Spanish labor reform: sure losses, uncertain benefits

In February 2012, in Spain, the proposal of labor reform headed by the government of Mariano Rajoy, of the Popular Party (PP), was converted into law. Truthfully, this undertaking is located in a larger context of labor market flexibilization movements, such as in Mexico, Chile, Argentina and, especially, in Brazil, which means that it cannot be considered a unique case. More than five years after its ratification, an evaluation of its results is required, so that parallels can be drawn with the process in progress in our country.

In short, the reform aimed at facilitating dismissals and hiring on a partial or temporary basis. Accordingly, the legal obligations of the companies that cut off their employees were reduced and the processes for the admission of new employees were simplified. The official justification was that, in a context of crisis, these changes would allow the external flexibility of firms (i.e. layoffs) to become internal flexibility (i.e. wage reductions), which would soften their negative effects and enable a faster recovery.

At first glance, the available data seem to indicate an ambiguous picture: concomitant increase in job creation and precariousness in labor relations. In fact, by the end of 2016, compared to the last quarter of 2011, the number of employed persons increased 350,000 and that of salaried employees was augmented by 250,000. Thus, the unemployment rate fell from a level of 24.8% to 18.5%, which was welcomed by enthusiasts of the legislation updates. On the other hand, the hiring of temporary employees and part-time workers has advanced, making the average annual salary, currently 800 euros, lower than the one in 2011.

It is up to the analysts to see if it is possible to attribute a direct causal relationship between the reform and the generation of jobs. That being said, despite the positive data on job creation, it should be noted that the analysis of the period when the reform was taking place shows a dubious scenario: although the unemployment rate has actually fallen since 2011, one should note that its level rose until mid 2014 — a trajectory that was only reversed with the resumption of economic growth in that year, that is, the quarters immediately after the reform point to an opposite picture to that imagined by its supporters. As the correlation between economic growth and job creation is well-proven in the specialized literature, it remains uncertain, albeit plausible, that the decline in the unemployment rate was actually caused by the labor reform

Figure 1

Number of employed persons in Spain — 1st trim./09-4th trim./15

SOURCE: Encuesta de Población Activa/Instituto Nacional de Estadística (2016).

Thus, a careful analysis of the data available indicates that the direct relationship between the flexibilization of labor laws and the creation of jobs is not conspicuous. In the Spanish case, at least, the link between the two elements only took place after the occurrence of an opposite phenomenon, indicating that the effect of job creation may be due to a third factor, independent of the reform — which casts doubts about whether a similar result would not have occurred even without these changes. This finding is especially relevant for Brazil, as the effects of the labor reform recently approved by Michel Temer will be observed in the coming months.

On the other hand, the negative externalities allowed for by the change in legislation seem to be inextricably linked to the reform itself: precariousness of work, increase in partial and intermittent contracts and immediate wage reduction were the stated aims of those who proposed the law. In fact, part-time jobs grew by 1.8 pp per year between 2011 and 2016, standing at 15.3%, while the rate of involuntary temporary contracts increased by 5.2 pp, reaching 60.5%. Finally, the reform also provided an increase in the number of “false self-employed workers”, employees who are forced by their companies to work on their own account. In relation to the total number of self-employed workers, this group represented 62.9% in 2011 and rose to 67.1% in 2016, confirming the trend of worsening the employment protection conditions.

In addition to warning about the need to reduce labor costs in order to turn external flexibility into internal flexibility, reformers also argued that this process would favor Spanish companies in terms of international competitiveness, as lowering these costs would allegedly increase their profits. On this point, it should be noted that these benefits will only occur if the world economy recovers, so that importers will increase their demand for Spanish products.

In these circumstances, it must be said that, for Spanish workers, the benefits of the labor reform seem ambiguous at best, since job creation is not necessarily linked to the change in legislation. In contrast, the losses are crystal clear, once these shifts have spawned precariousness in labor relations and wage contractions.