Free Market Fundamentalist, Top Story

Repeal of Spanish Labor Reforms Is Unwise

Liberalizations cut unemployment and encouraged business creation.

Madrid Spain
Skyline of Madrid, Spain (Unsplash/Alex Azabache)

Spain’s ruling left-wing parties have agreed to reverse the labor market liberalizations of the previous conservative government, which made it easier for firms to hire and fire workers.

The decision is hard to justify even by the standards set by proponents of repeal. The reforms did not create more precarious jobs, they did not cause higher structural unemployment and they barely made a dent in wages.

The politics

Repeal of the 2012 reforms was a key election promise of Podemos (We Can), the junior party in the coalition. They need a win.

They lost their leader, Pablo Iglesias, to a doomed attempt to prevent a right-wing victory in Madrid’s regional election in May. Iglesias resigned as deputy prime minister to lead Podemos in the capital only to place fifth with 7 percent support. He has retired from politics.

In October, the party was forced to give up a deputy, Alberto Rodríguez, who was found guilty of kicking a police officer during a 2014 protest in La Laguna, on the Canary Island of Tenerife.

Painfully, Rodríguez was suspended from Congress by the Socialist speaker, Meritxell Batet.

The hard left accuse Podemos of selling out. To join the government, the former protest party had to give up such far-reaching ambitions as nationalizing utilities and withdrawing Spain from NATO.

The Socialists, who lead the government, would prefer agreement from employers and trade unions before making a final decision on repeal. Podemos and smaller left-wing parties from the Basque Country and Catalonia, whose support the coalition needs, are comfortable with canceling them outright.

2012 reforms

Passed at the depth of the euro crisis, with encouragement from the European Commission, the 2012 reforms are the legacy of former prime minister Mariano Rajoy, who is reviled on the left for subjecting Spain to years of austerity.

The key changes were:

  • Retiring collective bargaining agreements after one year even if employers and trade unions fail to renegotiate.
  • Allowing companies to opt out of sectorial bargaining agreements and reduce salaries during a downturn.
  • Allowing companies with under fifty employees to keep new hires on trial for one year, compared to two months for regular employees and six months for recent graduates.
  • Expanding economic grounds for dismissal: companies can now fire workers when they’ve suffered three consecutive quarters of losses in revenue or sales.
  • Reducing severance payments from the equivalent of 45 to 33 days of salary for every year of service, with a maximum of 24 months’ pay, down from 42.

The reforms were justified:

  • Keeping old collective bargaining agreements in place when employers and trade unions failed to negotiate created perverse incentives: for employers to refuse better terms in good times and for unions to refuse cuts in bad times. By 2007, the subprime mortgage crisis had erupted in the United States and it was clear Europe would be affected. Salaries in Spain nevertheless rose from €26,630 that year to €27,570 in 2008 to €29,300 in 2009. That obviously didn’t make it easier for firms to weather the financial crisis.
  • Applying sectorial bargaining agreements uniformly undermined competition between firms: they all had to offer the same minimum benefits and wages.
  • Small companies and startups were reluctant to hire, because they would be stuck with an employee after just two or six months.
  • Prohibiting companies from firing workers even after three quarters of losses made it more likely they would go bankrupt, causing all workers to lose their jobs.
  • Spanish severance packages were generous by European standards, and still are. In the Netherlands, severance is one month’s wage for every year with a company. In France, it’s between a quarter and a third. In Germany it’s typically half, although there is no federal law.

And the reforms paid off:

  • Unemployment peaked at 26 percent in 2013 and then fell every year to 14 percent in 2019.
  • Spanish firms became more competitive. Exports contributed 31 percent to GDP in 2012. By 2019, the share had reached 35 percent.
  • Until the reforms, Spain’s net business growth was negative. By 2014, it had dropped almost to 0, meaning about as many businesses were created that year as shuttered. Since 2015, the number has been positive every year.

