With a current account deficit of 10% of GDP, to pull itself out of the slump Spain sorely needs to gain competitiveness – as Olivier Blanchard wrote last year.1 Within EMU devaluations are no longer possible, and competitiveness has to be earned the hard way. Since 1995, despite wage moderation (real wages have fallen by 0.5% per year), Spain has seen a 30% increase in its relative unit labour costs vis-à-vis the euro area, due to a dismal productivity record (total factor productivity has fallen by 0.1% annually). Increasing productivity will require, among other things, a sizeable reallocation of labour from inefficient firms that mushroomed during the boom to more efficient ones in industries where there is demand.
All these requirements point towards raising labour market flexibility. Indeed, as Giuseppe Bertola has recently pointed out, both increasing openness and EMU raise the employment cost of labour market rigidity and have led to some labour market deregulation in EMU countries.2 On top of those two forces, Spain has strongly felt a third one: immigrants currently comprise 16% of the labour force, up from 1.3% in 1996.
What reforms could be implemented to achieve those goals? Here are a few examples.
(a) In mid-1970s Spain had very high firing costs inherited from the Franco regime. To reduce them, fixed-term labour contracts were introduced in 1984, creating a dual labour market: about one-third of employees are on such contracts (vis-à-vis 15% in the EU-15). The evidence shows that those contracts are not stepping stones to permanent jobs. Thus, while better than the preceding regime on various counts, the two-tier system has also caused problems,4 such as excess job turnover (the ratio of annual contracts signed to the labour force was 92% in 2007) and a decrease in productivity growth,5 with a neutral or slightly positive effect on employment.
A sensible reform would close the gap between the firing costs of permanent and temporary contracts introducing gradual job protection. New hires would take place under a single permanent contract with severance pay that increases smoothly as workers accumulate job tenure.6 The system should be calibrated so that average severance pay for a given tenure level (e.g. 10 years) became lower than currently, since labour courts could be involved in the dismissal, whereas in the case of temporary contracts they cannot. Clearly, more radical reforms should also be entertained.
(b) Wage levels agreed at the industry level, between the two major labour unions and one employers’ association, are binding floors for all firms in the industry. Unions have shown wage restraint, presumably due to increasing openness, immigration, and fixed-term contracts. However, there is very little dispersion in bargained wage growth across industries to accommodate industry-specific needs. Thus the reform should aim at decentralising the wage setting process.
(c) Both the need for more worker protection against higher uncertainty as a result of increased openness/EMU and the now popular “flexicurity” approach suggest raising the generosity of unemployment benefits while reducing employment protection. However, strict enforcement of availability to work and efficient job search assistance would also be required, and these are far from assured.
These proposals are not so new (or bold). One can find similar ones in a report on Spanish unemployment by a set of highly reputed economists in 1995.7 Indeed, labour economics is one of the most developed areas in Spanish academia, so that economists could help in designing the reform.
http://www.voxeu.org/index.php?q=node/2623Zapatero's proposed changes to Spain's rigid labor-market regulations include more flexibility for collective wage bargaining, reducing working hours to preserve employment and improvement of job placement services.
The prime minister said such measures would preempt the need for more controversial ones like a reduction in Spain's high dismissal costs which economists say discourage hiring or the creation of a new type of contract they say would simplify hiring and firing.
He proposed the new measures be discussed between unions and employers starting early next year.
"I firmly believe our commitment should be to strengthen our companies without harming workers," Zapatero said.
Jose Ramon Pin, management professor at IESE business school and director of a quarterly Spanish labor market survey the IESE compiles together with Adecco SA, said the measures proposed by Zapatero don't address the root of the problems in the Spanish labor market out of a fear of angering Spain's powerful labor unions.
"All [economists] are telling [Zapatero] he needs to do a labor-market reform, but with labor-market reform they are referring to two things: reduction of labor costs and streamlining procedures for hiring and firing," Pin said.
http://www.dowjones.de/site/2009/12/spain-pm-zapatero-proposes-labormarket-reforms.htmlScrew the unions. When productivity is
falling by 0.1 percent a year, relative labor costs surge. A 20 percent unemployment rate is unacceptable.
The Spanish current account may be instructive.
http://fistfulofeuros.net/afoe/economics-country-briefings/spains-current-account-deficit-folds-in-on-itself/Spain's current account deficit had fallen from 8 to 10 billion euros annually to just 2 billion euros from mid 2008 to mid 2009, as imports collapsed. However, it has since widened again to 6.5 billion euros by spring 2010, fueled by ECB loans to Spanish banks that then lend it to the Spanish government, which spends it on imports, since Spain itself is not competitive.
Folks, this is no way to run an economy! The Spanish are essentially trying to stimulate
Germany's economy! What Spain needs to do is cut labor costs, break up the unions, break up rigid firing rules, and increase productivity. Once the current account is in surplus, then the economy will start to recover.
