ECONOMIST INTELLIGENCE UNIT / Spain economy: Labour pains
arthur garbayo
February 7th 2012 |
FROM THE ECONOMIST INTELLIGENCE UNIT A central tenet of the new government's policy programme is to introduce labour market reforms to improve the economy's longer-term competitiveness. Restrictive labour laws and a high degree of wage regulation have persistently undermined the Spanish economy's capacity to improve skills and productivity. The prime minister, Mariano Rajoy, seems determined to push through radical changes to the rigid two-tiered structure of the labour market and decentralise collective wage-setting procedures, although implementation risk suggests that their overall impact over the near term will be modest. Recent data underline the need for reform, with employment declining sharply in the final quarter of 2011 and the rate of youth unemployment rising close to 50%. Recognising that the political mood across Europe has shifted slightly in recent months from an earlier blinkered focus on "more austerity" to address growing concerns over future growth prospects, since entering office late last year Spain's new centre-right Popular Party government has placed a clear emphasis on the need to foster a more growth-oriented economic strategy. The prime minister, Mariano Rajoy, has called for a European investment programme to help stimulate demand, and the finance minister, Cristóbal Montoro, has unveiled tax-cutting plans for small businesses and the self-employed, while ruling out a widely-anticipated increase in value-added tax (VAT). There is an acknowledgement among Spain's European partners, and in financial markets, that Mr Rajoy is prepared to try to push through meaningful structural reforms that improve the underlying efficiency of the economy, although there are clear implementation risks. Of particular interest in Spain is Mr Rajoy's intention to proceed promptly with a reform of labour market regulations. At best incremental changes over the past decade mean that the labour market remains one of the weakest areas of the country's business environment, on account of its restrictive labour laws and a relatively high degree of wage regulation. The market is characterised by a duality between fixed-term (temporary) workers with little or no protection from dismissal, and "permanent" employees with indefinite contracts, who are often expensive to lay off. This two-tier system distorts incentives and undermines the economy's capacity to improve skills and productivity. Moreover, centralised collective bargaining procedures oblige companies to make pay awards that are often unrelated to individual company performance. As a result, labour market adjustment, when it occurs, works more through quantity than price: faced with rigid wages in a downturn, massive job losses occur. Generation gap This has certainly been the case in Spain. According to the country's main labour survey, employment fell by a seasonally adjusted 248,000 in the final quarter of 2011, a similar decline to that registered in the previous three-month period (237,000) and the worst rate of job destruction since early 2009. The figures confirm that the economy has entered a renewed and damaging contraction. This brought to 2.5m the number of net jobs that have been lost since the second quarter of 2008—about 12% of total employment at the time—and leaves unemployment standing at a seasonally adjusted 5.3m, a record high. The headline unemployment rate is now 22.8% of the active population (23% on a seasonally adjusted basis): the rate would be higher if it were not for a decline of 24,000 in the number of people seeking work in the final quarter of 2011. By age group, an extraordinary 48.6% of those aged 16-24 are now unemployed (compared with 21.4% of the 25-54 age group and 15.6% of those over 55)—a statistic that underlines the urgent need for reform. By sector, quarterly employment fell by a further 81,000 in construction (more than half of all construction jobs have been lost since 2007) and by 55,800 in industry, but increased by 67,800 in agriculture. For the second consecutive quarter the service sector shed the most jobs, with employment falling by 179,200. Moreover, job losses are accelerating in the public sector, where total employment fell by 84,500 in the final quarter (not seasonally adjusted). These are not workers with the full status and entitlements offuncionarios (civil servants), who enjoy virtually iron-clad job security, but the near 40% of Spanish public-sector employees who do not enjoy such status and are subject to standard labour law. This is an inevitable adjustment in the current circumstances, given that total public sector employment rose by almost 10% between 2002 and mid-2011. With the shakeout in the labour market limited to the private sector during the first four years of the crisis; as fiscal retrenchment is intensified, this is no longer the case, with widespread lay-offs occurring particularly at the level of local and regional government. Wage restraint Anticipating Mr Rajoy's reform proposals, and in the hope of affecting its outcome, the country’s main trade unions, UGT and CCOO, and business associations, CEOE and Cepyme, recently reached an agreement of their own, albeit focused more on wage settlements than structural reform. The agreement establishes a virtual freeze in nominal wages over the next 2-3 years, and a probable decline in real wage terms. The deal is significant, and represents an acknowledgement on the part of the trade unions that a substantial improvement in unit labour costs cannot be achieved exclusively through productivity gains, but also requires greater wage constraint. Since the economic crisis began, unit labour costs have fallen, but mainly by means of massive job losses rather than real wage moderation. With unemployment now standing above 20%, a new means of adjustment had to be found. The agreement sets guidelines for contractual pay increases, to be set by collective bargaining processes, of 0.5% in 2012 and 0.6% in 2013. In 2014, it accommodates the possibility of higher wage growth, but conditional upon the strength of the economy: if GDP rises by more than 2%, for example, wages will then rise by 1.5%. The agreement also abandons full indexation to consumer price inflation, thereby facilitating declines in real wages. At present, most wage agreements include an indexation clause which compensates workers when inflation rises above target, thereby guaranteeing real purchasing power. This is to be replaced by a new, somewhat convoluted mechanism, designed to only partially compensate workers in the event of higher-than-expected inflation. Moreover, the inflation index used will be either the Spanish national index or the harmonised euro zone index, whichever is lowest; the index used will also change if petrol prices rise by more than 10%, in which case a measure of core inflation (excluding petrol prices) will be used instead. The agreement between employers and trade unions represents a sea-change in the wage bargaining process. It was also accompanied by proposed reforms to collective bargaining processes, including easier opt-out clauses for firms in financial difficulties and greater flexibility in the organisation of working hours. The surprising reach of the agreement probably reflects the hopes among trade unions that evidence of concessions might be rewarded with only a further modest reform of labour market regulations by the government. However, Mr Rajoy, while welcoming the news of the wage deal, has sought to dispel any such impression, indicating that the government will look to press ahead with a more far-reaching shake-up of the labour market later this month. |
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