Repeal of Spain’s labor reform is reckless

Nick Ottens (Sentinel of the Atlantic) | The ruling left-wing parties in Spain agreed to roll back labor market liberalizations from the previous Conservative government, making it easier for companies to hire and fire workers.

The decision is difficult to justify, even by the standards set by supporters of the repeal. The reforms did not create more precarious jobs, they did not lead to higher structural unemployment, and they barely reduced wages.

Politics

The repeal of the 2012 reforms was a key electoral promise to Podemos (We Can), the junior coalition party. They need a victory.

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

In October, the party was forced to drop a deputy, Alberto Rodríguez, who was convicted of kicking a policeman during a demonstration in 2014 in La Laguna, on the Canary Island of Tenerife.

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

The hard left accuses Podemos to sell. To join the government, the former protest party had to give up ambitions as broad as the nationalization of public services and the withdrawal of Spain from NATO.

The Socialists, who run the government, would prefer the agreement of employers and unions before making a final decision on the repeal. Podemos and the small left-wing parties in the Basque Country and Catalonia, whose coalition needs support, are ready to cancel them altogether.

2012 reforms

Passed in the depths of the euro crisis, with the encouragement of the European Commission, the 2012 reforms are the legacy of former Prime Minister Mariano Rajoy, who is hated on the left for having subjected Spain to years of austerity.

The main changes were:

• Withdrawal of collective agreements after one year even if employers and unions fail to renegotiate.
• Allow companies to withdraw from sectoral agreements and reduce wages in times of downturn.
• Allow companies with fewer than fifty employees to keep new hires on probation for one year, against two months for regular employees and six months for young graduates.
• Expanded economic grounds for dismissal: Companies can now dismiss workers when they have suffered three consecutive quarters of lost revenue or sales.
• Reduction of severance pay from the equivalent of 45 to 33 days ‘salary for each year of service, with a maximum of 24 months’ salary, down from 42 previously.

The reforms were justified:

• Keeping old collective agreements in place when employers and unions failed to negotiate has created perverse incentives: employers refuse better terms at good times and unions refuse cuts at bad times. In 2007, the subprime mortgage crisis had erupted in the United States and it was clear that Europe would be affected. Salaries in Spain nonetheless went from € 26,630 that year to € 27,570 in 2008 and € 29,300 in 2009. This obviously did not make it easier for companies to get through the financial crisis.
• The application of sectoral bargaining agreements uniformly undermined competition between companies: they all had to offer the same benefits and minimum wages.
• Small businesses and startups were reluctant to hire because they would be stuck with an employee after just two or six months.
• Banning companies from laying off workers even after three-quarters of the losses made them more likely to go bankrupt, resulting in the loss of all workers.
• Spanish severance pay was generous by European standards, and still is. In the Netherlands, severance pay corresponds to one month’s salary per year in a company. In France, it is between a quarter and a third. In Germany it is usually half, although there is no federal law.

And the reforms paid off:

• Unemployment peaked at 26% in 2013 and then fell to 14% each year in 2019.
• Spanish companies have become more competitive. Exports contributed 31% to GDP in 2012. By 2019, the share had reached 35%.
• Until the reforms, Spain’s net business growth was negative. By 2014, it had almost fallen to 0, meaning that around as many businesses were started that year as they closed. Since 2015, the number has been positive every year.

Quality of work

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

These claims are not supported by statistics.

• 23% of Spaniards had a temporary job in 2012, compared to the EU average of 15%. 24% had a temporary job in 2020, compared to the EU average of 13.5%.
• 14.5% of Spaniards worked part time in 2012, compared to the EU average of 18%. 14 per cent still work part time and the EU average is still 18 per cent.
• 2.8 million Spaniards were self-employed in 2012. 2.9 million Spaniards were self-employed last year.
• Spaniards worked an average of 38 hours per week in 2012, compared to the EU average of 37 hours. They were working 37.5 hours per week in 2020, compared to the EU average of … 37. (Are you starting to notice a trend?)
• The share of Spanish jobs classified as “precarious”, ie with a contract of three months or less, fell from 4.2% in 2012 to 3.2%.
• The proportion of Spaniards working but at risk of poverty increased from 11% in 2012 to 12% last year.

The reforms do not seem to have affected the quality of work at all.

Structural unemployment

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

It is true, but Spain is not alone. All southern European countries have higher structural unemployment than their northern European counterparts. Even at the height of the economic boom in 2007, 8% of Spaniards were unemployed.

This is probably due to factors other than labor law:

• A relatively large informal economy, the size of which we do not know – by definition. IMF economists estimate that 20% of Spain’s economic activity is informal. This compares to around 13% in the Netherlands, 15% in France and 27% in Italy.
• The pre-crisis boom was fueled by a bubble In the real estate. Hundreds of thousands of lost construction jobs never returned – and neither should they. Spain was building too many houses. 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 construction jobs were taken by immigrants. In 2007, more than half of Spain’s 3.3 million non-European immigrants worked in construction. Immigrants did not stay away when the Spanish economy contracted; many are leaving countries like Colombia and Venezuela for political and security reasons. Their certifications are rarely recognized in Europe and they may have to wait months or even years to obtain a work permit. In the meantime, they contribute either to the informal economy or to Spain’s high structural unemployment rate.
• Education: Spain has a fairly high higher education rate of 36%, compared to a European average of 29%. But there is also a high school dropout rate. 38% of Spaniards do not complete college, compared to 25% of all Europeans.
• Bureaucracy and petty corruption are much less worse than before, but they still stifle business creation and growth. The 2012 reforms pushed Spain up in the World Economic Forum’s Global Competitiveness Index, but the group still cites bureaucracy, taxes and restrictive labor regulations as the top three weaknesses in Spain’s economy.

Wages

Supporters of the repeal are not all wrong. They have stronger arguments to make about wages. Salaries in Spain are barely higher than in Slovenia and lower than in Italy and Western Europe.

Even if one disregards the excessive wage growth in the last years before the recession, annual wages in Spain are still only € 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 this is almost certainly due to the pandemic and hopefully it will be an outlier. )

Socialists and Podemos were correct in classifying low-paid workers in the ‘labor economy’, such as Glovo couriers and Uber drivers, as employees instead of contractors, which gives them employment rights and benefits. collective bargaining.

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

They must give time to these reforms. The 2012 liberalizations did not bear fruit until two years later.

If in a few years Spain’s wages still haven’t gone up, consider toughening up labor rules, especially when it comes to collective bargaining rights.

But it is almost certainly unwise to reduce probationary periods for small businesses and make it more difficult and costly for businesses to fire workers.