Lessons from Spain’s Minimum Wage Experiment

By Paul Boyce

The impact of a higher minimum wage will depend on how much it is increased. For example, a new minimum wage of $20 will have a more significant effect than $10. Further, the impact can vary depending on how rapidly it is increased. Increasing the minimum wage to $20 over five years will have less of an impact than an increase in one year. It is because of such factors that some studies are able to conclude that there are no negative effects on employment.

Policymakers have generally acknowledged the need for slow and incremental wage hikes in order to limit any negative impacts. In turn, this has encouraged proponents of the minimum wage. Increases haven’t resulted in the mass unemployment that traditional economic teachings would suggest. The danger with this, however, is that we are now looking at pushing the boat out even further. A $15 minimum wage would mean an increase of over 100 percent on the existing rate. Even if this is phased in, it would be the highest historical increase and the highest rate in the world.

No Historical Precedent

There are some mixed results, but the empirical evidence to support a $15 minimum wage is sparse. The results of previous increases have been mixed. Studies by Krueger and Card for the National Bureau of Economic Research, as well as research from the University of California, Berkeley have shown little impact on employment. Nobel Prize winner Paul Krugman also weighed into the debate, stating:

There’s just no evidence that raising the minimum wage costs jobs, at least when the starting point is as low as it is in modern America.

On the other hand, such research has been rebuked. Neumark and Wascher published a re-evaluation of the Krueger and Card study, concluding that the minimum wage actually decreased employment by 4.6 percent

Though which study is most accurate is up for debate, it is important to note that past literature is based upon much smaller increases. According to research by Ernest Boffy-Ramirez of the University of Colorado, the largest increase in the minimum wage was $1.95, but the average increase is $0.48. Increasing the minimum wage to $15 would increase the federal rate by $7.75.

Even in the state of California, this is a three-dollar increase over its current rate. The plan would be to implement the $15 minimum wage incrementally. But even then, this represents a huge increase from the existing level. Businesses will have more time to adapt but will still face an existential threat unlike any experienced before.

Even if we are to believe that there are no dis-employment effects, it is dangerous to base policy on research that has studied smaller increases than those proposed.

Furthermore, there is already sufficient evidence to counter such claims. The main issue is that policymakers believe what they want to believe. When there are studies to claim the absence of dis-employment effects, they are able to push their agenda.

Irreparable Damage?

The route we are going down will cause economic damage that will last for decades. A $15 minimum wage will have negative effects in some shape or form whether this comes through lower employment opportunities, fewer working hours, lower benefits, or lower social mobility. We are already seeing the damage in some cities that have enacted a $15 wage. There are currently three helpful guinea pig cases in action: San Francisco, New York City, and Seattle.

San Francisco

Each city is different in its own right and is seeing different effects from the $15 minimum wage. San Francisco, for example, is already a high-wage city. Low-wage workers were already earning above the minimum wage before the increases, so when the rate went in excess of $15, the real increase was not that significant. Nevertheless, since the wage reached $14 in 2017, employment in the restaurant industry has declined. Looking at the Quarterly Census of Employment and Wages data, we find that over 1,000 jobs were lost since 2017.

Seattle

In Seattle, the evidence shows that the minimum wage has benefited experienced workers—but at the expense of low-skilled entrants. While experienced workers received higher pay, the number of new entrants declined. In other words, workers trying to get their first job were unable to. Though some minimum wage workers become slightly better off, this comes at the cost of those who are unable to find employment.

New York City

Restaurant workers have been significantly affected in New York City. Since the minimum wage increased to $15 in 2018, employment declined. Nearly 3,000 jobs were lost in 2018 alone, and that’s before we even consider the number of jobs that could have been created. Further, the city’s retail market has had a tough time.

Employment growth has halted recently. For the first time in over 11 years, the number of chain stores in New York City declined in 2018. When considering the tight profit margins retailers usually face, it is understandable that a higher minimum wage pushes many out of business.

The True Damage: The Case of Spain

It is easy enough to raise the minimum wage in economic booms. The tide is already pushing toward higher wages. The true problem occurs during a recessionary period. This has been highlighted in Spain. Wages rose too quickly in the boom years before the recession. Investments quickly migrated to Spain following the creation of the eurozone. This led to an economic boom. This boom in economic activity saw labor costs rise dramatically. To put this into perspective, labor costs in Spain increased by over 40 percent compared to Germany. This significantly hampered Spain’s recovery in the subsequent years.

The IMF added weight to this argument. In 2013, it suggested Spain should reduce its wages by ten percent. The argument was that such high wage demands were preventing workers from being hired again.

When wages increase, it becomes difficult for them to come back down again, especially when they are mandated by government.

Nevertheless, wages have had to decline rapidly to meet economic reality. The damage that has occurred during this re-adjustment has been dramatic. The unemployment rate for the OECD average reached its pre-recession levels in 2018. However, Spain’s unemployment rate still remains double its pre-recession level.

The case of Spain illustrates the perils of highly inflated labor costs. The same applies to minimum wage roles. During a recessionary period, there is inevitably a decline in consumer demand. Businesses respond by lowering their costs. During recessionary periods, the minimum wage will hurt those it intends to help the most.

The Rise of the Machines

Research from University of California, San Diego professor Jeffery Clemens concludes that the federal minimum wage hikes between 2006 and 2009 accounted for 43 percent of the decline in employment among young, low-skilled workers. As wages for the least skilled go up, it is easier for businesses to cut employees. During a recessionary period, the decision to cut jobs is made easier by the inflexibility of wages.

At the same time, during an economic expansion, that same minimum wage makes businesses more reluctant to hire back. With technology becoming cheaper and more accessible, the next recession may see a huge shift away from labor. Rather than spending time hiring back and training new employees, businesses will inevitably look to other solutions. By mandating a $15 minimum wage, the cost advantage of having machines serve customers will become a no-brainer.

Paul is a Business Economics graduate from the UK and currently an editor at http://boycewire.com.

Photo by Adli Wahid on Unsplash

This article was sourced from FEE.org