Spain is embarking on a major economic experiment: a 22 percent jump in the minimum wage that has ignited a high-stakes debate about how it would impact the economy.
The socialist government said the increase would bolster spending and hiring, giving legs to Spain’s expansion.
However, opposition lawmakers and wary business executives said that any additional pep to the economy would not be enough to offset the thousands of jobs they expect to be destroyed because companies cannot afford the jump in costs.
The increase to 900 euros (US$1,018) from 736 euros a month came into effect at the start of the year and directly affects about 8 percent of Spain’s workforce, or 1.2 million employees.
Its effects are already rippling through Spain’s economy, forcing companies to respond.
Madrid joins other governments around the world, including France, Greece, a Canadian province and some US states, that have recently lifted minimum-wage rates to jump-start broader salary growth, which has remained sluggish, despite the economic recovery.
For politicians, it is a way to curry favor with voters and diminish the appeal of anti-establishment parties.
Spain’s central bank estimated that the wage jump could destroy about 125,000 jobs this year.
However, it acknowledged that it cannot know for sure given the “uncertainty associated with a national minimum wage increase on an unprecedented scale in Spain.”
Budget watchdog AIReF has a more modest estimate of 40,000 jobs this year, while Spanish bank BBVA SA said more than 160,000 positions could be lost in the medium term.
Those forecasts are particularly jarring in Spain, where unemployment is the second-highest in the eurozone.
However, Raymond Torres, an economist at Funcas think tank in Madrid, said recent evidence has shown that higher salaries fuel greater spending that sparks more hiring, offsetting most of the job loss.
There is additional uncertainty given the timing: Spain, along with all of Europe, is moving into a slowdown that could worsen this year.
“We are in uncharted waters, nobody quite knows what the impact will be,” Moody’s Investor Service analyst Kathrin Muehlbronner said by telephone.
It “does come at an unfortunate time,” she said.
Assuming that employers pass on most of the increased labor costs to consumers, inflation could get a boost of as much as 0.4 percentage points next year, according to Bloomberg Economics.
Profit margins have been on the rise in the past few years, which means that some companies will be able to shoulder higher labor costs. Those that do not might have to cut employees’ hours, slow hiring or lay off workers.
“We can’t have poor workers,” said Hilario Alfaro, the owner of several clothing stores in Madrid. “We support an increase in wages as long as it’s linked to productivity.”
Jose Miguel Rosell, co-associate general director of Valencia-based cyber-security firm S2 Grupo, said his employees earn more than the minimum wage and would not be directly effected.
However, he is concerned that the sudden increase could affect clients, hurting his sales.
It is a “necessary measure, but they shouldn’t have done it so abruptly and with so little planning,” he said.
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