Minimum interprofessional wage (SMI)

economic-dictionary

The minimum interprofessional salary (SMI) refers to a maximum salary, below, regulated by law, that a worker should earn. In other words, it indicates the minimum that a worker has to be paid by law.

There are many economic theories about the advantages and disadvantages of setting a minimum wage. We are going to analyze them in detail.

Advantages of the minimum wage

There are several arguments in favor of the minimum wage. These are the main ones:

  • It is socially convenient because setting a minimum wage increases the incomes of low-income workers. Thus, all working citizens have sufficient purchasing power to lead a decent life.
  • By having higher wages, domestic consumption is increased: This strengthens aggregate demand, stimulating economic growth, increasing production and the subsequent generation of employment.
  • Aid to the distribution of wealth: The capital that was going to be used for corporate profits will be used to pay workers.
  • Eliminate precariousness and labor exploitation, since there is no one who charges less than a certain amount.

In the first place, there is a social argument that argues that a salary less than a certain amount is not enough to be able to meet the costs necessary to lead a decent life, such as having the ability to have a home and raise a family in conditions.

SMI supporters argue that establishing a minimum wage would lead to an increase in domestic consumption through a double effect: on the one hand, increasing workers' nominal income would improve their purchasing power; On the other hand, a redistribution of income towards the most disadvantaged sectors would boost spending due to the higher marginal propensity to consume of these groups.

Thus, an increase in the SMI would strengthen aggregate demand via domestic consumption, and therefore would reinforce the recovery of production and employment.

In the same way, they argue that a higher SMI would also have important redistributive effects without the need for any fiscal effort. According to this analysis, the resources allocated by the companies to cover the salary increase are subtracted from the corporate profits. This means that the lowest paid workers would go on to receive an income that would otherwise go to the owners, who usually enjoy a higher level of income. In this way, an increase in the SMI would contribute to reducing social inequalities without the need to resort to public spending, as is the case with many social policies for this purpose.

Without a minimum wage, wages could be very precarious because it would be up to the employer to set the wage. It seems that this way the labor market will balance the number of people who want to work with those who want to hire. However, keep in mind that with such low wages, workers may not want to work. Therefore, precariousness at work would increase, which could affect productivity and competitiveness.

Finally, SMI defenders affirm that the existence of a minimum wage is an effective instrument in the fight against labor exploitation, since it reinforces the position of workers who would otherwise have difficulties when negotiating their wages. At the same time, a higher SMI would help increase human capital formation and reduce temporary employment, as employers are often more open to investing in higher-paid workers in the long term.

Disadvantages of the minimum wage

However, the SMI is also open to less positive analysis. The three main arguments against the minimum wage are as follows:

  • The effect on consumption is only useful in the short term and the only effect in the medium term is to generate inflation. This reduces the purchasing power of low-income people who depend on fixed benefits, such as pensioners and the unemployed.
  • The minimum wage increases unemployment: Fewer companies can hire because that would mean paying more than what employees are capable of generating with that work. Additionally, by reducing business profits, you reduce the ability for new hires.
  • It generates an increase in the underground economy, if there are workers willing to work for less than the minimum wage.

We are going to analyze the three main disadvantages in detail:

In the first place, the detractors of the minimum wage point out that the positive effect on consumption would only take place in the short term, since the increased cost of labor would end up being passed on to prices (generating inflation) and workers would lose power. purchasing power that they would have gained at first.

Thereafter, domestic consumption could only improve slightly thanks to the monetary illusion, and the authorities should take measures to avoid falling into a vicious circle of inflation and wage revisions.

On the other hand, the redistributive effects of the SMI are not clear either, since its defenders assume that the minimum wage subtracts business benefits that would otherwise pass into the hands of owners with a higher income level.However, they forget that on many occasions these profits are reinvested in the company (improving the conditions of the workers themselves) and that frequently many of the shareholders are actually people of medium and even low income. In addition, the inflation generated by a higher SMI could reduce the purchasing power of low-income sectors that depend on fixed benefits, such as pensioners or the unemployed who survive thanks to public aid.

Additionally, it can be argued that an SMI that is too high can have a detrimental effect on unemployment, as it could drive the lowest paid workers out of the labor market. However, if there is no minimum wage, or it is very low, companies would pay workers less, and in this way, having lower labor costs, they would want to hire more personnel, which would reduce unemployment.

This means, for example, that a minimum wage of 2,000 euros would prevent access to a job to all those who cannot demand that amount for their work. For the simple fact that it contributes a lower value to the company. That is, the income generated by the worker for the company is less than the salary that the company has to pay for the work. In addition, if this lasts over time and happens with many workers in the same company, this situation can lead to bankruptcy and all employees of the company end up losing their jobs.

For this reason, the shadow economy can increase. On many occasions (especially in less developed countries) increases in the SMI that do not follow the evolution of real productivity only end up promoting black work, and have little impact on the lives of workers. So the minimum wage may end up harming precisely those it is intended to help.

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