World Economy

Spain Labor Reform Delivers Jobs, But at Heavy Price

Spain Labor Reform Delivers Jobs, But at Heavy PriceSpain Labor Reform Delivers Jobs, But at Heavy Price

Spain’s labor market reform has helped bring down sky-high unemployment but critics complain the bulk of the jobs it created offer lower salaries and less security.

Without the 2012 law “we would not have dared to expand so quickly,” said Juan Martinez, the manager of a Kia car dealership in northern Madrid, AFP reported.

The reform drastically reduced the amount of compensation that must be paid when workers are let go and allows for collective dismissals, even when a firm is not facing economic difficulties.

It also created a new open-ended contract, which can be used by small- and medium-sized businesses, which allows dismissals without justification during the first year of employment.

Prime Minister Mariano Rajoy’s conservative government adopted the reform in 2012 after 2.6 million jobs had been lost following the 2008 global credit crisis, which hastened a correction already underway in Spain’s key property sector.

It has been held up as an example of “flexicurity”—a cooperative approach to labor relations pioneered by Denmark in which employees accept a degree of flexibility in working arrangements—to be followed in France and other European nations.

“You have less obligations as a business and that allows you to have less worries about the future than before,” said Martinez.

A third of jobs in the car sales sector disappeared after 2008. Spain’s car dealers association credits the reform with a recovery in employment in the sector.

When Martinez opened his Kia dealership in 2014, he recruited a total of 30 people, roughly a third under the new open-ended contract, which allows for dismissal without justification during the first year.

The workers were eventually given permanent contracts as car sales recovered along with the overall economy.

Spain’s economy, the eurozone’s fourth largest, expanded by 3.2% last year, one of the fastest rates in Europe.

Flexicurity Not Flexibility

About 10% of open-ended contracts in Spain now allow for dismissal without justification in the first year.

Unlike what happened at Martinez’s dealership, half of these contracts are terminated after the one-year trial period, according to a report by Spain’s second-largest union, the UGT.

This more flexible contract has not led to the disappearance of temporary contracts, which continue to represent over one-fourth of all contracts, a record in the 28-nation EU.

Spain’s left-wing opposition parties have vowed to scrap the reform, which the government credits for a sharp drop in unemployment. Spain’s jobless rate fell from a record 27.2% during the first quarter of 2013 to 18.7% during the first quarter of this year.

But while the reform was meant to provide “flexicurity”, the government has only focused on “flexibility” and has forgotten about the “security” portion, said Manuel Lago, an economist at Spain’s largest trade union, the CCOO.

Denmark sought to attenuate the problems of globalization by offering employers greater flexibility to let workers go but also gave workers greater security in the form of easy access to unemployment benefits and retraining programs.

But the Spanish government has “made access to unemployment benefits more difficult and reduced the amount that is paid” as part of austerity measures, said Lago.

State spending on unemployment benefits has fallen from €33 billion ($36.7 billion) in 2010 to €19 billion last year, a drop that is only due in part to the decline in joblessness, he added.

Unions argue the reform has also caused salaries to fall, by favoring negotiations over pay within individual firms instead of collective agreements covering an entire sector.

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