MADRID, Spain — The government approved a raise in minimum wages in Spain that will range from $513 to $1,130 per month to support its working, low-income households amid the economic crisis brought upon by COVID-19. The Spanish economy could contract by more than 12% in 2020, depressing the employment rate to 80%. The rise in the minimum wage rate overall will increase the standard of living for these low-income households while reducing inequality and poverty experienced during the COVID-19 crisis.
What’s the Importance of Imposing a Minimum Wage?
A minimum wage is defined as the lowest amount of compensation
that an employer is obligated to pay their employees in exchange for work that cannot be reduced by “collective agreements” or an “individual contract.” The purpose of imposing a minimum wage is to prevent employers from exploiting their workers and to shield employees against “unduly low pay.” Some believe that imposing a higher minimum wage increases poverty by decreasing employment as business owners are more likely to lay off workers after being required to pay higher wages. Many also argue that increasing wages harm businesses that must raise prices to meet the costs of the minimum wage requirement. On the contrary, many supporters argue that setting a minimum wage decreases inequality and poverty rates
within a country, increases the standard of living and stimulates the local economy.
Relationship Between Minimum Wage and the Informal Economy
Still, others state that the effects of minimum wage on poverty in developing nations depend on the characteristics of formal and informal sectors
within a country. Minimum wages mainly target formal sector workers who mostly do not live in poor households. Therefore, the effect of raising minimum wages depends on the number of job losses in the formal sector and the effect on informal sector wages. If the number of jobs lost limits in the formal sector and the wages in the informal sector increase, following a rise in the minimum wage, then increasing minimum wages can be an effective tool in decreasing poverty. Nonetheless, it is essential to ensure that the government enforces these minimum wage laws to secure this effect.
How Minimum Wages in Spain Benefits Workers
To understand how the increase in minimum wages in Spain benefits low-income households, it is important to identify the characteristics of the labor market. Spain has a large informal sector that is worth a little over 20% of its GDP
, as of 2019. Therefore, poverty will decrease if the number of jobs lost in the formal sector stays at a minimum or if the wages in the informal sector increase. Additionally, in Spain’s case, there is not a requirement for business owners to increase the expenses within their firms because the government is absorbing this cost by providing subsidies to low-income households. Therefore, researchers expect poverty to decrease as the wages of workers in low-income households within both the formal and informal sectors will rise, and the job loss in the formal sector will be minimal.
The Spanish government increased the minimum wages for 850,000 low-income households that will reduce poverty for 2.3 million people and cost $3.3 billion. This subsidy will increase earnings for low-income households in the formal and informal sectors and prevent further job loss in the Spanish economy. By increasing the minimum wages in Spain, the government is taking a step closer to economic recovery and preventing more individuals from falling into poverty.