Spain’s historic 22% minimum wage hike in 2019 led to a reduction of barely 1% of its employment, far less than some analysts had forecast, a Bank of Spain report published on Tuesday showed.
The finding is the latest to add weight to a growing international consensus among economists that minimum wage policies do not discourage firms from hiring workers, contrary to what was a widely held belief up to the 1990s.
The hike approved by Pedro Sanchez’s newly-arrived socialist government two years ago was at the time one of the highest ever recorded in a developed country. With its high unemployment and low-wage labor market, many feared a dramatic impact on hiring.
However, the report concluded that the wage rise led only to a reduction of between 0.6-1.1 percentage points in low-wage jobs that year – or roughly 90,000-145,000 positions.
It did not say whether those jobs were destroyed outright, allocated elsewhere or simply not created due to the reform.
Overall employment grew by 2.3% in Spain in 2019. Jobless comparisons between 2019 and 2020 are less meaningful due to the onset of the coronavirus pandemic, but the headline rate rose slightly from an average 14.1% in 2019 to 16.1% by end-2020.
After the first 2019 rise, Sanchez ‘government approved another 5.5% increase for 2020, leaving the minimum wage at 1,108 euros a month with the promise – frozen by the pandemic – to continue raising it in the coming years.
“In none of its pages does (the report) talk about job destruction, for the first time we agree,” Labor Minister Yolanda diaz told a news conference.
The authors of the study, which took 18 months to publish after analyzing millions of contracts, came up with a formula for use by other policy-makers when making decisions about minimum-wage increases.
They found that for every percentage point increase in the minimum wage, there is a reduction in job growth – which can be either job destruction or lack of job creation – of between 0.03 percentage points and 0.05 percentage points.
“The decision whether or not to raise the minimum wage cannot be circumscribed to the impact of this instrument on a single factor,” they concluded, urging policy-makers to assess whether positive impacts outweighed any hit to employment.
The study called notably for looking at changes in other variables such as consumption, investment and savings.
Spanish GDP grew by 2% in 2019 before crashing a record 10.8% in 2020 due to the pandemic. Household spending in 2019 rose by 0.9%.
The report split out data on the impact on the hospitality sector, which employed around 1.7 million workers before the pandemic and where the minimum wage is commonly used.
It estimated that at least 0.4% or 70,000, of those jobs were destroyed outright after the increase.
Spain’s minimum wage is now around the mid-point in the European Union, with Bulgaria lowest on 332 euros a month and Luxembourg highest on 2,202 euros, EU data show.