The Minimum Wage Outlook for Spain & Europe

Carlos Vacas Soriano

8 mins - 7 de Julio de 2023, 14:15

The strong growth of the Spanish minimum wage in recent years has allowed it to close the gap with the richest countries in the European Union and to reach the levels recommended by new EU legislation.
After the precarity caused by the pandemic, minimum wages have continued to rise significantly in Spain and the rest of the European Union (EU), although not always above inflation. The new European Directive on adequate minimum wages was approved at the end of 2022 and must now be transposed into national legislation by all EU-27 countries, thus reinforcing the political importance of this instrument which has been developing strongly in Spain in recent years. This article provides an overview of the evolution of minimum wage policy in Spain and the implications of the new European Directive in this field, based on a recent study published by the European Agency for the Improvement of Living and Working Conditions.

Minimum wage developments
What happened in 2023? The inter-professional minimum wage (IMW) in Spain rose by 8% to €1,080 in fourteen annual payments (or €1,260 pro rata in twelve payments). This is an increase below the average for EU countries, far behind Germany and Latvia (more than 20%) and also behind other eastern countries (Romania, Hungary, Poland, and Lithuania) and Belgium, all above 15%.

These major advances have few precedents and are explained by the attempt of European governments to protect the purchasing power of minimum wages against the sudden irruption of a level of inflation that had not existed for decades. Spain is among the few European countries that have made progress in their minimum wage in real terms over the last year, as the rise in the nominal level of the IMW has been higher than the rate of inflation, one of the lowest rates in the EU. 

This latest update of the IMW represents its biggest advance since the pandemic, as it grew by less than 4% in January 2022 and by less than 2% in September 2021, after having remained stable since January 2020, when it had progressed above 5%. 

Major progress since 2018. Among the 22 EU countries that have an IMW, Spain’s is similar to Slovenia’s and is clearly above that of other Mediterranean countries (Cyprus, Portugal, Malta, and Greece) and especially that of the Eastern countries (reaching up to €400 in Bulgaria). At the same time, it is still far from the six countries above it (see Figure 1), with the highest minimum wages, from €1,709 in France to €2,387 in Luxembourg (in twelve annual payments, which exist in most countries).

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The great progress of the Spanish IMW in recent years has allowed it to close the gap with the richest European countries. Several periods can be distinguished in its evolution over the last two decades: it grew by 44% between 2001 and 2009 (from €506 to €728), especially from 2004 onwards; it remained almost stagnant during the long years of economic difficulties until it reached €764 in 2016; and it has progressed by 65% between 2016 and 2023, to €1,260 today, the biggest advance recorded in Western Europe. While the IMW already started to improve significantly from 2016 onwards, it is the big update in 2019 that marks the turnaround and brings the IMW to an increase of almost 50% between 2018 and 2023. 

Thanks to this large increase in the IMW in 2019 (of more than 22%), the incomes of the most disadvantaged workers rose sharply, and not only those earning wages around the IMW, but also those above it. As a result, Spain was the country with the largest fall in wage inequality in the EU as a whole. On the other hand, according to the empirical studies available so far, this policy did not have a very significant impact on employment: the number of wage earners continued to grow in 2019, so either the rise in the IMW did not have significant negative effects, or it caused a slowdown in net job creation of between 28,000 and 173,000 workers, according to different estimates.
Figure 1.- Inter-Professional Minimum Wage (€ per month, prorated over 12 payments)

Minimum Wages and the European Directive
Does the European Directive obligate member states to fix the level of the minimum wage? The EU cannot set minimum wages, which are a strictly national competence, but it does reinforce the political importance of this instrument and aims to make minimum wages more transparent and objective. 

To this end, member states are asked to assess the adequacy of minimum wages when deciding on their annual updates according to a set of clear, stable criteria. These include: the purchasing power of minimum wages; the general level of wages and their distribution; the rate of wage growth; and long-term national productivity levels and developments

It calls for minimum wages to be updated on a regular, timely basis, although in order to cope with inflation, adjustment will also be a national competence. There are currently very few countries that automatically revalue their minimum wage in line with inflation: France and Belgium do, which explains their large growth between 2022 and 2023 (see Figure 1). Like most countries, Spain does not have automatic indexation of its minimum wage, although it has managed to protect its purchasing power between 2022 and 2023. It remains to be seen whether, with the entry into force of the Directive, an increasing number of countries decide to use certain formulas or automatic indexations to update their IMW.

The Directive also suggests the establishment of advisory bodies to advise the government on its decisions. There are institutions established in some European countries (Germany, France, England, and Ireland) that decide independently or suggest to the government the annual update of the minimum wage. In Spain there is no equivalent institution, although the Advisory Commission for the analysis of the minimum wage was created in 2020, with a temporary mandate to advise the government until 2023, so it is not known whether its activities will continue in the future.  

Adequacy of minimum wages. Among the possible criteria for assessing the adequacy of the minimum wage, it is best to compare it with the general level of wages and their distribution in each country through the use of indicative reference values. The most commonly used international benchmarks state that minimum wages in each of the EU countries should reach at least 60% of the median wage, or 50% of the average wage. The ratio between the IMW and the median wage (the so-called Kaitz index) is a useful indicator, because it provides a relative measure of the level of the minimum wage compared to the median wage in each country.

The evolution of this index in Spain clearly reflects the progress of the IMW in recent years and its alignment with the standards of our European neighbours (Figure 2). In 2008, the IMW represented only 35% of the average Spanish wage, a far cry from the relative levels in other European countries. This very low relative level of the IMW even worsened during the long years following the financial crisis. But from 2016 onwards, and especially thanks to the large increase in 2019, the level of the IMW reached almost 50% of the average wage in 2020
Figure 2.- Inter-Professional Minimum Wage in Relation to Average Salary (Kaitz Index, %)
Following the mandate that the commission advising the government on the latest updates of the IMW had received, the IMW has reached a level of 60% of the average net wage in 2023 according to national statistical sources. This is even higher than the level recommended by the European Directive. This means that Spain is the country where the evolution of the IMW and the average wage contrasts the most, as the former has grown much more than the latter in recent years. It also means that the current level of the IMW is approximately that which corresponds to the average wage in Spain, as the relationship between the two variables is now more comparable to that which exists in the European countries around us, putting an end to the abnormally low level of the Spanish IMW of several years ago.
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