Spain’s labor market woes

Samuel Bentolila, Juan Dolado and Juan Francisco Jimeno write this super post on the topic.

Despite having a public debt-to-GDP ratio that is lower not only than Italy’s but also than that of France, Germany, and the UK, and despite having a new government committed to fiscal consolidation, Spain is still in trouble. It faces difficulties obtaining credit in international financial markets. Aside from the unresolved restructuring of its banking sector, this situation has arisen mainly as a result of a lack of competitiveness and low expected economic growth.

The problem is Spain’s unemp rate which ash zoomed from 8% pre-crisis to around 21% now. And is still rising:

At the root of these problems lies an extremely dysfunctional labour market that has performed very poorly in every slump since the 1980s. Moreover, during the Great Recession, Spain has suffered the highest employment losses per point of GDP in the OECD, while its unemployment rate has rocketed from 8% to 21.5%, and is still on the rise.

Spain’s labor market has some unique features. It has more number of temporary workers with minimal rights. And these are the guys who have lost their jobs:

First, Spain has the most extreme case of what economists call a ‘dual labour market’ – in which temporary workers have few rights and are easy to fire, while incumbent workers are on permanent contracts and the cost of dismissal is prohibitively high. In Spain, temporary jobs represent on average one third of employees

Second, collective bargaining – stemming from the industrial relations system under the Franco regime – mostly takes place at the industry or province level and collective agreements have the status of a law, affecting all workers and firms in the relevant area Wages and other working conditions of employees under permanent contracts are covered by collective bargaining agreements that protect them against inflation and adverse negative shocks. By contrast, workers with temporary contracts – a group in which young people, women, and low-skilled workers are overrepresented – suffer the burden of adjustment. Out of the 1.6 million employees to have lost their jobs since mid-2007, 1.4 million had temporary contracts. 

The authors look at the insider outsider model of labor markets and suggest reforms needed to protect the outsiders. Previous reforms have attempted but failed:

The Spanish economy is in a dire situation. External financial conditions are very unfavourable, making reductions in private and public indebtedness urgent and tying fiscal policy. Since a domestic monetary policy is not available, supply policies should dominate the policy agenda.

Two further ideas should guide labour-market reform. The first is that reducing the insider-outsider divide and lowering barriers to product-market competition would raise job creation and productivity growth, thereby increasing fiscal revenues and easing the fiscal constraint. The second is the need to be aware of reform fatigue. There have been far too many unsuccessful labour-market reforms. The new reform will be implemented in the midst of an intense fiscal retrenchment and with public opinion being highly critical of the management of the crisis so far. The reform should therefore have clear goals, be properly communicated to the public, and be perceived as equitable. The task is not easy but its time has come..

A unique aspect of Spanish labor markets. Most would think in Spain jobs are more permanent as seen in Europe. Because of economic difficulties these jobs are shelved…However, here we have temporary jobs which form 1/3rd of the market which is a problem…

Samuel Bentolila   Juan Dolado   Juan Francisco Jimeno 

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