Will Spanish Jobs Reform Ease Economy Worries?
May 21st, 2010
Spain’s long-awaited jobs reform, likely this week, will cut the cost of hiring and firing but may not provide enough flexibility to erase financial markets’ doubts about the economy in the longer term, economists said.
The reform is key to Spain’s ability to create jobs, pay down its debts and build up muscle to turn around an economy which shrank 3.6 percent year-on-year in 2009.
But after a week in which the government announced an austerity plan which it had spent months denying was necessary, some believe that Socialist Prime Minister Jose Luis Rodriguez Zapatero has finally woken up.
That could mean the kind of measures which cut the cost of firing fixed workers, and some relief for financial markets worried about the size and cost of Spain’s debt, as the nation’s ability to create work and boost tax revenues rises.
“For the first time the government has shown that it is willing to assume the political cost of government and start taking unpopular decisions,” said Javier Diaz-Gimenez, Economics Professor at Madrid’s IESE Business School.
“But they won’t have the courage to go all the way and create one employment contract,” he said, adding that he was expecting the government to cut the cost of firing fixed workers to more than 8 days from 45 working days per year worked, and with a time limit.
That could boost the yield on Spanish 10-year Treasury bonds just as the austerity plan did last week.
Dual contracts hold economy back
One in five people in Spain are unemployed, double the euro zone rate and double the number two years ago. There are also 1.3 million households in which not one member has a job.
Spain especially needs to get rid of a crippling two-tier jobs market, where the cost of sacking those with fixed contracts is among the highest in Europe. Meanwhile, firing those on temporary contracts costs next to nothing.
“I expect more flexibility (of the jobs market),” said Jose Zarate, economist at 4Cast in London.
(But) markets want a labour reform along the lines of the UK and that is not going to happen. So they will not be pleased.
Unemployment is also 40 percent among the young, while older workers take up the bulk of fixed contracts with damaging potential consequences for productivity.
“The result of not pushing ahead with this could be catastrophic,” Zarate said, referring to the spillover effects of high unemployment – depressed consumption, lower government revenues via income taxes and higher expenditure in benefits.
Labour reform talks between unions and employers have taken months because of clashing demands, especially over firing costs, and Zapatero’s unwillingness – until now – to push them.
But that has changed under new pressure from the EU and market jitters about the euro and its members following the fallout from the Greek bailout package. The reform appears to be close to agreement, with media reporting this weekend that Zapatero last week gave them a 10-day ultimatum.
The danger might be that, in its haste to present the markets with something, the government pushes through a blueprint which initially looks good but then becomes weak.
“Labour reform will be done under pressure and will be a low-quality affair, something that in the longer term will have to be modified,” said Josep Soler, Economist and Director at Barcelona business school IEF.
Initially the market reaction will be positive … and then when people realise that measures do nothing to boost employment, it will respond badly.
Story from Reuters
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Big problem and why these measure wont make a big difference; Spain’s economy needs to reblanace so not over reliant on property and tourism. Spain’s affordability would be better enhanced by a weak euro. This would help increase foreign prop buyers and tourists.
So rebalancing and lobbying the EU to allow the euro to drop re US/UK will help Spain the most. Hopefully politics wont get in the way.
Dear M. Morris, what you say is correct. if the euro drops all Europe will gain. BUT it seems that pride is factored in this equation. The chaps in Brussels are probably chuffed that Mr Obama wants to see the euro gain. Well that is good for the US as their products will be cheaper compared to Europe’s.
BUT don’t forget also that the EU is governed by one law that fits all. This is why I say the PIIGS should go it alown for now. The higher the euro does the more porminent will be the viability of buying in PIIGS countries.
Hi Manuel,
Yes it would be more sensible for PIGS to at least temporarily go back to their old currencies and devalue, but i dont see this happening unless things get much worse.
Problem is that EU politicians now feel that the euro symbolises success or failure for the european project…which is really silly since the EU worked fine before the single currency.
PS: Cajasur went down over the weekend. Quite a large Andalucian regional bank.
It is one thing reforming employment law, of course, and quite another to generate jobs. The latter should have been tackled long ago – had Zapatero possessed the wit to realise the depth of the dire economic problems faced by Spain. Instead, incredibly, he spent a fortune on Plan E – which mostly amounted to non-regenerative employment projects aimed at masking the appalling employment figures. Frankly, the past six years have seen gross economic negligence on the part of the government that has been simply breathtaking. So, to credit the same people with the ability to find a way out of the current mess is unimaginable.
Surely making it easier and cheaper to get rid of long term faithfuly employees will only increase the number of unemployed. Workers need more rights to protect their jobs not less. The Government should make employing staff cheaper by reducing the amount of social security they pay per member of staff and give everyone protection with a fixed term contract. As it is they only ever pay the minimum wage on which they pay the nomina and pension contribution and add all sorts on as ‘extras’ to make up an already poor wage.
This step is going to be really bad for employees who are lucky enough to still have a job at all.
I believe that there would be so many more ‘self-employed / autonomo’ workers paying into the system again if Spain was to introduce a Voluntary Contributions system like in UK. At the moment in Spain they must pay about 260 euros every month, and when they have no work they get nothing back, plus the costs of putting their work in alta & baja everytime they had / lost work. I am sure if / when most of them were to get a little bit of work & had the option to continue paying in to the system say with 80euros / month to Seguridad Social, this would atleast help a little & bring in a bit more to the country’s funds, and give them essential health cover etc. I am sure there are many many self employed workers who would like to continue to contribute, but simply cannot afford to at the present rates, due to no work, or very little / irregular work coming in.