The SMI, an economic policy tool
Fernando González Urbaneja | Wages are set by the market, willingly or by force. But behind this axiom there are exceptions or nuances. Wages are fixed by agreement, often asymmetrical, between the payer and the beneficiary. Either by a verbal or individual contractual agreement, or by a collective agreement of any scope. In this dynamic, the State intervenes, of course, with mandatory rules. The most typical intervention is the fixing of the wage floor, the minimum which tries to prevent abuses in the form of exploitation.
There is an abundant academic literature on wages which starts from the consideration of wages as a price adjusted by supply and demand. But wages involve many other factors that go beyond the natural adjustment of supply and demand. Salaries determine a large part of budget revenue (more than half) due to their impact on personal income tax (about 80%). Also on social contributions, which are nothing more than deferred wages that generate the expectation of an indefinite right to benefits, since it depends on future income.
The most powerful government interference in the field of wages, apart from the public wages of civil servants or contractors of any kind, lies in the fixing of a minimum wage (SMI) for full-time work. The SMI is justified as a mechanism for protecting fair remuneration that avoids exploitation or abuse and guarantees decent living conditions. The SMI tries to avoid living wages, which for some are the optimum of supply and demand, but which are incompatible with a social state, with a decent society that respects people and their most basic rights .
The responsibility for setting the minimum wage rests with the government, a political decision which may result from a social agreement, but which does not require this procedure. It is a tool of economic policy which tries to force wages in general upwards.
The assertion that the increase in wages goes against the volume of employment is legitimate, but academic, theoretical. Hiring involves many other factors that are difficult to weigh. Some scholars argue that the best salary is one that is efficient, that is neither maximum nor minimum; it is the one that generates stability, low conflict and progress. It is one that suits all parties involved in the process, which can be cooperative rather than adversarial. More pay does not mean less benefits; there is no direct or antagonistic relationship between the two concepts. Other factors come into play, such as productivity, competition, working conditions or the character of individuals and their expectations.
A recommendation that enjoys general consensus is the ILO’s proposal that national minimum wages should reach 60% of the average wage. In the Spanish case, according to the latest official data for 2019, the average salary is €24,400 per year, with fluctuations ranging from an average of €20,000 in Extremadura to €29,500 in the Basque Country; from €52,000 in the energy sector to €14,000 in hotels and restaurants; €26,500 for permanent contracts and €18,000 for fixed-term contracts… plus the fact that the most common salary, the median, is €18,500.
With this battery of data, a reasonable approach for the minimum wage in Spain today would be around 60% of the general average of €24,400, or €1,050 per month (14 installments per year) as a benchmark for 2019. By setting the SMI at this symbolic €1,000, the government falls short of what should be a reasonable, albeit apparently audacious, political objective.
The arguments of the employers against this latest increase are well-founded, they join the demands of the companies which accumulate more low-skilled work. But they lack vision for the future.
It should be kept in mind that the increase in the employee base in the minimum wage zone (now up to two million people) does not indicate equilibrium; too many minimum wages that undermine collective bargaining power and leave little room for “efficient wages” (thesis of Mercadona and others). This question of the SMI requires more finesse than political photo shoots and postures. Salaries in Spain (too low) require deeper and more challenging approaches.