Quality of work

Critics contend that, while the reforms may have created jobs and helped businesses grow, they created worse jobs and enabled bosses to take advantage of their workers.

These claims aren’t backed up by statistics.

  • 23 percent of Spaniards had a temporary job in 2012, when the EU average was 15 percent. 24 percent had a temp job in 2020, when the EU average was 13.5 percent.
  • 14.5 percent of Spaniards worked part-time in 2012, when the EU average was 18 percent. 14 percent still work part-time, and the EU average is still 18 percent.
  • 2.8 million Spaniards were self-employed in 2012. 2.9 million Spaniards were self-employed last year.
  • Spaniards on average worked 38 hours per week in 2012, when the EU average was 37 hours. They worked 37.5 hours per week in 2020, when the EU average was… 37. (Starting to notice a pattern?)
  • The share of Spanish jobs classified as “precarious,” meaning they have a contract for three months or less, has fallen from 4.2 percent in 2012 to 3.2 percent.
  • The share of Spaniards in work but at risk of poverty has gone up from 11 percent in 2012 to 12 percent last year.

The reforms don’t appear to have affected the quality of work at all.

Structural unemployment

Another argument against liberalization is that Spain’s structural unemployment rate remains high.

That’s true, but Spain is not alone. All Southern European countries have higher structural unemployment than their Northern European peers. Even at the peak of the economic boom in 2007, 8 percent of Spaniards were unemployed.

This is probably due to other factors than labor law:

  • A relatively large informal economy, the size of which — by definition — we don’t know. IMF economists estimate that 20 percent of Spain’s economic activity is informal. That compares to an estimated 13 percent in the Netherlands, 15 percent in France and 27 percent in Italy.
  • The pre-crisis boom was fueled by a bubble in real estate. Hundreds of thousands of jobs lost in construction have never returned — nor should they. Spain was building way too many homes. Between 2000 and 2009, it built 30 percent of all new homes in Europe while its economy generated only 10 percent of the EU total.
  • Immigration: Many of the jobs in construction were filled by immigrants. In 2007, more than half of Spain’s then-3.3 million non-European immigrants worked in construction. Immigrants didn’t stay away when Spain’s economy contracted; many leave countries like Colombia and Venezuela for political and security reasons. Their certifications are seldom recognized in Europe and they may have to wait for months or even years to get a work permit. In the meantime, they either contribute to the informal economy or to Spain’s high structural unemployment rate.
  • Education: Spain has a fairly high tertiary education rate of 36 percent, which compares to an EU average of 29 percent. But it also has a high school dropout rate. 38 percent of Spaniards don’t complete middle school, compared to 25 percent of all Europeans.
  • Bureaucracy and petty corruption are far less worse than they used to be, but they still stifle business creation and growth. The 2012 reforms moved Spain up in the World Economic Forum’s Global Competitiveness Index, but the group still cites bureaucracy, taxes and restrictive labor regulations as the three main weaknesses of the Spanish economy.

Salaries

Advocates of repeal aren’t wrong about everything. They have a stronger case to make on wages. Salaries in Spain are barely higher than in Slovenia and lower than in Italy and Western Europe.

Even when we disregard the excessive wage growth in the last years before the recession, annual salaries in Spain are still just €1,000 higher than they were in the early 2000s — and they have fallen since 2012, from €27,715 to €27,330 in 2019. (They fell to €26,500 in 2020, but that’s almost certainly due to the pandemic and will hopefully be an outlier.)

The Socialists and Podemos were right to classify low-paid “gig economy” workers, like Glovo couriers and Uber drivers, as employees instead of contractors, giving them collective bargaining rights and benefits.

They were right to raise the minimum wage to €13,500 per year.

They need to give those reforms time. The 2012 liberalizations didn’t pay off until two years later.

If, in a few years, Spanish wages still haven’t increased, then consider tightening labor rules, particularly around collective bargaining rights.

But cutting trial periods for small businesses and making it harder, and more expensive, for firms to fire workers is almost certainly unwise.

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