Raising the minimum wage has undeniably been an obsession of the Spanish left for a long time. Ever since taking power in 2018, the ruling coalition has raised the minimum wage on multiple occasions. Policymakers have constantly bragged about these increases, framing them as a political triumph, and they have made it clear that they want to continue this way in the foreseeable future.
With the minimum wage now standing at €1,221 per month against a median wage of €1,833, the statutory floor has reached a staggering 66% of the median wage. This ratio pushes the cost of labor dangerously high relative to the average productivity of the Spanish worker.
Unfortunately, despite the confident rhetoric, they do not seem to have taken the time to thoroughly analyze what the actual macroeconomic consequences of this policy are. The economic data simply does not lie, and it strongly indicates that legislating a higher minimum wage will not do anything to solve Spanish problems. In fact, an objective look at the mechanisms of the labor market reveals that such policies often harm the very people they intend to protect.
The Theoretical Framework: Wages, Productivity, and Value
First, to properly evaluate this issue, we have to understand that wages inherently depend on productivity. In a functioning, competitive labor market, an employee’s salary depends directly on how much economic value he or she produces for the enterprise. Second, we have to understand the basic financial reality that a company will only keep an employee if that individual produces more value than what they are paying them. Businesses are not charities, they must maintain profitability to survive and provide jobs in the first place.
After explaining this fundamental rule of business, we can start analyzing the implications of the minimum wage from an economics standpoint. A minimum wage is essentially a price floor set by the state. If a firm assesses its operations and thinks that the statutory minimum wage that a government has set up is higher than the financial value of what the employee actually produces, the employer faces a mathematical loss. Consequently, the employer will just fire him, reduce his hours, or simply choose not to hire him at all. Once we are done understanding this at a theoretical level, we can now go to the empirical evidence on the topic to see how these dynamics play out in the real world.
The Empirical Evidence: Immediate Job Losses and Long-Term Stagnation
Politicians like to claim that raising the minimum wage does not have a negative effect on employment. Despite being a popular talking point, the broader academic consensus simply does not support this claim. For instance, a study done in 2021 found that an overwhelming 80% of studies conclude that raising the minimum wage has a clear negative effect on immediate employment. In addition, the statistical significance of these findings is incredibly robust, with 53.8% of these being at the 10% level or more, and 46.2% at the 5% level or more.
This negative impact is only for immediate, short-term jobs. In the long term, the destructive effect on the labor market is even stronger. When labor costs are permanently elevated by mandate, businesses alter their expansion plans. More concretely, research indicates that a 10% permanent increase in the real minimum wage reduces job growth by about 0.3 percentage points annually. Over an extended period, this compounding loss represents about 15% of the baseline level of job creation. This means millions of potential jobs are simply never created.
The Accelerating Threat of Automation
Artificial increases on the minimum wage also have a strong effect on automation. By making human labor artificially more expensive, the government heavily incentivizes companies to invest in capital over labor. This dynamic ends up with low-skilled workers being replaced by machines faster than if it didn’t happen, as this study found. We see this daily in the form of self-checkout kiosks, automated customer service software, and robotic manufacturing.
Beyond just unemployment, aggressive increases of the minimum wage also have other severe social effects, like raising homelessness. By setting a high barrier to entry, these policies effectively price the most vulnerable, marginalized, and lowest-skilled individuals out of the job market entirely, removing their only path to financial self-sufficiency.
The Spanish Context: Suffocating Small Businesses
In Spain, domestic macroeconomic data aligns with these international findings. Multiple studies show that raising the minimum wage has also had negative impacts on employment in the country, like this study on the 2019 raise. Following historic hikes, thousands of entry-level jobs were lost or never materialized, particularly affecting the youth.
Moreover, these minimum wage raises have hurt small companies the most. This outcome is not surprising since local small and medium-sized enterprises inherently have less capacity of paying them compared to large multinational corporations. While massive conglomerates can absorb these sudden labor costs or invest heavily in automation, the local bakery, mechanic, or independent retailer operates on razor-thin margins. When the state forces their payroll expenses up, they are often pushed toward bankruptcy, further consolidating corporate power and damaging local economies.
In summary, the government is making a big mistake by raising the minimum wage constantly. This aggressive, politically motivated strategy will inevitably hurt, from stifling job creation and accelerating worker displacement to suffocating the small business sector. Trying to legislate prosperity by merely changing a number on a decree ignores the fundamental laws of supply and demand.
Sustainable Economic Alternatives
Instead of relying on destructive price floors, the government should instead pursue structural measures that actually raise salaries. The most effective way to organically increase wages is by boosting worker productivity, which requires capital investment.Therefore, policymakers should implement supply-side reforms, like reducing the corporate tax rate or reducing regulations.
The Virtuous Cycle: Lower Taxes, Higher Wages
By lowering the tax burden on businesses, the government would incentivize companies to reinvest their profits into better tools, newer technologies, and expanded operations. When workers are equipped with better capital, their marginal productivity increases. Consequently, businesses naturally compete for this highly productive labor, driving salaries up organically and sustainably without the need for destructive government mandates.
The Hidden Cost of Regulation on Wages
Minimizing the regulatory burden is also essential for wage growth. Regulations force companies to divert resources away from production and into compliance. This increase in unproductive compliance tasks lowers overall labor productivity within the firm, which directly limits and lowers wage growth. Additionally, when regulations force businesses to downsize, the displaced workers face significant and sustained long-term earnings losses—even after finding new jobs—due to skill mismatches in the broader labor market.
Artificially raising the minimum wage ignores basic economics, inevitably destroying entry-level jobs and suffocating small businesses. The only proven path to genuine prosperity and sustainable wage growth for the Spanish working class is boosting worker productivity through capital investment, lower taxes, and fewer regulations.
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This piece reflects the author’s views, not necessarily the entire magazine. We welcome a range of pro-liberty perspectives. Send us your pitch or draft.
