Time to end Spain’s labour market apartheid

Take a look at a crowded street in any Spanish city and you will see two classes of workers. You won’t be able to distinguish them by their clothes, their skin colour or their schooling. But when they show up for work, receive their payslips at the end of the month or think about their future, they are very different.

One group, let’s call them the fijos, feel more secure and more confident. With fixed contracts from their employers, they know they can’t be laid off easily – or cheaply – even in the current recession-bound economy. They don’t have to worry about their bosses renewing their contracts every month, every six months or every year. They may get training to advance their careers, seniority bonuses, a share of company profits, annual pay increases, early retirement, and generally have few problems getting a bank to give them a mortgage or personal loan. They are, in effect, a privileged majority, accounting for around seven out of every 10 Spanish employees.

The other approximately 30 percent of workers on the street will be made up of their less privileged colleagues. They are the temporales, people on temporary contracts, who will probably spend a good portion of their working lives fretting about whether they will have a job in a month, six months or a year’s time. They will often, but not always, be young, women, foreign, or any combination of the above. They will get little, if any, professional training from their employers, who don’t see them being worth the investment, although, in turn, companies also suffer because they have a less skilled – and hence less productive – labour pool. With little chance for career advancement, temporales often struggle to raise their salaries and living standards no matter how much effort they put in. Once their contracts end, they may find themselves out of work, if they have not found themselves in that situation already: temporales make up most of the more than four million people currently unemployed in Spain.

Spain’s discriminatory dual contract system is something that politicians, economists and business leaders have long known needs to be tackled, but during the economic boom of the last decade it didn’t seem like a pressing issue. Jobs were plentiful, unemployment was low by historical standards – albeit high by European ones – and although temporary workers grumbled about salaries, job insecurity and poor career prospects, most felt they would be able to jump the wall into fixed-contract paradise one day. Social tensions were kept to a minimum.

A painful recession that has led to the highest unemployment rate in the euro zone at almost 20 percent – 40 percent among workers under 25 – has changed all that. And the government has finally embarked on a serious effort to put labour reform on the table. However, it hasn’t slammed down any sweeping proposal for a major overhaul, instead opting to shuffle its papers and nudge them cautiously in the direction of labour unions and employers.

“The government does not want to set out a position that defines the debate,” Labour Minister Celestino Corbacho said as he unveiled the reform plans in early February. “We want to approach the negotiating table in a different way, by saying that it would be good to correct the high numbers of temporary contracts and look for alternatives… We want the maximum consensus possible.”

And the government wants it in the shortest time possible, with Corbacho pointing to a time horizon of “two to three” months to have a draft reform ready. It is a tall order for what the administration evidently hopes will be a major reform to correct the long-running imbalances in the Spanish labour market.

Unions and business agree… to talk

As expected, employers, led by the CEOE business federation, have welcomed the announcement. They have long been clamouring for changes to make it cheaper and easier to hire and fire workers.

“The serious current difficulties demand deep reforms,” wrote CEOE Chairman Gerardo Díaz Ferrán in a recent opinion column in the left-leaning El País newspaper. “Real structural reforms that make Spanish companies competitive in the markets and follow the path that has already been followed in the countries with which we compete.”

More surprisingly, Spain’s largest labour unions, the CC OO and the UGT, have also embraced the opportunity for debate. However, their acceptance of talks on labour reform – even as they take to the streets in protest at the government’s pension reform plans – is largely a reflection of the fact that they, like everyone else, are unclear exactly what changes the government would like to make.

“They’ve established a connection between the content of the proposal for labour reform and the economic recovery. And a labour agreement could help. But they cannot hang the solution to Spain’s economic problems on changes to labour rules alone,” argued Cándido Méndez, the head of the UGT union, after the reform proposal was announced.

