Nova workboard

a blog from young economists at Nova SBE

The controversial minimum wage

The alarming year of 2008 will always be associated with probably the worst financial crisis since the Great Depression of the 1930s, which ultimately resulted in a severe economic decline during the following years. Europe was harshly hit by such crisis, with special evidence on its southern countries like Portugal. Therefore, several measures were taken to turn the situation around, being one of them the freeze of salaries, namely the national minimum wage.

The national minimum wage is a price floor, meaning that no worker can be legally employed at a lower wage. During the freezing time (2011-2014), the minimum wage in Portugal was 485 euros, rising to 505 euros in 2014. Although when the Socialist Party constituted government with the support of left-wing parties, the minimum national wage increased to 530 euros this year, with a planned gradual increase to 600 euros until 2019.

Obviously such policy has different outcomes for different stakeholders (workers, corporation and Government), existing therefore opinions for and against it.

On the one hand, some argue that the introduction of a minimum wage law lead to the increase of unemployment, especially for the youngest and least skilled workers, and to the damage of smaller and medium businesses, as they will struggle to keep their competitive indexes and investments the same with a higher minimum wage.

On the opposite side, supporters of the increase of the minimum wage claim that such policy improves the life quality of the employees and allows them to have a higher purchasing power parity, once has they have more money they can spend more and circulate more money in the economy. Such increase of the minimum wage would also be positive to keep companies stable, as employees would have less incentives to leave, allowing savings on training costs. Moreover the strongest argument of this position is one of Krueger and Card’s study statement that there is no indication that the rise of the minimum wage reduces employment [1].

For Portugal, so far, the outcome has corroborated the Krueger and Card’s study: the prime-minister António Costa claimed that “(…) the increase of the minimum wage in 2016 did not contribute to the increase of unemployment, which fell this year” [2]. According to such results, CGTP general secretary, Arménio Carlos, argued then that “there is no reason for the minimum wage not to evolve again in 2017” [3].

The controversy from this topic come from Brussels. The European Commission considers that increasing the minimum wage to 600 euros in 2019 is not aligned with the macroeconomic scenario in terms of inflation, unemployment and productivity growth. There will be pressure to increase the remaining wages besides the minimum one, which may lead to loss of employment and competitiveness if not aligned with productivity growth [4].

Despite the negotiations between the Government and the social partners, the annual increase of the minimum wage until 2019 will just be implemented year after year, if the Government and CPCS (Confederações Patronais e Confederações Sociais) perceive the policy as social desirable.

 

Miguel Madeira

References:

[1] Card, D; Kruegman, A; “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania”; October, 1993; <http://www.nber.org/papers/w4509.pdf>

[2] Novais, P.; “Costa diz que haverá aumentos reais das pensões mais baixas e dos apoios sociais”; Jornal Expresso em 17/09/2016 <http://expresso.sapo.pt/politica/2016-09-17-Costa-diz-que-havera-aumentos-reais-das-pensoes-mais-baixas-e-dos-apoios-sociais>

[3] Cabrita, M; “Aumento do salário mínimo não prejudicou o emprego, diz Governo”; Jornal de Notícias em 15/09/2016 <http://www.jn.pt/nacional/interior/aumento-do-salario-minimo-nao-prejudicou-o-emprego-diz-governo-5391900.html>

[4] Fernandes, D; “Bruxelas alerta para impacto negativo do aumento do salário mínimo”; Expresso em 16/04/2016 <http://economico.sapo.pt/noticias/bruxelas-alerta-para-impacto-negativo-do-aumento-do-salario-minimo_247457.html>

 

Advertisements

Author: studentnovasbe

Master student in Nova Sbe

Comments are closed.