Spain's Jobs Miracle Is Under Threat
(Bloomberg Opinion) -- The euro zone’s response to the sovereign debt crisis is usually associated with austerity. Yet some member nations have forged their own path: Spain and Portugal, for example, overhauled their labor and product markets, helping them return to growth.
Now, these structural reforms are under threat in Madrid, as a left-wing coalition of the Socialist Party and Podemos wants to take the country’s labor market back to the pre-crisis era. The minority government of Prime Minister Pedro Sanchez is having to rely on a bunch of regional parties to pass legislation, so it’s possible it will lack the votes to make significant changes. Nonetheless, it’s worrying that Spain wants to row back on measures that have made it outperform the rest of the single-currency area.
Spain introduced big changes to its labor market regulations between 2012 and 2013, as part of a rescue program agreed with the European Commission, the European Central Bank and the International Monetary Fund. This package gave priority to company-level agreements over sectoral collective bargaining; provided employers with the flexibility to change wages and working conditions unilaterally; and cut the cost of dismissing workers.
Sanchez and his allies have taken aim at some of these measures, saying they want to tilt the balance back in favor of employees. The government intends to switch back to industry-wide negotiations on pay and working conditions and to limit the use of subcontracting.
Yet it’s difficult to see how much they’d gain. While the crisis-era reforms have boosted employment, there’s little evidence that they’ve increased inequality. Two researchers at the IMF published a study last week looking at the distributional impact of the 2012-3 reforms. They found that between 2014 and 2018, employment growth averaged about 2.5% a year and that labor law changes played a significant part in that, including in reducing youth unemployment. The authors also found that the reforms helped reduce the country’s Gini coefficient — a measure of inequality — and had no detrimental effect on the overall risk of poverty.
The labor market overhaul did have some negative side effects. It contributed to a reduction in the average number of hours worked; while more people found jobs, many don’t work as much as they’d like. This has contributed to a rise in in-work poverty. So, while the reforms were successful, more needs to be done to foster job security, especially for the most vulnerable workers.
There’s plenty a left-wing administration could do, short of a damaging policy reversal. The priority should be to help those at the very bottom of the job ladder, for example by restricting short-term contracts, which are used excessively and sometimes fraudulently. Madrid is planning to make it harder for companies to sack workers who have to take sick leave repeatedly. That would be justified.
It’s unclear, however, why bringing back rigid wage bargaining would help vulnerable workers. Such a move would only hand more power to trade unions and staff representatives, even when they don’t represent the majority of companies and workers. There is a risk that reinstating the old regime will make businesses reluctant to invest in Spain. “In the future workers are going to shift a lot between jobs,” says Marcel Jansen, an economics professor at the Universidad Autonoma in Madrid. “If we go back to the pre-crisis labor market, designed in the 1970s, future reforms to deal with this new world of flexibility will become less likely”.
Nadia Calvino, deputy prime minister for the economy, said in a recent interview that the government will discuss its proposals with all stakeholders, including business. Even then, it’s far from certain that Sanchez will have the votes to pass his changes, especially the radical ones.
But Madrid needs to be mindful of the signal it sends to the world. The European Commission predicts the Spanish economy will expand by a mere 1.6% in 2020, down from a relatively impressive 2% in 2019. This is not the time to undo the good work.
To contact the author of this story: Ferdinando Giugliano at fgiugliano@bloomberg.net
To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.
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