Spain’s jobs miracle is under threat

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 labour 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 labour market back to the pre-crisis era. The minority government of Prime Minister Pedro Sanchez has 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 labour market regulations between 2012 and 2013, as part of a rescue program agreed with the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF). 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 balance back in favour 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 boosted employment, there’s little evidence that they’ve increased inequality. Two researchers at IMF published a study 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 labour law changes played a significant part in that, including in reducing youth unemployment.
The labour 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 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.
—Bloomberg