The Minimum Wage and public contracts

ERTESSpanish Ministry of Labour, Yolanda Díaz, in a meeting with trade unions’ respresentatives at the left and employers’ representatives at the right

Fernando González Urbaneja| The SMI (Minimum Wage) is one of the assets of the Sánchez government that the vice-president of Sumar chalks up as a win. It is a minor but very visual asset, raising the SMI sounds good, especially to all those who do not have to pay it. Because raising the SMI is a free power of the government, since it is a wage cost for companies that hire employees at the lowest market price. The question is to determine what kind of jobs and people are affected by the SMI. It is estimated that around 1.5 million jobs are directly affected by the SMI plus other jobs that are pushed by the SMI in the collective agreement tables.

The increase in the SMI means higher labour costs for companies and higher tax revenues for the state in the form of taxes and social security contributions. The increase is justified for reasons of equality and dignity, for the need to establish decent working conditions, which are those that allow people to make a living from their work. This is not a minor aspect, and one that should govern a society that treats its members with respect.
Spain has a problem of low employment (one of the lowest rates of labour activity in the OECD) and low wages (an average of 20% less than the average of the countries with which it competes). In theory, the increase in the minimum wage is detrimental to job creation; in practice it is not so clear and the effects on the fall in employment and unemployment have yet to be proven. The effect on the average wage is obviously positive, as increasing the lowest wages raises the average wage.

As to how the increase in the minimum wage will be assimilated by companies, this will obviously be done through improvements in efficiency and productivity, which is undoubtedly positive. Therefore, there is little to object to an increase in the minimum wage in percentages higher than the cost of living as long as the objective set by the ILO that the minimum wage should be above 60% of the average or median wage is achieved.

Another question is to analyse the consequences. To determine which companies are most affected by the increase in the minimum wage, which are none other than those that subcontract their lower-skilled services to other companies, fundamentally to the public sector, which seeks to minimise its costs by passing the responsibility on to third parties.
Of the 1.5 million jobs affected by the minimum wage, a large number are in companies providing services to the administration with closed, non-indexed contracts. A good part of these minimum wages are linked to contracts of some of the public administrations with service companies to which they award the contract at the lowest price. Wages are the major cost component of these services.

It is therefore understandable that the employers’ association wants to link the increase in the SMI with the revision of public sector contracts (also private) with companies affected by the SMI. It is only fair that what is imposed by decree should not be arbitrary and that the public sector should bear a large part of the cost imposed by decree on its suppliers.

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The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.