September 25, 2020

Moody's believes that economic growth will absorb the cost of raising the minimum wage | Economy

Moody's believes that economic growth will absorb the cost of raising the minimum wage | Economy



The rating agency Moody's has presented a report on Monday stating that the detrimental effects that the increase of the minimum interprofessional salary (SMI) to 900 euros this year can have on the labor market will be offset by GDP growth, since companies can correct the increase in costs with higher billing. The increase of the consumption derived from the rise of the SMI causes the increase of the GDP of 2.3%, according to the American company. Moody's also warns that job creation will be hurt because companies will tend to reduce the number of hiring to contain labor costs.

Moody's notes that job creation will slow down as a result of the rise of the SMI. And it calculates that the new hires will be reduced in a range that places, between 40,000 and 150,000 jobs, according to the estimates of the Bank of Spain and the Fiscal Responsibility Authority. The most affected by this fall in employment will be young people, who will find more difficulties when looking for a job.

"These estimates are subject to a high degree of uncertainty," explains the report of the rating agency, which in any case warns that companies will tend to reduce the number of new hires to contain the rising wage costs, mostly from those who apply for employment for the first time.

Moody's believes that the absence of a specific minimum wage for young workers (which would be lower than the SMI) may mean that, with equal wage conditions, companies prefer to hire more experienced workers to the detriment of those who are seeking their first job. Around 52% of workers below 24 years of age receive a monthly salary equal to or less than 1,000 euros, according to the rating agency's report.

The document warns that the increase of the SMI will directly affect the costs of Spanish companies, especially companies with fewer than ten employees (micro enterprises) in which one in five workers currently receive the minimum wage. Microenterprises currently represent around 86% of the total of companies in Spain, while they represent around 45% to 50% of the volume in portfolios of securitization of SME debt in Spain, says Moody's.

Moody's notes in the report that the Spanish GDP will grow 2.3% this year, one tenth over the government's forecast, with an unemployment rate of 14%, and that economic activity will moderate to 1.8% in 2020, driven mainly by domestic demand.

The rating agency values ​​in its report that the SMI increase will help households reduce their debt, since the increase in disposable income will have a greater impact on the early amortization of consumer loans than of mortgage loans, since that the interests are greater while the quotas are lower and their maturity is shorter.

Moody's believes that the increase of the SMI will not affect the credit quality of the securitizations currently rated by the company in Spain, so that the behavior of the loans that support the securitized bonds will continue to be stable.

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