also about issues such as equality, narrowing the pay gap and increasing worker productivity. It should also be borne in mind that the 8% increase implemented by the government of Mariano Rajoy had the same impact on employment as the 22% increase in 2019. 

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