Madrid joins other governments around the world, including France, Greece, a Canadian province and some US states, that have recently lifted minimum-wage rates to jump start broader salary growth, which has remained sluggish despite the economic recovery. For politicians, it's a way to curry favour with voters and diminish the appeal of anti-establishment parties.

Job warnings

Spain's central bank estimates the wage jump could destroy around 125,000 jobs this year. But it acknowledges it can't know for sure given the "uncertainty associated with a national minimum wage increase on an unprecedented scale in Spain".

Budget watchdog AIReF has a more modest estimate of 40,000 jobs this year, while Spanish bank BBVA says more than 160,000 positions could be lost in the medium term.

Those forecasts are particularly jarring in Spain, where unemployment is the second-highest in the euro zone. But Raymond Torres, an economist at Funcas think tank in Madrid, says recent evidence shows higher salaries fuel greater spending that sparks more hiring, offsetting most of the job loss.

There's additional uncertainty given the timing: Spain, along with all of Europe, is moving into a slowdown that could worsen this year.

"We are in uncharted waters; nobody quite knows what the impact will be," Moody's analyst Kathrin Muehlbronner said. It "does come at an unfortunate time."

At the European Central Bank, officials may be watching as they monitor labour-market developments and underlying price pressures across the region. Its efforts to lift inflation have had limited success: Core inflation is 1.1 per cent in the euro area, and even lower in Spain.


Assuming that employers pass on most of the increased labour costs to consumers, Spanish inflation could get a boost of as much as 0.4 percentage points during the next year, according to Bloomberg Economics.

Profit margins have been on the rise in recent years, which means some companies will be able to shoulder higher labor costs. Those that don't may have to cut employees' hours, slow hiring or lay off workers.

"We can't have poor workers," said Hilario Alfaro, the owner of several clothing stores in Madrid. "We support an increase in wages as long as it's linked to productivity."

Jose Miguel Rosell, co-associate general director of Valencia-based cyber-security firm S2 Grupo, says his employees earn more than the minimum wage and won't be directly affected. He's concerned, though, that the sudden increase could affect clients, hurting his sales.

It's a "necessary measure," he said. "But they shouldn't have done it so abruptly and with so little planning."

Bloomberg