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According to the BBC, Spain wants to increase the minimum wage by more than 20%:

Spain's minimum wage will jump by 22% in 2019 - the largest annual increase in more than 40 years.

It means millions of low-paid workers could see a pay rise from €736 ($835; £665) to €900, effective from January.

An increase to the minimum wage is also a topic where I live (Romania) and I've often heard analysts arguing that large increases like this are rarely followed by a productivity increase of the same amount and that it might even make some investors leave the country.

Why would the government increase the minimum wage by such a large percentage in one go rather than by a smaller percentage more often (e.g. yearly)? Theoretically, such a strategy should minimize the risks.

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    I assume that "€900" figure is a monthly salary? Minimum wages in the US are typically expressed as an hourly rate, but €900 per hour seems unlikely so I want to make sure I'm understanding what that number actually means. – Kamil Drakari Dec 19 '18 at 14:36
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    @KamilDrakari - yes, it is a monthly figure. – Alexei Dec 19 '18 at 15:09
  • Lots of comments deleted. Please don't use comments to answer the question. Also don't use comments to debate the subject matter of the question. For more information about how comments on questions should be used, please review the help article about the commenting privilege. – Philipp Dec 23 '18 at 18:59
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You're looking at the policy economically rather than politically.

Spain has to have a general election by July 2020. The government are contemplating having it earlier, possibly in May 2019 (to coincide with regional elections).

So announcing a flagship policy of the "look what we're doing for our people" variety, a few months before an election, keeps it in people's minds. Also, it won't have had an opportunity to have negative consequences prior to the election, so there's only upside at this point.

Obviously, this wouldn't work as well, politically, if you announced a much smaller increase, even if you plan to give further increases in subsequent years. The Euro in the pocket is worth a lot more than promises.

It could have economic harm subsequently. However, given there would be 4-5 more years before the next election, the minimum wage rise will be old news and a downturn can be blamed on other things.

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    TL:DR: buying votes? – user4012 Dec 19 '18 at 21:51
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    @user4012 More specifically, buying votes with other people's money. – reirab Dec 20 '18 at 4:06
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    This answer fails to consider that raising the economic wage may make economic sense. The wage share in many countries has been going down for years if not decades, and a substantial increase in wages across the board is one way to bring it back up, as a higher minimum wage may also benefit low-paid workers not on minimum wage. It also encourages companies to increase productivity. It's the old labour vs. capital struggle in which labour has lost out in recent decades. See also Trilarions answer. – gerrit Dec 20 '18 at 12:12
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    @gerrit The question wasn't about the merits of a minimum wage. The question was: why such a large (22%) increase in Spain and why now. I'm offering an alternative analysis to the economic one. There are others. For example, a number of news outlets are emphasising that it will be formally passed in Barcelona so linking it to the Catalonia situation. I happen to not think that that fits the facts but that's just my opinion. – Alex Dec 20 '18 at 13:00
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    @gerrit Raising minimum wage doesn't benefit low paid workers. It just makes some of them lose their jobs or prevents them from getting one. It also has a history of being used by racists to keep disadvantaged people willing to accept a lower wage from pricing the dominant race (usually white people) out of the market; see Davis-Bacon Act and South African apartheid. Forbes article introducing the topic – jpmc26 Dec 21 '18 at 3:03
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There is also a possibility that current minimum wage doesn't reflect actual wages paid to the people.

For example, in my country, due to poor law enforcement abilities to pursue these types of offences, it was very common practice in many sectors for employers to declare workers' pay as being only minimum wage, but actually pay them a higher wage. The difference between the reported wage and actual wage was paid in cash without paying taxes on it. It is still the situation in some sectors, but the situation has improved quite dramatically over the last decade.

Bringing minimum wage closer to actual minimal pay employees receive eliminates the opportunity to evade taxation. It is much easier to prosecute for using employees that are paid completely under the table, than to prove partial cash transactions.

