Rajoy, reform and the burden of employment expectations

As thousands took to the streets at the weekend, it quickly became clear that the Partido Popular’s approach to job creation had more than a few critics. Focusing their anger on reforms passed on February 9, critics called out the new government’s efforts to reduce mandatory severance pay from 45 to 33 days per year worked and allowing what they felt was an unfair freedom for companies to opt out of collective bargaining agreements and adjust wages and hours according to their financial standing.

The Rajoy government insisted that it “wants to give firms the ability to modify workers’ hours in response to demand rather than simply laying them off, bringing an end to the rapid rise in temporary contracts that has helped push youth unemployment to just shy of 50 percent.”

But the reforms approved by decree by the Rajoy government, which earned a powerful legislative majority in November’s general elections, should not have come as much of a surprise. The governing Partido Popular is, after all, the country’s conservative party, so supply-side reforms to the labour market should have been expected. Alongside widespread cuts to public spending, business-friendly labour reform seems as much a part of the conservative platform as reversing anything that offends the Catholic Church. Prior to the elections, Rajoy and company hinted at such an approach and with a strong parliamentary majority, they delivered.

Still, now that the reforms have passed, it should be asked, is that all they have to offer? It’s hardly a novel observation that massive cuts, no matter how much they are required by Brussels and Berlin, are not a sure-fire way to spurring growth.

“They don’t have much of a strategy apart from the typical laundry list of structural and labour market reforms, which is fine, but that is not going to deliver much in the short-term,” Guntram Wolff, deputy director of Bruegel, a Brussels think-tank told Reuters. “It’s become clear that this focus on austerity and fiscal consolidation is not enough, so they need the economic growth and employment element.”

So, are Rajoy’s labour reforms the only other solution they are offering to resolve Europe’s worst unemployment rate, at nearly 23 percent?

The short answer is no. The government has pledged that more is to come. Though, this promise has come with a warning that given the country’s current trajectory, things will likely get worse before they get any better. Indeed, analysts at BBVA predict the jobless rate will hit 24.4 percent by the end of this year and a likely 24.6 in 2013.

Specifics on this pledge have been light, though Rajoy and EC President José Manuel Barroso have both called for additional funds from the European Regional Development Fund (ERDF) and the European Social Fund (ESF) to be put aside specifically for job-creation programs. Of the countries with accessible funds, Spain boasts the most, with €10.7 billion.

Perhaps a more relevant question is will the reforms do enough to address the structural challenges that led to such a daunting unemployment rate in the first place. Will it be enough to reverse what Samuel Bentolila, Juan Dolado and Juan Francisco Jimeno call Spain’s “insider-outsider” labor economy? In a report published just days before Rajoy presented his labour reform, the three argued for greater attention to the country’s temporary contract economy, which accounted for 1.4 of the 1.6 million jobs lost since 2007 and efforts to combat the country’s nearly 50-percent youth unemployment rate.

Dormant industries, lack of training

The answer to this question comes with a deeper look at Rajoy’s proposed reforms aimed at providing tax breaks for hiring workers under the age of 30 and reducing the time needed to ensure a permanent contract from three to two years. While straying slightly from the party’s supply-side approach, the reforms do little to address issues of training, education and diversification in a labour market previously led by now dormant industries.

Rajoy has been quick to defend his approach, stating that it will not only increase employment, but also put the country’s economy on equal footing with the rest of Europe.

“We are planning an economic policy which coincides substantially with what is being planned at the European Union level — so we support that and will be at the forefront in all these things, particularly in budget consolidation and structural reforms,” he told a press conference in Madrid last week.

However, even the prime minister has warned that the results will be slow to materialize. Echoing the aforementioned BBVA predictions, Rajoy has stated that the country’s employment numbers will likely rise before falling. That warning may sound dour for those hoping for a rebound this year, but it may just buy the new government enough time and tapered expectations to allow for his labour reform to start showing progress. Once that time is up, it’s difficult to imagine even his supporters in Madrid and Brussels staying quiet for very long.