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April 9th, 2014

Spain’s labour market and social reforms have exacerbated the country’s unemployment problem

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Estimated reading time: 5 minutes

Blog Team

April 9th, 2014

Spain’s labour market and social reforms have exacerbated the country’s unemployment problem

3 comments

Estimated reading time: 5 minutes

Spain was one of the countries hardest hit by the Eurozone crisis. Vincent Navarro writes on labour market and social reforms which have taken place within the country as part of the response to the crisis. He argues that policies aimed at deregulating the labour market have done little to solve Spain’s unemployment problem and have been more geared toward reducing wages. Moreover, the reforms have damaged Spain’s view of Europe, given the belief that many of these policies have been implemented to meet the demands of the Troika.

Spain, under pressure from the Troika (International Monetary Fund, European Commission and European Central Bank) has gone through three major labour market reforms, presented to the public as necessary in order to reduce the scandalously high level of unemployment: 25 per cent in general and 52 per cent among the young. Spain (alongside Greece) is currently at the top of the unemployment league.

Since the beginning of the crisis, both the socialist (PSOE) and conservative (PP) governments have made reforms aimed at what they have called ‘deregulation of the labour market,’ assuming that the problem of high unemployment was created by too many labour market rigidities. It was said that labour unions have protected fixed workers too much at the cost of making it too risky for employers to hire new workers. As a consequence – it is being said – the employers are afraid of getting stuck with the new hires without being able to fire them again when their need for labour diminishes.

Spanish prime minister Mariano Rajoy and European Central Bank President Mario Draghi, Credit: Spanish Government (CC-BY-SA-3.0)
Spanish prime minister Mariano Rajoy and European Central Bank President Mario Draghi, Credit: Spanish Government (CC-BY-SA-3.0)

This assumption has become dogma, and as with all dogmas it has been sustained by faith rather than scientific evidence. With a clear apostolic mood, both the (socialist) Zapatero government and (conservative) Rajoy government have been making it easier and easier for employers to fire workers. And they have indeed fired thousands and thousands of workers. But the employers have not hired workers at the rate they have fired them.

The results are clear to see for anyone who wants to see reality for what it is, rather than for what they claim it to be. Unemployment, rather than declining, has kept increased more rapidly than before the reforms. For example, from the last quarter of 2011 to the fourth quarter in 2013, 1,049,300 jobs have been destroyed, with an increase of unemployment of 622,700 people. The number of unemployed now sits at 6 million people, 47 per cent of whom do not receive any unemployment insurance (due, in part, to the cuts in this type of insurance that accompanied the last labour market reform).

Besides the growth in unemployment, another consequence of the reform has been a rapid deterioration of working conditions. Precarious work has increased rapidly. Actually, most of the new jobs belong to this category. Ninety-two percent of new contracts have been temporary jobs, with only eight per cent as fixed contracts.

Another result of the reforms has been the lengthening of the period of unemployment. Six out of every ten unemployed persons have been out of a job for more than a year, an authentic tragedy. This is another record in the unemployment league (side by side with Greece). These are indeed the predictable results of reforms which were applauded by the Troika, reforms presented as necessary to reduce unemployment. And, as a sign of cynicism, they are even now still presented as necessary to resolve the high unemployment rate, even though the failure to do so is apparent. These reforms have achieved the opposite of what they, in theory, were supposed to do.

The actual objectives of the labour market reforms

These policies have, however, been very successful at achieving the hidden objectives of the reforms (never mentioned in the media or in circles of polite discourse). The reforms have had an enormous impact on the reduction of wages: a decline of 10 per cent in two years. No other EU-15 country (besides Greece) has seen such a dramatic reduction.

This reduction was actually what the Troika and the Spanish governments had in mind when they imposed such reforms (and I use the term imposed because these reforms did not exist in the electoral platforms of the governing parties, either socialist or conservatives). As in the case of former Chancellor Schröder’s reforms in Germany (taken as a model for the rest of the EU-15), the purpose of the latest market reforms was to reduce the power of labour unions and to cut wages, both perceived as the key measure to increasing competitiveness. Another element of the reform is to assume that high salaries are the cause of the supposed decline of competiveness of the Spanish economy, even though the data shows that Spanish wages are among the lowest in the EU-15.

Despite the fact that labour productivity had been increasing prior to the crisis at a rate much higher than the increase in salaries, the Troika and the Spanish government keep insisting that they are still too high. Labour income as a percentage of national income has declined dramatically during the 2009-2013 period, reaching the lowest percentage ever (52 per cent).

Meanwhile, income in the top levels, and near the top levels, has increased enormously. Today, Spain has one of the largest levels of inequality in the OECD. The 20 per cent of the population with the highest income (the super-rich, the rich, the well to do, and the professional classes) make seven times more than the 20 per cent at the bottom (mostly unskilled working class). In this last group, two million families do not have anyone employed. And among the persons employed, almost 15 per cent are poor, since the level of salaries is so low that it is not sufficient to get them out of poverty.

But, where the drama appears with brutal intensity is among children. Poverty in this group (three times higher than in the EU average) has been increasing rapidly since 2011, hitting almost 30 per cent. There are over 2.5 million children living with families in poverty in Spain, while the total number of children in the country is just over 8.36 million. Spain, which has one of the lowest family expenditures in the EU-15, has seen a reduction in this area of 18 per cent, at a time when need was highest. Twenty-four percent of children in these poor families cannot eat fruit or vegetables on a daily basis. Forty-two per cent cannot attend special events outside their home, and 38 per cent have problems eating a normal diet.

The destruction of the welfare state

Another component of the dogma is the belief that the welfare state has grown out of control and is ruining the economy. Again, the data shows that Spain has one of the lowest social public expenditures per capita in the EU-15. In spite of this reality, the governments have been cutting those expenditures. In health care services (Spain has a National Health Service), there has been a cut of over 12.8 billion euros. This has amounted to a reduction of 18.21 per cent of health care expenditures, with a cut of 55,000 jobs since 2009, which has been a frontal attack on the viability of the Spanish NHS.

A consequence of these enormous cuts has been the most remarkable growth in private health insurance, opening up the NHS to all types of insurance, hedge funds and risk capital. All of them, with banking, have enormous influence on the Spanish state. One of the major cuts has been in Catalonia, where the Minister of Health, who used to be President of the Private Hospital Association and the Health Association Society, is now in charge of dismantling the public health system.

What we are seeing in Spain is a dream for the conservative forces (large employers and banking) that have been the dominant forces over the Spanish state. They are achieving what they always wanted: a reduction of salaries, frightened labour, weak labour unions, and the dismantling of the welfare state. And they are doing it under the excuse that there is no other alternative. They even say that they do not like to make the reforms, but simply have to do it because the European authorities force them to do so. Not surprisingly, the popularity of Europe is declining rapidly. Eighty-two percent of Spaniards feel they do not like this Europe. Europe, which for many years, and very much during the dictatorship, was seen as the dream – a model of democracy and well-being – has become a nightmare.

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Note: A version of this article originally appeared at Social Europe. This article gives the views of the author, and not the position of EUROPP – European Politics and Policy, nor of the London School of Economics.

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About the author

Vincent Navarro – Pompeu Fabra University / Johns Hopkins University
Vicente Navarro is a Professor of Public Policy at Pompeu Fabra University in Barcelona, Spain and also a Professor of Public Policy at Johns Hopkins University, Baltimore, in the United States. He has written extensively on the Spanish economy, the welfare state, and the Eurozone crisis. In 2002 he was awarded the Anagrama prize.

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