  • @lazarusL do you have data on the actual wages in Spain that include untaxed cash earnings? Or do you mean to say that currently many people officially receive less than current minimum wage? That would be completely illegal. – Gnudiff Dec 19 '18 at 16:02
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    I completely misread your point. I had a previous association with cash payments being lower than minimum wages for completely under-the-table workers that weren't on the books at all. Deleting my previous comment. +1 – lazarusL Dec 19 '18 at 16:08
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    I also had to read it multiple times to get your point. Maybe you should make it more explicit. I understood now, you're saying that the increase won't affect the pay out to the employee, but only reduce tax fraud? – Chris Dec 19 '18 at 17:16
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    @user4012 I would think it was common in most Eastern Europe countries immediately after the fall of the USSR, but probably more so in those which were actually part of the USSR, prior to its collapse. Real taxation practices was something that had to be learned, as I do not think the USSR had any tax fraud. The state was practically the only employer, and private enterprise was generally forbidden. Those who engaged in (private enterprise), were primarily not prosecuted for not paying taxes, but for doing it at all. – Gnudiff Dec 19 '18 at 22:32
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    This is still widespread in Hungary (which wasn't a part of the USSR, but certainly under its influence), I know many people who get a part of their salary "in an envelope" (i.e. in an unofficial, unreported way). I couldn't find any recent statistics, this article from 2013 says that up to every sixth employee may have been paid in such a way. – molnarm Dec 21 '18 at 8:51
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I often heard analysts arguing that large increases like this are rarely followed by a productivity increase of the same amount and that it might even make some investors leave the country.

This sounds very vague. Many economic policies (higher taxes, lower spending, more debt, ...) have the potential to make some investors leave the country and there are always some analysts predicting imminent doom as consequence of almost any proposed policy.

When Germany introduced a minimum wage in 2015, quite a few prominent economics' scientists predicted the loss of in the order of hundreds of thousands of jobs. They erred and the unemployment continued to fall and the number of jobs continued to rise.

One positive effect of a higher minimum wage is that almost all of it is spent immediately and returned to the economy. So if indeed not too many people lose jobs through it, then there is also a chance of additional economical growth. Low incomes are spent proportionally more on domestic products (not spending money on expensive oversea-trips, buying second-hand cars instead of imported cars). There is a long going international trend of a declining wage share. An increased minimum wage could counteract the decline in the wage share and reduce inequality. A higher minimum wage is not only a risk but also a chance.

I wonder why having such a large increase at once and not increasing by a smaller percentage often (e.g. yearly). Theoretically, such a strategy should minimize the risks.

It would minimize the risk, but it would also minimize the chances. And it just may be a too small step anyway to show any effect.

Let's just assume for a moment that there is an optimal minimal wage, which might be defined as the minimal wage with the highest benefits (more income to lowly paid employees) at the lowest costs (less income to those not having jobs anymore).

Now the question is how far the current minimal wage is away from that optimal minimal wage. If the difference is large, then you actually want to make a large jump. 736€ per month doesn't sound like it's overly large, even 900€ per month doesn't sound like it's overly large, even more may be imaginable. For comparison, the minimum wage per hour in Germany is currently at 8.8€ which means something like (160 hours per month x 8.8€ per hour = 1408€ per month (before deductions), similar to the minimum wage in France) which is way above the numbers you have given for Spain.

Example: if the current minimal wage is $1 per month and the optimal minimal wage is $100 per month then you want to increase the minimum wage by 10,000 % and nothing less. It all depends on where you come from and where you want to go and what you fear more (over- or undershooting your goals).

I agree that once you are close to the optimal minimum wage you probably want to adjust the minimum wage in smaller steps.

How will we know if the rather large jump now was right or wrong? The time evolution of the unemployment/employment rate as well as the growth/shrinking of GDP will probably give a hint.

The current economic situation of Spain is not too bad. GDP is growing continuously since 2014 and unemployment is falling. However, unemployment is still quite high. A strong increase in the minimum wage might indeed be too risky. But that's far from sure. I think that the answer from Alex framing the strong increase as a pure election present is not proven sufficiently. I cannot exclude that the two major political parties supporting the increase in the minimum wage (PSOE and Podemos) actually believe this increase is a sound economic policy. Time will tell but it might be that the strong increase now will actually be beneficial for the Spanish economy.

