Juan Laborda – Spain: Minimum Wage and Employment, the Story of a Lie

Whatever the Bank of Spain, among others, says, the reality is that the wage increase has not only not led to an increase in layoffs, but also creates jobs without generating inflation.

Juan Laborda teaches Financial Economics at the University of Carlos III and Money and Banking, Syracuse University (Madrid)

Originally published in Spanish at vozpopuli

Minimum wage and employment: the story of a lie

The rise in the minimum wage and its effects on employment is the umpteenth example of how things work in Spain, full of servility to nauseating levels. Faced with the search for truth and the contrasting of hypotheses, lies and blatant manipulation were imposed. And always with the help of some academic reports. My question to the Bank of Spain is a direct one: when are you going to apologise to the public for the use of dynamic stochastic general equilibrium models? They are incredibly unreliable! But they are full of ideology. AIREF (Independent Authority for Fiscal Responsibility) has already apologised and publicly acknowledged that the increase in the minimum wage is not having any negative effect on employment.

One thing is to publish exoteric papers for certain academic journals that are not in tune with reality, but which have a profound ideological charge. Another different thing is to translate their dystopian false recommendations into real life. In this case we would speak of psychopathies. But here it is that those champions of truth called Casado and Rivera believed to their feet and toes the nonsense that the governor of the Bank of Spain and liberal think tanks were doing. What think tanks say, as they would say in my land, “brings it to me”, but not an organism subject to public control, as is the case of the Bank of Spain. There have been too many “mistakes”. When structural incompetence is consolidated in time and they do not remedy (what a difference with the Bank of England!) we speak of class interests.

The facts: wage increase, without inflation and with employment

The reality is this: the rise in the minimum wage has not led to an increase in redundancies, quite the opposite. But the reality goes even further. Wages accumulate six consecutive quarters with increases of more than 1%, which means the greatest advance since 2011, but is that they also rise without generating inflation and with strong job creation, which reinforces the increase. But let’s go to the arguments behind something that for post-Keynesian economists is trivial, but for most economists and certain media hordes sounded like alchemy.

While for orthodox economists, given real autonomous spending, there is a negative relationship between the level of the real wage and the demand for labour of companies, for those of us who defend the principle of effective demand, under realistic microeconomic assumptions, there is a positive relationship between the level of the real wage and the demand for labor of companies. An increase in real wages leads to a shift along the effective labour demand curve, so that the rise in real wages leads to a higher level of employment. This positive relationship is paradoxical. What is true for a company can be false at the macroeconomic level. It is the Kaleckian paradox of costs.

But there is more. As you well know, it was the European Central Bank itself who, in the working paper “On the sources of business cycles: implications for DSGE models”, undoubtedly made one of the greatest criticisms of the economic theory that has been used by our mass media to tell the false story of wages and employment. In that document, as I have already recounted over and over again, its authors invalidate the stochastic dynamic general equilibrium models: “the most outstanding DSGE models today are not compatible with our empirical findings on the number of factors and the nature of the joint movement in macroeconomic data”.

New economic policy measures need to be further deepened

Faced with the salary devaluation policies implemented by Rajoy’s government, seasoned with constant gifts to the different national oligopolies, and an irresponsible abandonment of investment in R&D, the measures agreed in the previous legislature between the government of Pedro Sánchez and Unidos Podemos meant a change of course in Spanish economic policy. Ultimately, they sought to improve the level of income of Spanish families. In a context where fiscal policy is expansive and the Central Bank finances the Treasury with great ease, the effect of the rise in the minimum wage was going to be positive.

The reality is different from the one told to infinitum by the mass media patriots. The labour reform implemented by Rajoy’s government only served to modify the distribution of the pie in favour of the capital factor, without this even translating into an improvement in the country’s productivity. The internal devaluation was used by the aggregate of the companies not to improve their theoretical competitiveness-price, but to increase their unitary profit margin (what we post-keynesians define as mark-up).

However, for these policies, such as the increase in the minimum wage, to have the desired effects on the Spanish economy, an even more radical change in Spanish economic policy is needed, which tends to modify the national production model in the medium and long term so that it is compatible with more decent wages. The dynamism of our foreign sector, thanks to the surprising expertise of small and medium-sized national companies, is insufficient. The unemployment rate continues to be huge, our labour market fragile and precarious. Add to this the limitations derived from that superstructure that arises from political and economic interaction -Ibex 35-, and that gives rise and support to the search for income or appropriation of wealth by certain groups (income seekers), through non-competitive mechanisms. This is how the Hispanic productive model has been modelled over time: the predominance of rentiers and a series of oligopolies that have done practically nothing to change the productive framework of our country. The impact on Spanish Public Finances of this superstructure of power is brutal. In addition to being a socially unjust tax system, it is inefficient. Spanish fiscal revenues are very volatile depending on the economic cycle and are sustained by workers, and small and medium producers, who no longer admit any additional tax increases.

Under these premises, without having monetary sovereignty, it is urgent to redesign a tax system that under the principle of equity redistributes wealth from the wealthiest to the poorest without punishing productive activity, in short, the creation of wealth. In addition, an active industrial policy centred on everything that Spain can and knows how to do well is urgently needed. For instance, a new renewable energy model, a “new green deal”.

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