The controversy over the minimum wage

The minimum wage as a political weapon.

The minimum wage has become a political weapon. Many political parties raise the issue of revising it during election campaigns. But, conversely, libertarian thinkers believe that the State should not regulate it. Many questions may arise. For example,

• Are the libertarians right?
• Does raising the minimum wage cause inflation?
• If we increase the minimum wage, does economic activity decrease?
• Does its increase put employment at risk?
• Should there be a minimum wage for all of Spain?
• What do we mean by minimum wage?
• Should the minimum wage and the minimum living allowance be equated?
• Should Congress approve the minimum wage?
• Are there countries without a national minimum wage?

Opponents of the minimum wage argue that,

1. Firstly, Lawyer Alex Kaiser believes that the State should not establish any minimum wage, as it interferes with the free formation of prices.   According to this line of thought, wages should be determined by the law of supply and demand, without any State intervention. Similarly, traffic signs influence a driver's behavior but do not restrict their freedom of movement. In other words, the most important question is whether this legal and economic institution is useful or not—that is, whether traffic signs provide added value or not. The problem is not so much the existence of a minimum wage, but rather how, by whom, and for which territory or sector it is established.  I will comment on this matter later.
2. Secondly, they also argue that the minimum wage effectively prohibits work for individuals whose productivity is below the legal minimum wage, thus generating structural unemployment. The minimum wage presents a significant barrier in countries where labor costs are high and the marginal productivity contributed by workers is low or nonexistent.   This leaves the most vulnerable groups out of the labor market, such as inexperienced young people or less skilled workers.   Opponents of the minimum wage say: “Imagine if Congress passed a “minimum height law” that prohibited employers from hiring workers shorter than 1.95 meters: would this regulation increase the height of shorter workers or would it effectively prohibit them from working by law?”  This amusing example forces us to consider the following points.  If a worker does not contribute wealth above the minimum wage level established by law, it is possible, firstly, that the legal minimum is high for the area, which compels us to consider whether there should really be a minimum wage at all. We will address this issue later. Secondly, it is possible that the worker does not meet the technological standards required by the market. In this case, the problem lies with the individual, not the legal framework. A widely accepted and manageable rule should not be eliminated simply because a small minority cannot adapt to it. Instead, alternative solutions should be sought to help this minority achieve the required standard of living, but a useful measurement tool should not be eliminated. The Netherlands solves this problem by establishing a minimum wage based on the worker's age. The Dutch Ministry of Social Affairs and Employment reviews the minimum wage every six months.
   
3. As a third argument, a high minimum wage encourages the informal economy. I agree with this statement and will address this issue later.
4. Libertarians believe that the minimum wage could  destroy private investment and employment. Some economists, such as Juan Ramón Rallo in Spain, are deeply and radically convinced of this assertion,  or David Neumark and William Wascher   in the United States. According to these economists if, as a consequence of an increase in the minimum wage, a worker's marginal productivity becomes low or negative, they risk losing their job. If a group of workers on a production line find themselves in this situation, they risk being replaced by machinery. Therefore, the minimum wage influences the struggle between man and machine. While this last statement is true, it's important to consider that labor costs are not the only factor influencing this struggle. Currently, access to easy and cheap money has a greater impact on job losses than the minimum wage itself. The current monetary overcapacity, with the Federal Reserve and the European Central Bank reporting losses for the last three years due to excessive monetary energy, is compelling evidence. Several serious economic studies support both this effect and its opposite. Therefore, depending on the range of economic circumstances, an increase in the minimum wage may not lead to job losses. For example, in their 1994 study, David Card and Alan Krueger challenged this economic theory, concluding that raising the minimum wage does not necessarily lead to job losses. This research is considered highly influential in modern economics. For example, in 1991, New Jersey raised its minimum wage from $4.25 per hour to $5.05 for fast-food restaurants. Card and Krueger found no evidence of job losses in fast-food restaurants, despite this being an area where one might expect a greater negative impact. In Spain, for example, the minimum wage has risen sharply in recent years without any apparent negative effect on the economy.
   