Unions want to see fewer temporary workers, but not at the expense of the privileges afforded to their fixed-contract counterparts, who make up most of their fee-paying, card-carrying members. Raise that prospect – as it seems the government will have to do if it is to increase economic competitiveness and boost jobs – and the unions will all but certainly have no qualms about taking action as they did in 2002, when a general strike was called against changes to labour rules imposed by decree by the then centre-right Popular Party administration of José María Aznar.

Aznar’s centre-left successor, José Luis Rodríguez Zapatero, long seen as an ally of the unions, has promised he will not do the same. His Socialist Party is the party of “dialogue” not “decree”, he recently assured. How far he is swayed or not by union leaders’ pressure to maintain the status quo for fixed-contract workers will be a measure of how committed he is to labour reform.

Though only around 16 percent of Spanish workers are unionised, the two big unions have long been able to punch well above their weight in part because of their influence in the public sector and cosseted industries. It is a situation that helps explain why public workers have managed to secure pay rises well above the rate of inflation in recent years, including a 3.5-percent hike in 2009 when consumer prices rose just 0.8 percent that year and even declined for several months.

The evils of “social cohesion”

The unions claim – and in this they have sometimes been joined by Zapatero and other left-leaning Spanish politicians – that they are guarantors of social cohesion, protecting humble workers from capitalist greed and the economic inequalities that a freer, less tightly regulated labour market would foist upon them.

But there is ample evidence, highlighted by many economists and international institutions, that in the case of Spain’s labour market such policies actually achieve the opposite of what they purport to do.

Instead of creating a more egalitarian society, labour laws defended in the name of social cohesion lead companies to claw back the competitiveness they lose to an over-protected majority of workers from a mostly unprotected minority. The result is deep and pervasive inequality.

By supporting rules – such as large severance packages and professional requirements that create barriers to entry in certain jobs – the unions are in essence protecting “expensive” insiders on near iron-clad fixed-contracts, while forcing “cheaper” outsiders on temporary contracts to bear the costs of that protection, from less job security to lower wages. Such protections also contribute to Spain’s structurally high unemployment levels by discouraging companies from hiring, and have led to more strain being placed on the pension system because of the widespread use of early retirement plans by employers as a way to get rid of fixed-contract workers.

“Spain suffers two problems that differentiate it from other countries… less employment (and more unemployment) and very high numbers of temporary contracts. Both elements are related to the existence of a labour market segmented into two sectors: one very protected and the other with very little protection,” CEOE head Díaz Ferrán wrote.

It is the protected, fixed-contract segment of the Spanish labour market that economists, analysts and international institutions are referring to when they complain that the Spanish labour market is too rigid.

“Labour market rigidity has caused Spain’s structurally high unemployment but the sudden increase in unemployment recently represents a different phenomenon. Most of those laid off have been on temporary contracts and companies have been able to shed jobs quite quickly in response to the economic downturn – that shows flexibility rather than rigidity,” Ben May, an economist who covers the Spanish economy for Capital Economics in London, told Qorreo.

But it is a flexibility that falls exclusively on the 30 percent of the working population who are on temporary contracts, twice the EU average and the highest level in the 27-nation bloc.

In bad times, “flexible” temporary workers are the first to be let go as employers cut jobs: once their contracts run out, they cost nothing to get rid of, compared to a fixed-contract worker who in most cases is entitled to 45 days worth of salary for every year worked.

Even in good times, many temporales cannot rid themselves of a lingering fear that their contracts will not be renewed. They are forced to live with a debilitating sense of job insecurity, which, given that half of all workers on temporary contracts are under the age of 30, puts many off starting a family – a major cause of Spain’s low birth rate. It also makes it hard to plan for the future in other ways as banks, for example, prefer to give mortgages to fijos.

Temporales can expect to receive little, if any, training from their employers, who don’t want to spend the money on building up the skills of someone who will be the first out the door should the business situation change. And, because of that, workers on temporary contracts find it hard to secure pay rises and progress in their careers, hence a large number of Spaniards in their 20s or 30s – many of them with university degrees – regularly find themselves jumping from job to job and earning €1,000 a month or less. Six out of 10 Spanish university graduates are not doing the jobs they studied to do, the highest rate in the EU.

