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The Globe and Mail

Spain's job 'insiders' face threat to entitlements

Spaniards demonstrate at the Puerta del Sol square in Madrid last month to protest spending cuts, high unemployment and political corruption.


In his first speech as Spain's prime minister-elect, Mariano Rajoy pledged to have "no enemies" beyond unemployment, the deficit and economic stagnation.

With 22.8 per cent of Spaniards out of work, unemployment alone will be a formidable foe.

Economists say the problem requires a radical overhaul of a labour market that divides workers into two groups: permanently employed "insiders" who enjoy a wealth of job protections and insecure, tenuously employed "outsiders" stuck in temporary jobs.

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A new case study calls for the wholesale abolishment of temporary contracts as crucial to reining in joblessness and reviving Spain's sputtering economy.

"The very high and persistent segmentation prevailing in the Spanish labour market since the late 1980s is the key factor behind its huge employment and unemployment volatility," write Juan Dolado of Universidad Carlos III, Samuel Bentolila of Spain's Centre for Monetary and Financial Studies and Juan Jimeno of Banco de Espana.

"Temporary contracts do not only bear the brunt of the adjustment during recessions but they also negatively affect the career developments and labor productivity of temporary workers."

Following a recession in the 1980s, Spain embraced temporary contracts as a way to loosen its rigid labour market and boost sagging employment. The reform opened a yawning gap in protection levels, with permanent workers shielded by severance pay requirements of 45 days per year of service (among the highest in Europe), versus eight days for temporary workers. Not surprisingly, the number of temp contracts immediately surged. By 2007, temporary work accounted for 33.5 per cent of employment, according to the study.

The result was a labour market in which unemployment soared during tough times with most of the pain borne by temporary workers (predominantly migrants, women and young people). Indeed, while 60 per cent of all temporary jobs were lost between the first quarter of 2008 and second quarter of 2011, employment among permanent workers in Spain continued to grow right up until 2009. Employment among "insiders" didn't slip below 2007 levels until the first quarter of this year.

At the same time, a rigid system of collective bargaining at the industry level has left wages unresponsive to the challenges of individual firms, Mr. Dolado says.

"The unions only represent the insiders," he said in an interview. "They are still a slim majority and therefore they don't give a damn about the unemployed or those with temporary contracts. They only work to protect those who can't easily be fired. How do they protect them? They increase their wages. How do firms respond? By firing temporary workers."

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The relentless churn of temporary jobs has put a massive strain on Spain's social welfare system. It has also contributed to a precipitous decline in Spanish productivity levels by removing any incentive for temporary workers to perform or for companies to train them. One study blamed temporary work for 20 per cent of the slowdown in productivity in Spanish manufacturing firms between 1992 and 2005.

The solution, Mr. Dolado and others argue, is to eliminate the gap between permanent and temporary work with a single open-ended contract that would see severance pay start out low and increase gradually with each year of service. Low firing costs would encourage job creation and reduce the rapid turnover of temporary workers so damaging to productivity, they say.

Two years ago, more than 100 academic economists in Spain signed a manifesto calling for such a reform. And though politicians have yet to "take the bull by the horns," the pressure is rising, Mr. Dolado says.

As Europe's economic crisis deepens, joblessness is starting to affect "insiders" too, namely male adults in their 40s and 50s -- a development that could threaten a key social support system. Indeed, though Spain's youth unemployment rate has soared to nearly 50 per cent, families who subsidize young people by keeping them in the nest longer have absorbed much of that damage.

"This is only sustainable as long as parents keep their jobs," Mr. Dolado said. "But if the parents lose their jobs, the whole system collapses. Then we will see real social unrest."

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