5. As a fifth argument, many economists believe that the minimum wage generates inflation and slows down the economy. In Spain, despite the 2020 COVID pandemic, this phenomenon has not been observed over the last six years.
6. What we can observe is that the wage increase ends up being paid for by the consumer, since the employer is forced, in many cases, to raise prices. In the aforementioned study of Card and Krueger prices at these fast-food restaurants increased compared to similar restaurant chains in eastern Pennsylvania, likely because the cost of the minimum wage increase was passed on to consumers. In Spain, the minimum wage has doubled in the last 10 years, almost at the same rate as the cost of basic goods, but no inflationary process was observed. Furthermore, other, more significant factors, such as rent, also influence the CPI.
7. Critics of the minimum wage also argue that it limits employers' bargaining power. This claim is true only in areas where the minimum wage is high relative to the cost of living. In other areas, it serves as a benchmark or point of reference. In other words, in areas where the minimum wage is below the cost of living, employers retain that prerogative.
8. Some opponents of the minimum wage argue that it is not an effective tool for reducing poverty. This is correct, since this measure is not intended to reduce poverty. The best way for a government to reduce poverty is 1) first, o issue money according to the Interest Pattern Monetary Theory, so that the market does not absorb more monetary energy than its activity requires, and 2) secontly, to invest in the education of its citizens. To avoid economic crises, significantly reduce poverty, and diminish large social inequalities, the four fundamental macroeconomic variables must evolve proportionally.
9. Ninth argument. Alex Kaiser believes that the genuine way to increase wages is through economic growth, capital investment, and innovation—factors that organically increase worker productivity. This assertion is correct, but it has nothing to do with the need for a legal framework that is useful, as we will see, for the administration of justice and the economy.

 The defenders of the minimum wage.

• One of the main reasons I defend the minimum wage is its use as a judicial and collective bargaining benchmark for salaries in higher categories. Indeed, judges need to know what the minimum wage is that cannot be seized. And there must be a minimum wage that cannot be seized because, otherwise, we would be practically forcing working people to commit crimes to survive. The judicial and police costs for crimes that these people might commit would be higher for the State than protecting a group of citizens who already have enough to contend with being limited to receiving only the minimum wage, regardless of how much they earn. For this very reason, I am also in favour of the minimum living allowance. However, I see no justification for such a large difference between the minimum wage and the minimum living allowance. In theory, the minimum wage and the minimum living allowance should be the minimum amount of income required for a person (not a family) to live in a given area. The State should have institutions that provide support to the rest of the family unit when the head of the household falls on hard times
• The minimum wage also serves as a benchmark for wage negotiations, both individual and collective, in any industry.
• Proponents of the minimum wage say it increases labor productivity endogenously. For example,

1. This can provide a Keynesian stimulus to the rest of the economy. I should emphasize that the increase in prices and wages reduces public debt as a percentage of GDP and the relative debt of households. Using the minimum wage and issuing money beyond what is needed are old tricks used by States to reduce debt.
2. Similarly, also partly for the reason mentioned above, an increase in the minimum wage can motivate the worker, making them identify with their work and become more efficient.
3. Higher labor costs will encourage employers to reduce their internal organizational inefficiencies.
4. or because the higher salary will discourage high employee turnover in the same job.

Effects of minimum wage leveling
A high minimum wage encourages the informal economy.  €1,381 a month, paid in 12 instalments, has different purchasing power in Madrid than in a remote, mountainous village in a distant province. When, due to the low cost of living in an area, a worker's marginal productivity is reasonable for the social model but low relative to the minimum wage, labor relations undoubtedly become strained, fostering the underground economy.
Conversely, when the cost of living is high and marginal productivity is also low, social tensions arise. If the employer is fair, the legal framework is meaningless. And if the employer merely pays the minimum wage, they are morally abusing their power and creating a long-term social problem.
Therefore, in my opinion, there should not be a single minimum wage for all of Spain. The social actors in each economic zone, operating under a system of institutional regulatory competition, should determine the applicable minimum wage.
Several countries, especially in Europe, do not have a national minimum wage, relying instead on collective bargaining between unions and employers to set wages. This is the case in Denmark, Sweden, Finland, Italy, Norway, Iceland, Austria, and Cyprus, where 90% or more of workers are covered by sectoral agreements. These models operate through strong collective bargaining agreements, not by law, considering these agreements to provide sufficient protection for workers. I believe it is more appropriate for the minimum wage to be based on geographical areas rather than sectors of activity, given that the common denominator of all sectors is the area of activity. In fact, logic dictates that, in Austria, most sectors already apply a minimum gross monthly wage of €1,983, prorated over 12 payments. As the territory of application becomes smaller, it makes more sense for the minimum wage to be applied territorially rather than sectorally. Collective bargaining agreements serve their purpose of negotiating wages for other professional levels, using the local wage as a reference.
In Switzerland, some cantons have regulated minimum wages, but there is no such regulation at the federal level. There are countries, like Ethiopia, that have neither a national minimum wage, nor do collective bargaining agreements that regulate this aspect cover even 10% of workers.
The State of New York does not have a single minimum wage for its entire territory; instead, it varies by geographic region. Thus, in 2025, the minimum wage is $16.50 per hour for New York City, Long Island, and Westchester County. For the rest of New York State, it is $15.50 per hour.

