Minimum Wage and Inequality Between Autonomies

The per capita income of an economy can be expressed as the product of the average productivity per worker and the employment rate (defined as the percentage of the total population that has an occupation). In other words, the per capita income of a society can be increased either by making each worker produce more or by encouraging a greater percentage of people who are producing within that society.

For example, the per capita income of Spain in 2018 amounted to 25,727 euros, because its apparent productivity per worker was 62,200 euros and its employment rate, 41.74%. The richest region in Spain was Madrid, with a per capita income of 35,041 euros, which could be broken down into a productivity per worker of 77,188 euros and an employment rate of 45.9%, while the poorest was Extremadura, with a per capita income of 18,769 euros, decomposable into a productivity per worker of 52,857 euros and an employment rate of 35.9%.

The figures are relevant because they reveal a reality that often goes unnoticed: the differences in per capita income between Spanish regions are due both to productivity gaps and differences in employment rates: for example, if Extremadura maintained its employment rate is 35.9% but will increase its productivity to reach the average of Spain, it’s per capita income would go from 18,769 euros per year to 22,329 euros; if, on the other hand, it maintained its productivity and raised its employment rate to the Spanish average, it’s per capita income would amount to 22,062 euros. Thus, regional convergence requires policies that contribute to raising both productivity and employability in the poorest regions.

Minimum Wage Rates made Compulsory

It happens that in the last 70 years, the productivity differentials between autonomies have been narrowing but, instead, the differentials in the employment rate or have remained unchanged or have even worsened. And, in this sense, perhaps it is believed that the very important gap in the employment rate is essentially due to the different demographic profile between rich regions and poor regions: namely, emptied Spain has run out of a young population of work that, on the other hand, has ended up emigrating and concentrating in the most prosperous areas of the country. But this diagnosis only indicates a very partial part of the problem.

And it is that the employment rate (defined, as we have already said, as the population employed among the total population) can be expressed as the product of three ratios: the population rate of working-age over the total population (this would be the demographic component), the activity rate (what percentage of those who can work is willing to do so) and the employment rate (what fraction of those who want to work have a job). Well, the population of the working-age population was, in 2008, 62.4% in the case of Spain, 65.5% in the case of Madrid and 60.4% in the case of Extremadura.

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In turn, and as the activity rates were not very different from each other ( 79% in the case of Spain, 79.9% in Madrid and 77.9% in Extremadura ), the percentage of the total population that he was willing to work was 49.2% in Spain, 52.3% in Madrid and 47% in Extremadura.

But where the most important differences occurred was in the employment rate, which is nothing more than the mirror of the much better known and illustrative unemployment rate: in 2018, the latter was 15.35% in Spain, 8% in Extremadura and 12.27% in Madrid.

In other words, even if Extremadura had the same percentage of the active population in Spain (49.2%), its employment rate would only increase from 35.9% to 37.5% (and, therefore, it’s per capita income only would grow from 18,768 euros to 19,820).

On the other hand, if you had your unemployment rate (12.27%), your employment rate would become 39.8% (and, therefore, your per capita income would rise from 18,768 euros to 21,044 euros).

In 2019, the unemployment rate in Extremadura has closed at 23.48% (a reduction of just 32 cents compared to its average of 18 ), Spain has concluded with a 13.78% (a fall of 1.57 points ) and Madrid, with one of 9.99% (a reduction of 2.28 points).

The employment rate, therefore, has increased from 35.9% to 36.33% in Extremadura; from 41.74% to 42.6% in Spain, and from 45.9% to 47.7% in Madrid: that is why, unless Extremadura productivity has increased much more than Madrid (unlikely), in 2019 we will have had divergence, and not convergence, between the per capita income of these two regions (and also between Extremadura and the whole country): the emptied Spain will have incentives to empty a little more.

The phenomenon deserves reflection, since it is possible to suspect that the differences in employability between regions have much to do with the establishment of homogeneous labor legislation for all of them: to the extent that this entails setting the same minimum hiring cost for all the autonomies, hinders the generation of employment in the less productive regions with respect to the most productive. The problem is not only the minimum wage ( although, with such high Kaitz rates in some regions, it is already difficult to ignore its influence on job creation barriers ), but in general all the labor regulation that determines the globality of labor costs and, therefore, becomes relatively more burdensome for some regions than for others.

In a Spain where (with good judgment) it is committed to administrative and regulatory decentralization, it would be highly desirable that labor legislation (or, at least, some key elements of it: such as the minimum wage, the cost of dismissal or negotiation collective) will also be decentralized to the autonomies so that they could adapt their regulatory framework to the real conditions of their local labor market. Pretending to design the labor regime throughout Spain from the provincial vision of the hyperproductive region of Madrid will only contribute to perpetuating territorial inequalities in the country.