with stimulus spending. Its €11 billion stimulus
Structural reforms to the labor market
package provided money for public works
are needed to secure the country’s long-
and the declining auto industry. But while
run economic prosperity. The left-leaning
this spending helped to halt the country’s
government has already recognized this.
economy from spiraling further downward, it
In June, it cut the maximum severance
did not create lasting employment because it
pay from 45 days to 33 days. It also
lacked much needed labor reform. Employers
made it easier for businesses to reduce
were reluctant to hire permanent workers, who
work hours for permanent workers. The
would be expensive to fi re, in the uncertain
measures are steps in the right direction,
times. Instead many employers cut back their
but the government needs to do much
Structural reforms of the labor market are needed to secure the country’s long-run economic prosperity. labor costs and either did not hire or hired
more. Unfortunately, there is widespread
temporary workers. Unemployment increased
resistance to any changes. Labor unions are
until it reached its current level of 20%.
against a more flexible labor market because
High
unemployment
has
exacerbated
it will decrease their bargaining power and
The
benefits. And it does not help that Spain’s
government’s defi cit, already high because
Socialist Prime Minister Zapatero depends
of the stimulus spending, rose even more
on the support of labor unions. Permanent
because
workers
other
problems
of
the
country
increased
faces.
unemployment
oppose
any
changes
because
spending. As a result of increased debt and
they will lose job security. Additionally, a
uncertainty, rating agencies like Moody’s
more flexible labor market is likely to lead
and Standard & Poor’s downgraded Spanish
to an increase in unemployment initially
debt. With lower ratings, government debt
before employment picks up again. Labor
became more expensive. Higher interest
reform should have been made during the
rates increased the need for additional debt,
2006-2007 construction boom when the
resulting in a vicious cycle of increasing
country could have coped with an increase
interest payments and increasing debt. The
or at the height of the financial crisis when
unemployment problem is also lowering the
political obstacles for action were weakest.
country’s productivity. Young adults straight
Unfortunately,
out of university have trouble fi nding work
structural issues like the labor market while
despite their high level of education. At the
expansions tend to hide these problems.
same time, many permanent workers do
It is up to Spain’s political leaders to make
not work as hard because they have almost
the case for labor reform. So far, Spain has
complete job security. It is no surprise
missed its chances. iBR
recessions
often
reveal
that Spain has one of the lowest levels of productivity in Europe.
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