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    "One positive effect of a higher minimum wage is that almost all of it is spent immediately and returned to the economy". It might be worth out pointing that this is a return to the local or at least national economy. Specifically, people on low incomes (such as minimum wage) spend a larger fraction of their income domestically. They don't go on long vacations to far-away countries, for instance. They buy second-hand cars, not new imports. – MSalters Dec 20 '18 at 16:22
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    @MSalters but also a lot of cheap stuff from china, right? – Eric Duminil Dec 20 '18 at 21:54
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    @EricDuminil Less cheap stuff than one might think. Typically a Western Industrial nation trades about 30% of the GDP which means that statistically 70% of your spending go on domestic products, services, ... Example would be an Iphone: manufacturing is in China but the manufacturing price is only a small part of the selling price. – Trilarion Dec 21 '18 at 8:42
  • @MSalters Thanks, that's also a good point for arguing that a higher minimum wage doesn't do too much damage. Added it in the answer. – Trilarion Dec 21 '18 at 9:02
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    So minnimum wage adjustments can be looked at as sprawled on the Laffer like curve as well. Nice, never thought of that to be honest. – mega_creamery Dec 21 '18 at 11:50
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As Alex says, the purpose of the increase might be due to elections being close, although it being approved is unlikely given the support this measure has in the Parliament is not enough.

In order to understand if the minimum wage should really be raised, knowing that a more or less common apartment rent cost might be around 600€ in a non-centric area of the main cities. This makes that even two people living together with both earning the minimum wage, can be very short of money.

Still, having lived in Spain for whole my life and having known people in these conditions, controlling that contracts are respected can be even more useful. It is not uncommon that low-end workers, poor people or immigrants are contracted part time but actually are working full time. Extra hours are also usually not paid apart from some specific areas (some industries and hotels or restaurants). IT companies for example almost never pay extra hours, being very common and numerous amongst all of them.

P.S.: My English is very rusty so there might be many grammatical mistakes.

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    Re: respecting working hours, a 2015 change in the Estatuto de los Trabajadores required business to provide a log for flex time workers and extraordinary hours, and some sentences extended that to all workers for a time, but finally the Tribunal Supremo did revoke that interpretation. After that, recently the Parliament did change the law to explicitly require almost all employers to register the work hours (lin in Spanish)... – SJuan76 Dec 20 '18 at 14:23
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    ... of course, it is yet to be seen how effective this measure is, as it is often difficult to protect people from laboral abuse if the victims cooperate with their employer out of fear of losing their jobs. – SJuan76 Dec 20 '18 at 14:24
  • I didn't know about that change, still, as you say, if employees don't fight against these practices, there is little to be done, except for inspections, but government doesn't seem to be interested in doing them properly. In my company we must only log 8 hours a day, no matter the real working time, and I guess other companies are similar. Unless we fight to change this, it will keep the same... But it is too assimilated in our working culture that we must do extra hours when the company needs them (read: plans projects assuming that extra hours will be made). – randomname39 Dec 21 '18 at 11:33
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"I often heard analysts arguing that large increases like this are rarely followed by a productivity increase"

Is that a problem? Productivity has increased over the years, but salary hasn't increased by the same magnitude. So increasing the minimum wage is one way to redistribute the wealth.

Numbers for US, but similar numbers are found in most countries:

Change 1973–2017:
Productivity +77.0%
Hourly pay +12.4%
Productivity has grown 6.2x more than pay

https://www.epi.org/productivity-pay-gap/

  • The problem with this is - productivity increases generally comes from automation, which requires more skilled workers. which get more than minimum pay anyway. The productivity of typical low wage jobs (shoveling sand, cleaning, delivering stuff) tends to increase a lot less over time. – Guntram Blohm Dec 20 '18 at 19:05
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    Low wage jobs are getting fewer by automation as welle, but there are no other ways of redistributing wealth except for wages and taxes. Basic income might be one, but I think it has higher resistance to implement. – Viktor Mellgren Dec 21 '18 at 8:53
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The answer to "why" is part of the linked article.

The large bump is the result of an ongoing attempt by Mr Sánchez's minority government to secure its political plans - including budget measures - with the help of anti-austerity party Podemos.

Podemos claimed the minimum wage increase as a victory for the party, with its General Secretary Ramón Espinar calling it "the first step to balance the scales".

Mr Sánchez is also under pressure from Catalan separatist parties - they have refused to back him over rising tensions between the semi-autonomous region and Madrid - and from the success of far-right party Vox - it made gains in Andalusia's regional election.

protected by Philipp Dec 22 '18 at 19:32

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