28 September 2023
Higher wages and a less insecure labour market without major job losses!
In 2019, the government of Spain increased minimum wages by 22% in a single step, raising it from 40% to 50% of the median wage and affecting 7% of dependent employees who until then had been paid less than 1050 euro a month.
The Bank of Spain, ahead of the reform in 2017, predicted a job loss between 1.4% and 11.3% of affected workers, but recently published research from the OECD shows otherwise.
The OECD finds that the minimum wage rise:
• Increased wages significantly. Workers who in 2018 had been earning less than the 2019 minimum wage benefited from a 5.8% wage increase in 2019, with workers on open-ended contracts gaining 7.1%.
• Encouraged employers to shift towards using more open-ended employment contracts at the expense of fixed -term contracts, thereby reducing some of the preciousness and insecurity that characterises the labour market in Spain. (The incidence of temporary employment in Spain was the second highest in the OECD in 2019).
• Only had a very limited impact on employment by reducing by 0.6%. the probability of remaining employed for those workers who were previously paid below the increased minimum wage.The difference with the Bank of Spain estimating even up to 11% job losses is striking. In absolute numbers, the OECD reports a total of around 18.000 jobs lost in a labour market employing 17 million employees.
The finding that minimum wages reduce labour market segmentation is new and the OECD puts forward two arguments to explain this.
– Minimum wages, by setting a wage floor, constrain the extent to which employers can shift expected dismissal costs to workers by pressing their wages down. Minimum wages thus fully expose employers to labour law measures that aim to promote open ended contracts, such as severance pay at the end of a fixed term contract.
– Another explanation is that higher minimum wages incentivise employers to opt for stable employment contracts to build a more experienced work force that will deliver the productivity to finance better wages.
Minimum wages and job protection measures that aim to stabilise the employment relationship are complementary and reinforce each other. This, together with the fact that claims about large minimum wage increases destroying jobs are once again proven wrong, warrants close attention by policy makers elsewhere.