Minimum wage increases: what do we know about their effects? | Economy

Minimum wage increases: what do we know about their effects? | Economy

Joseph Stiglitz claimed, in an interview published on November 11 in this newspaper, that raising the minimum wage does not harm employment, rejecting the prediction drawn from a simple competitive model of the labor market that a rise in the same reduces the quantity demanded of work and, therefore, employment. Is the Nobel Prize in Economics and other economists defending the minimum wage increases right? Let's see.

According to the review carried out by two North American economists (Neumark and Wascher) ten years ago, two thirds of the works referred to different countries found negative effects on employment, but these were not always statistically significant, so it could not be excluded that the impacts were null. In fact, new studies conducted in recent years suggest that the estimated effects tend to be around zero, once certain aspects related to the analysis and the econometric specification are improved. In general, new jobs and meta-studies of jobs that refer to specific countries, such as the United States and the United Kingdom, or to a wider group of countries, conclude that the minimum wage does not significantly influence the level of employment or which has practically no effects.

In the Spanish case, studies have found evidence of a weak negative impact of the minimum wage on adolescent employment (16 to 19 years), with negligible effects for the rest of the workers. Even the increase by which the gross monthly SMI increased from 655.20 euros in 2016 to 707.60 euros in 2017 would have had little effect on aggregate employment. According to the simulation carried out by the Bank of Spain, using data from the Continuous Sample of Labor Lives of 2015, the impact would have been a decrease in employment of 0.1%. It is the data that is used to estimate the supposed negative effect of the proposed increase up to 900 euros.

In view of the empirical evidence presented previously, it seems that an increase in the minimum wage could be a good measure aimed at reducing wage inequality, without appreciable negative effects on aggregate employment. This is the conclusion reached by the OECD even in one of its latest reports (Employment Perspectives, 2014).

One way to examine the existing margin to raise the minimum wage in Spain is to compare the ratio between the minimum wage and the average salary with other countries. With information from the OECD database, Spain (44%) is below the average of the countries belonging to this organization (47%). Another way is to compare the minimum wage in net terms (the one that the workers receive) and in gross terms (the labor cost of the companies). The difference between the two would be the fiscal wedge associated with the minimum wage. As the OECD also shows, the average in developed countries is 20%, but in some countries (including Spain) it reaches 30% or more.

This means that our country would have margin to reduce this wedge, increasing more the net income of the workers with the level of the minimum wage than the gross labor costs of the companies, using taxes and transfers to reinforce the impact of the minimum wage on the workers. living standards of affected workers and subsidies to companies (reductions of social contributions) to reduce the impact on labor costs and minimize the potential adverse effects on employment.

Carlos García Serrano He is Professor of Fundamentals of Economic Analysis at the University of Alcalá.


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