Who should approve the minimum wage and how?
In Spain, the government does not require the approval of the Congress of Deputies to increase the minimum wage. This prerogative has been used by many governments as a political tool. This is extremely dangerous. While not ideal, it would be reasonable for Congress to approve these important economic changes.
Some areas adjust the minimum wage based on inflation. Alaska has an inflation-indexed minimum wage. But other states do not. For example, the Massachusetts General Court and the Texas Legislature set the minimum wage for the entire state, and it is not automatically adjusted for inflation. Furthermore, in Texas, cities are prohibited from setting minimum wages higher than the state minimum wage.
Based on all of the above, we arrive at the following conclusions. First, each economic zone should have a minimum wage based on the cost of living and the specific characteristics of the area. Second, the economic actors in each zone should, under a system of institutional competition, determine the minimum wage. Most of the current cantonal minimum wages in Switzerland have been approved directly by citizens through referendums. For example, in the canton of Geneva, voters approved the introduction of a minimum wage in 2020 after several previous attempts were rejected. But this solution does not seem to me to be the definitive one. While it is true that as the territory becomes more fragmented, a uniform minimum wage makes more sense, we will never know for sure either the optimal wage or the territory it should cover if we do not allow for social calculation.
But how would social calculus or Regulatory Institutional Competition work?

The social calculus regarding the minimum wage.
Social calculus, or regulatory institutional competition, operates through the organic competition of two types of regulatory units: Regulators or private professional associations, and the various bodies at different levels of public administration. Private Regulators, upon their establishment, will define their area of jurisdiction in their bylaws. Regarding the remaining requirements for establishment and operational details, I recommend reading the book Regulatory Institutional Competition.
Let's imagine there is a Regulator overseeing the entire province of Madrid, made up of professionals from various economic sectors: business owners, union representatives, and workers. Let's also suppose there is a Regulator for the municipality of Pozuelo, in Madrid Province, one of the municipalities with the highest per capita income in Spain. These private organizations would overlap with each other and with public administration bodies. Finally, let's imagine that all the regulatory bodies approve the minimum wage with the following majorities:
In the municipality of Pozuelo, the minimum wage of €2,000 would apply, as it enjoys the greatest consensus. For the rest of the Province of Madrid, the minimum wage of €1,860 would come into effect, given that the number of members who voted in favor in the Regulatory Council exceeds that of the Assembly of the Community of Madrid, and there is a tie between these two regulatory bodies in terms of percentage of votes. Finally, for the rest of Spain, the minimum wage will be €1,400. The required majority for the municipality of Pozuelo is 80%. Anyone wishing to change this regulation would need to obtain a majority equal to or greater than this percentage.

If the results of the vote had been,  
In the municipality of Pozuelo, the State criterion would not apply, but rather that of the Provincial Assembly, therefore 1,760 euros.

This simple example illustrates how what I have termed the concurrent majority interacts in society. Social calculus will revolutionize all social sciences, as it's applicable to multiple normative aspects, such as security, urban solid waste management,  fire safety plans, flood safety plans, etc.
Social calculus is to law what differential calculus was to mathematics, as the working philosophy is exactly the same. The integration of small units of civil society into the normative apparatus is key to achieving a solid and dynamic comprehensive legal framework. The State is designed for problems of scale, not for addressing the much-needed legal microsurgery. Creative destruction (Schumpeter) must be accompanied almost in parallel by the normative destruction (Pedro Gómez). Otherwise, the administration of justice becomes unjust, and we resort to the courts to address external issues. Without institutional regulatory competition, humanity will lose its fight against AI and robotics.


Pedro Gómez Martin-Romo
Professor
Master's Degree in Financial Consulting and Insurance
Polytechnic University of Valencia