B Y S I N DH U R A C H I T T U R I ( W ’ 13)
SPAIN & THE CASE FOR LABOR REFORM Gran Via Street in Madrid, Spain, at night.
pain’s economy continues to lag
country had been shaken by the bursting of
behind many of its European peers.
its construction bubble. But the bust alone
The country’s unemployment rate of
cannot explain the country’s economic woes.
20% is the second highest in the European
Much of the answer lies in the country’s
Union behind Latvia’s. Furthermore, Spain’s
antiquated and inﬂ exible labor market.
youth unemployment rate makes the overall
comparison. Half of all Spaniards under the
labor market, permanent workers receive
age of 25 are out of work. Spain’s deficit to
GDP ratio was about 7.9% in 2009, more
Government regulations make it very costly
than twice the European Union’s limit of
for employers to ﬁ re these workers. Until this
3%. As a result, Spain is widely referred to
June, permanent workers received severance
as one of the PIIGS (Portugal, Italy, Ireland,
payments of up to 45 days in wages for each
Greece, and Spain), a rather unflattering
year worked. Meanwhile, temporary workers
designation for Europe’s reckless spenders.
comprise the lower tier of the labor market.
What is difficult to believe is that just three
They work on short-term contracts and can
years ago, Spain’s economy was one of the
be fired at will. Most of Spain’s temporary
strongest in Europe. In 2007, the country’s
workers are immigrants or young adults
unemployment rate was only 8%, high by
and make up about a third of Spain’s
American standards, but low compared to
workforce. While some temporary workers
its European counterparts’.
are eventually able to secure permanent
from grace? For starters, the global ﬁ nancial crisis of 2008 hit Spain at a particularly inconvenient time, just a year after the
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referred to as two-tier market. In a two-tier
How do we explain Spain’s rapid fall
I N T E R N AT I O N A L B U S I N E S S R E V I E W
jobs, many work contract to contract with frequent bouts of unemployment. When
recession in 2008, the government responded
FA L L 2 0 1 0
11/27/2010 3:13:14 PM
Fall edition of the IBR magazine at the Wharton School.