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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.

FA L L 2 0 1 0

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11/27/2010 3:13:14 PM

Profile for Daniel Hellwig

International Business Review - Fall 2015  

Fall edition of the IBR magazine at the Wharton School.

International Business Review - Fall 2015  

Fall edition of the IBR magazine at the Wharton School.

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