“The precarious employment status of young workers, whose levels of qualification are especially high, is strongly related to their lack of access to positions that are commensurate with their skill levels,” the Organisation for Economic Cooperation and Development (OECD) noted in a 2008 report.

These low-earning so-called mileuristas have recently been joined by another group of young workers who left school or university to jump on the labour ladder in hot sectors such as construction, tourism and services when the economy was booming. Amid the economic crisis, they are starting to look like the makings of a lost generation – unable to find work and unable or unwilling to resume their education or retrain.

There are even downsides for the fijos. Because getting a fixed contract is difficult, those workers fortunate enough to have them are reluctant to give them up. They find themselves tied to their place of work: relocating elsewhere for personal reasons becomes almost unthinkable and the idea of taking a break from their career for leisure, travel, health or education seems crazy. As a result, labour mobility suffers and workers burn out sooner. According to a National Statistics Institute study, 40 percent of salaried Spanish workers suffer from stress, which accounts for up to 10 percent of all sick leave at a cost to the public and private sectors of upwards of €20 billion per year.

Inevitably, all of this is bad for the Spanish economy. Not only has the country suffered from structurally high unemployment even in the best of times, but it has seen its economic competitiveness erode as labour costs have risen without commensurate gains in productivity.

Spaniards spend more time at work than most Europeans – an average of 38.2 hours a week – but for each hour worked their contribution to GDP (adjusted for purchasing power) is just 90 percent of the euro-zone average, according to figures from EU statistics agency Eurostat.

Raising productivity, boosting competitiveness, getting people back to work and ending the discriminatory imbalances in the labour market will not be easy. And the government may find that achieving it with the agreement of both employers and labour unions will be impossible.

A choice between consensus and real reform?

Though the Zapatero administration is holding its cards close to its chest, documents handed to business and union representatives at a preliminary meeting last month hint at where the government would like the labour reform negotiations to lead. They contain something for everybody, plenty that neither side will like, and – if the government is committed to building consensus – will probably result in a reform far less sweeping and penetrating than Spain really needs.

On the one hand, the government has indicated that it would like to make temporary contracts less attractive for employers by forcing them to shoulder the costs of paying unemployment benefits to the temporary workers they have laid off, and by making them prove why they need the worker only for a certain period and not indefinitely. Unions will probably be happy to accept that, employers much less so.

On the other hand, the administration is thought to be considering changing a scarcely used kind of fixed contract that was introduced in 1997 so that employers could use it to take on more workers at lower cost. Originally designed for young people and women as an incentive to hire them, the contract reduces the worker’s severance pay entitlement to 33 days per year worked from the more usual 45. The government is reportedly contemplating making the contract applicable to all workers.

Unions will surely baulk at that idea – “We see dialogue (over labour reform) as a way to improve workers’ rights,” the UGT’s Méndez has declared – and employers are unlikely to be rejoicing either.

Proposals released by the CEOE recently indicate that the employers’ federation will push for a new fixed contract to be introduced with around 20 days severance pay entitlement “in line with what exists in other European countries.” But the business representatives also floated the prospect of creating a new kind of temporary contract designed specifically for the young: no severance pay and no contributions from employers for unemployment pay – similar to a controversial plan eventually withdrawn by the French government.

Unions called the spectre of such a contract “Frankenstein’s monster” and the government scoffed at the idea.

“Spain needs stability and not greater precariousness in the labour market,” said Public Works Minister José Blanco.

Indeed, what Spain doesn’t need are more types of contracts. If the government, employers and unions are serious about levelling the playing field for all workers, boosting employment, productivity and competitiveness, increasing job security and worker mobility and, above all, promoting real social cohesion, they could probably find a way to make do with just one.