Why the Bank of Spain believes raising the minimum wage will hurt job creation

Why the Bank of Spain believes raising the minimum wage will hurt job creation
Strawberry pickers in Spain: Photo: SAMUEL ARANDA / AFP
The Bank of Spain has warned of the "collateral damage" the country's job market suffered the last time the minimum wage was raised, amid reports the Spanish government is considering revising this figure again and giving more rights to temporary workers.

In its report published on Tuesday, the Bank of Spain wrote that after the increase in Spain’s Minimum Interprofessional Salary (SMI) in 2019, there was less growth in employment among those who earned the lowest wages. 

The last time the Spanish government increased the minimum wage to €900 in 2019, it caused the loss of between 98,000 and 180,000 jobs, El Banco de España wrote.  

The central bank of Spain explained that if this were to happen again, these negative consequences could be especially tough “on the employment of older people and will cause a reduction in hours worked and job creation for young people”. 

Spain’s top banking entity also indicated that after the rise in the mininum wage in January 2019, there was “a sharp drop in contracts with base wages less than or equal to €1,050”.

The report comes just after the Spanish government announced it was considering raising the minimum wage in 2021 by an amount which is yet to be confirmed, but which is expected to be between €50 and €250 more per month than the current base salary.

Spain’s current minimum wage is set at €1,108.3 gross per month. In reality, this equates to €950 a month, payable in 14 instalments to allow for the double monthly salary in July and December. 

This analysis by the Bank of Spain comes after the Organisation for Economic Co-operation and Development (OECD) criticised Pedro Sánchez’s government on May 27th after not having applied increases to the minimum wage “gradually” and for not having analysed the repercussions this has had on its employment.

“The process of setting the minimum wage could be modified with the creation of a permanent independent commission, in charge of evaluating its possible effects and preparing recommendations that allow a gradual modification of the minimum wage in line with the evolution of the conditions of the labor market and the productivity”, the OECD explained in its report to Spain.

The Bank of Spain’s report also indicated that the rise in the minimum wage would affect all age groups who are employed to a greater or lesser extent.

For those under 33 years of age there is “an important and significant increase in the probability of going from full time to part-time”. Among young people between 16 and 24 years old, the report stated that “the probability of being employed full time is reduced”. And with regards to the elderly, in most cases, they become unemployed.

According to the Bank of Spain, it’s the young people who will be the most negatively affected by this rise when it comes to finding work.

Unlike what happens with job loss, which affects older people, the most damaging effects are on those trying to find a job in the first place, especially those under 24 years of age.

The report estimated that there will be a reduction in job creation of 1.9 percent for those between 16 and 24 years old and of 1.2 percent for those between 16 and 64 years old.

The young are also the group most affected by unemployment. According to the latest government figures, this stands at around 39.9 percent and is the worst in the EU. 

The Spanish government is also currently trying to address the precariousness of the country’s job market by shortening the maximum length of temporary work contracts to six months so that temporary employees can access fixed positions sooner.

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