The Spanish housing market will recover when the unemployment goes down says BBVA, one of Spain’s biggest banks. Lawyer and guest contributor Raymundo Larraín Nesbitt looks at the new labour reform and how it might lift employment, which might in turn help the housing market.
Lawyer – Abogado
8th of March 2012
Spain has the dubious honour of being the country with the highest unemployment rate of all developed countries (OECD), followed closely by Ireland. The causes of this are many and its analysis would exceed the object of this article. However, I will focus on one of the main culprits which has brought about this situation – Spain’s outdated labour market laws.
Labour law in Spain has its roots deeply embedded in the Franco regime. Traditionally it has been overprotective of workers to the point employers regard them more as an obstacle than as a useful tool. It is safe to say that labour court rulings in Spain are biased towards workers. Ironically, these overzealous laws have played out against the workers themselves at a time of great economic weakness fracturing Society, broadly speaking, into a two-tier system of workers:
A. Those with a job. They enjoy a high status of legal protection. To the point that many employers would rather hold on to a bad worker than make him redundant as the severance pay would far outstrip the benefits.
B. The jobless. The losers. They find themselves locked out of the labour market. Particularly affected are young workers, the unemployment rate of under twenty-five-year-olds is well above 50pc. Employers – fearing Spanish draconian labour laws- are highly reluctant to take on new employees, even if required, as labour laws are far too rigid and strict and always biased towards workers. In times of great financial uncertainty employers would rather avert additional concerns and problems and refuse to hire new employees.
This has led to a paradoxical situation, whereby long-standing workers, albeit inefficient, are kept by companies as the costs of dismissal would be prohibitive whilst younger workers, more prepared and with languages, are let go or even not hired quite simply because companies cannot afford the expenses of a dismissal.
The above generalisation helps to explain why Spain has reached all-time record levels of unemployment reminiscent of the Great Depression. Moreover, I believe the official unemployment figures are in fact well below reality. Many young people have flocked abroad seeking new job prospects or else have been forced to extend their studies with the hope of seeing better days. Not to mention the huge amount of people who are studying hard to secure a post as a civil servant which used to guarantee a lifetime free of economic woes. All these are conveniently excluded from the unemployment figures and could easily add over a million to the official unemployment figures.
To give you an idea of how this situation is endangering public finances in Spain, there used to be a ratio four workers for every pensioner; now there is barely a ratio of two workers per pensioner. Moreover, if we take into account not only pensioners but also unemployed and civil servants each active worker is now shouldering – all by himself – a civil servant, or a pensioner or an unemployed on a ratio one to one. Clearly, this is unsustainable. There are scarcely 14 million active workers in Spain and well over 14 million unemployed, pensioners and civil servants. If this troublesome trend continues unchecked, Spain will need to leave the Euro to re-instate its Monetary policy to devaluate its new currency and regain competitiveness. However, Spanish politicians are adamant; they have no intention of leaving the Eurozone and are now addressing the problem of Spain’s weak competitiveness in other manners, such as the current labour reform which in time will lead to lower wages. Much like the trial Greece is undergoing.
As the current Minister of Economy, Mr Luis de Guindos, in Spain phrased it: “Spain needs a very aggressive Labour Market reform”. The aim of this reform would be to get rid of the dead wood and make hiring and firing of workers more flexible. Spain’s Labours laws were far too rigid as they were and locked out of the job market millions of workers because employers feared hiring them. The official line is that the aim of these reforms will pave the way to create a stable legal framework which – in time – will enable growth in the job market. Here’s hoping.
However, the cynic in me sees these changes in law as rather opportunistic. The perfect embodiment to administer bad medicine to an already ailing patient. Lowering wages and smoothing redundancy procedures, making it altogether less onerous for employers. In other words, these reforms will make jobs even more precarious. Wages in Spain are already very low and will be furthermore post-reform. Some economists may argue this is a necessary evil to recover lost competitiveness as Spain faces ruthless competition from third-world countries with more lenient (or non-existing) labour laws. Maybe it is indeed the case; I won’t dispute it. But, being pragmatic, what I find undeniable is that in both the short and medium term, this change in law will make it easier overall to lay off workers and reduce wages. In time, we will see if it actually did contribute to job growth, decently paid jobs that is, not low-pay, dead-end McJobs.
I am of the opinion that Spain needed to address its anachronistic labour laws, which dated back to the Franco era, to make them fall more in line with real world’s demands. I believe this reform should have been implemented more gradually, in a more consensual manner with all opposing forces, rather than just flogged by the ruling government under the pretext of a dire economy. They have chosen a time where the job market is weak and cornered; labour laws have swerved from one extreme to another: from over-protectiveness to almost anything goes. I’m afraid the reform may have in fact been, true to Mr Guindos’ words, over aggressive and perhaps even short-lived as it will surely be challenged by opposing political parties in the near future.
Highlights of the Reform
Royal Decree law 3/2012 came into force on the 12th of February. It brings a slew of changes which I will list briefly in bullet points:
- Unfair dismissals. Severance pay is reduced from 45 days per year worked, down to 33 days per year worked. The maximum amount of months one accrues has been brought down from 42 months to 24. This applies not only to new contracts, but to pre-existing contracts as well.
- Objective dismissals: companies making losses in three consecutive quarters can now lay off staff with only 20 days of severance pay per worked year. Accrued claim is limited to a maximum of 12 months.
- Discounts to employers of up to €3,000 that hire long-term under thirty-year-old workers (SME companies with a maximum of 50 employees). Bonuses on enrolling workers in training courses (acquiring new skill sets).
- Making internal clauses flexible i.e. modifying working hours, changing work shifts (night / day), changing responsibilities and tasks etc. If the worker disagrees with these imposed changes he can request his contract is terminated by the company which leads to a severance pay of 20 days per year worked with a maximum of 9 months accrued.
- Employers are free to reduce wages alleging financial difficulties. i.e. recession
- Forbidden to sign consecutive short-term contracts for more than 24 months.
- Large companies may now ignore the collective labour covenants (“convenio colectivo”) if they are able to demonstrate three consecutive quarters in losses setting out worse conditions than those laid out in the covenants.
- Companies that hire long-term unemployed will receive a discount of €4,000.
- The tax allowance given to woman on returning to their workplace post maternity leave has been eliminated.
Spain has undertaken the most drastic labour reforms of its short-lived Democracy to ensure its inclusion in the Eurozone and help revive an ailing economy. These reforms will generate great controversy and spark much debate amongst the Spanish society. They are – without doubt – a major milestone in Spain’s labour reforms marking a turning point in Spain’s jobless tide. Let’s hope this is the inflection point from which a new, more robust job market emerges.
The winners of this reform are employers to a great extent and unemployed workers to a lesser extent. The losers are all those that now have a job and have seen their hard-fought rights and benefits significantly reduced.
If you are a worker in Spain, or plan to seek a job in Spain, it is very important you acquaint yourself with Spain’s labour laws which may differ significantly from that of your home country. There are niche lawyers known as “abogados laboralistas” who specialise in this branch of law. Laboralistas are the lawyers you must seek in cases of unfair dismissal to take your case to court. You are bound to win.
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2012 © Raymundo Larraín Nesbitt. All rights reserved.