Spain’s Minimum Wage Just Jumped. The Debate Is Continuing.

https://www.nytimes.com/2019/03/07/business/spain-minimum-wage.html

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MADRID — As Spain grapples with a turbulent political crisis, one of Europe’s last Socialist governments may soon fall amid the rise of a new nationalism in the country. But whatever the outcome, Prime Minister Pedro Sánchez is leaving behind a signature legacy: a record increase in the minimum wage.

The 22 percent rise that took effect in January, to 1,050 euros (about $1,200) a month, is the largest in Spain in 40 years. Yet the move has ignited a debate over whether requiring employers to pay more of a living wage is a social watershed, or a risky attempt at economic engineering.

Mr. Sanchez insists that the plan will underpin growth by putting more money into the pockets of low-paid workers, which will flow back to the economy through increased spending. Critics, including Spain’s own central bank, have warned that it will kill tens of thousands of jobs by increasing business costs.

It’s a debate playing out around the world, as politicians and officials try to address issues of inequality plaguing their economies.

In the United States, left-leaning politicians, led by Representative Alexandria Ocasio-Cortez of New York, a self-described democratic socialist, have tapped into frustrations over inequality by promoting strategies to parcel out the economy’s gains more evenly, in part through higher wages for low-income workers.

Around the Continent, a crisis over the standard of living has fueled protests like the Yellow Vest movement in France, which forced President Emmanuel Macron to bump up the minimum wage with subsidies.

In Spain, anger has likewise helped lift a new far-right party, Vox, which trumpets a nationalist platform that feeds into fears of immigrants taking jobs and driving down wages. In the early general elections in April, Vox could gain seats in Spain’s national Parliament for the first time.

Since maneuvering to grab power last summer in a fragile coalition with the left-populist Podemos party, Mr. Sánchez has attempted to roll back austerity in Spain. Countering a trend of fiscal tightening in other European countries, he has sought to lift social spending for the growing ranks of people who have fallen down the economic ladder.

But with his Socialist party holding only 84 of 350 parliamentary seats, Mr. Sánchez forced through the higher minimum wage with an executive order. His 2019 budget proposed more spending for social care and pensions, and higher taxes for companies and the rich. Spanish lawmakers rejected his budget last month, forcing Mr. Sánchez to call a snap general election in April that is likely to oust him.

Mr. Sánchez is nonetheless betting that his push for higher wages will address indignation over income inequality. He cited the risk of rising populism as he pushed the social spending platform.

“A rich country can’t afford to have poor workers,” Mr. Sánchez told Parliament.

While Spain’s economy has rebounded quickly from the financial crisis that buffeted Europe, income inequality has grown. Analysts say a new leader would be unlikely to take the political risk of rolling back the minimum wage at a time when more people are struggling with low wages and a proliferation of temporary contracts.

Around 14 percent of Spain’s population now counts as working poor: people who have jobs but can’t regularly pay electricity bills and basic necessities.

The share of national income paid to workers fell last year to 56 percent from 63 percent in 2007, as the pace of growth in real wages declined, said José Manuel Amor, a partner at AFI, a Madrid-based economics research and consultancy firm.

Mr. Sanchez argues that the minimum wage increase will help address a widening wealth divide as well as provide low-income earners with the means to spend more. That, in turn, would fuel economic growth and hiring.

María López, 57, works as a check-in agent at Madrid’s international airport. Her current post, with pay linked to the minimum wage, requires her sometimes to sign one-day contracts that mean no income if she’s not called in. She started her career decades ago with well-paid positions at national carriers, only to watch them evaporate into a vortex of insecure work and lower pay.

The increase in the minimum wage, she said, will allow her and her husband, who lost his job as a driver and is on unemployment, to spend more on items that they have neglected, such as a new clothes washer.

“We have so many needs that we haven’t taken care of,” Mrs. López said. “We need to start spending right away.”

As it is, more workers have been turning to banks to help make ends meet, said Mr. Amor, the economist.

“They’ve been going into debt to finance everyday expenses because incomes aren’t rising,” he said. Consumer credit in Spain jumped to €131 billion last year from €110 billion in 2015, he added.

While the steep wage increase is good for people like Mrs. López, it’s less appealing to businesses footing the bill.

Critics, including Spain’s center-right Popular Party, which carried out harsh austerity policies to help mend the nation’s finances during the financial crisis, blast the wage increase as a menace to jobs. Businesses say wages will outpace productivity as upward pressure on pay ripples to other low-end salaries. Employers may pass on higher costs to consumers or compensate by cutting work hours, delaying hiring or downsizing.

Spain’s central bank has warned that around 125,000 jobs could be wiped out this year, as employers offset higher costs by shedding older workers or not hiring new people. BBVA, Spain’s biggest bank, estimates that over 160,000 could be lost.

Improved profit margins at big Spanish companies may allow them to absorb the higher labor costs. But smaller businesses face steeper hurdles.

Over 95 percent of businesses in Spain are small and medium-size firms, many of which operate with thin margins, according to Celia Ferrero, the vice president of the National Federation of Self-Employed Workers.

“You won’t find people disputing that higher wages are needed,” said Ms. Ferrero, whose organization represents many smaller businesses. “The question is whether firms can afford it. Higher wages and social security taxes simply make it more expensive for employers to hire or maintain staffers.”

“It’s not that they don’t want to pay; they literally can’t,” she added.

Lucio Montero, the owner of General Events, which makes booths and backdrops for firms displaying wares at big conventions, employs eight workers on the outskirts of Madrid. He pays each €1,400 a month.

The higher minimum wage and increased social security charges will put upward pressure on his labor bill and already thin margins, he said. It is a cost that he can ill afford.

“I would need to think twice about hiring more people,” said Mr. Montero, walking around his tiny, sawdust-covered factory floor. And if a new project comes in requiring more workers, “rather than hiring someone with extra costs, I would prefer to subcontract to another company,” he said.

Government officials say the policy isn’t intended to hurt people like Mr. Montero. The main target is bigger companies that can afford to pay more, after years of compressing wages.

“We’ve had a widespread devaluation of salaries and working conditions in Spain,” Magdalena Valerio, Spain’s labor minister, said in an interview. “If people didn’t lose their jobs, they came home at the end of the month with worse wages, worse types of contracts and more precariousness.”

Even if the Socialist government loses power, officials insist they are at least setting the stage to reverse declining living standards in Spain.

“This is a fight for a return to stable, well-paid work,” Ms. Valerio said.

“We have to guarantee that workers have fair conditions,” she added. “Otherwise, we’ll be sliding back toward the 18th century.”