As thousands took to the streets this past weekend, it quickly became clear that the Partido Popular’s approach to job creation had more than a few critics. Focusing their anger on reforms passed on the 9th of February, critics called out the new government’s efforts to reduce mandatory severance pay from 45 to 33 days per year worked and allowing what they felt was an unfair freedom for companies to opt-out of collective bargaining agreements and adjust wages and hours according to their unique financial standing.
Explaining their approach, the Rajoy government explained that “it wants to give firms the ability to modify workers’ hours in response to demand rather than simply laying them off, bringing an end to the rapid rise in temporary contracts that has helped push youth unemployment to just shy of 50 percent.”
Really, the reforms proposed and passed by the dominant Rajoy government, who earned a powerful legislative majority during November elections, should not have come as much of a surprise. They are, after all, the country’s conservative party so supply-side reforms to the labor market should have been an expected part of the package. Alongside promises of widespread cuts in public spending, business-friendly labor reform seems as much a part of the conservative platform as reversing anything that offends the Catholic Church. Prior to early elections, Rajoy and company promises such an approach and with a strong parliamentary majority, they delivered.
Still, now that the reforms have passed, it should be asked, is that all they have to offer? Its hardly a novel observation that massive cuts, no matter how much they are required by Brussels and Berlin, are not a sure fire way to spurring growth.
“They don’t have much of a strategy apart from the typical laundry list of structural and labor market reforms, which is fine, but that is not going to deliver much in the short-term,” Guntram Wolff, deputy director of Bruegel, a Brussels think-tank told Reuters. “It’s become clear that this focus on austerity and fiscal consolidation is not enough, so they need the economic growth and employment element.”
So, are Rajoy’s labor reforms the only other solution they are offering to resolve Europe’s worst unemployment rate?
The short answer is no. Rajoy and his PP-controlled parliament have pledged that more should and will be done. Though, this promise has come with few actual specifics and a warning that given the country’s current trajectory, things will likely get worse before they get any better. Indeed, analysts at BBVA predict an increased 24.4 percent unemployment rate by the end of this year and a likely 24.6 in 2013.
Specifics on this pledge have been light, though Rajoy and EC President José Manuel Barroso have both called for additional funds from the European Regional Development Fund (ERDF) and the European Social Fund (ESF) to be put aside specifically for job creation programs. Of the countries with accessible funds, Spain boasts the most with 10.7 billion euros.
Perhaps a more relevant question for analyzing the Rajoy approach is will the reforms do enough to address the structural challenges that led to such a daunting 22.9 percent unemployment rate in the first place. Will it be enough to reverse what Profs. Samuel Bentolila, Juan Dolado and Juan Francisco Jimeno call Spain’s “insider-outsider” labor economy? In a report published just days before Rajoy presented his labor reforms, the three argued for greater attention to the country’s temporary contract economy, which accounted for 1.4 of the 1.6 million jobs lost since 2007 and efforts to combat the country’s nearly 50 percent youth unemployment rate.
The answer to this question comes with a deeper look at Rajoy’s proposed reforms aimed at providing tax breaks for hiring workers under the age of 30 and reducing the time needed to ensure a permanent contract from 3 to 2 years. While straying slightly from the party’s supply-side approach, the reforms do little to address issues of training, education and diversification in a labor market previously led by now dormant industries.
Rajoy has been quick to defend his government’s approach, stating that it will not only increase Spanish employment, but also put the country’s economy on equal footing with the rest of Europe.
“We are planning an economic policy which coincides substantially with what is being planned at the European Union level — so we support that and will be at the forefront in all these things, particularly in budget consolidation and structural reforms,” he told a press conference in Madrid last week in response to labor reform criticism, according to Reuters.
However, even he has warned that the results will be slow to materialize. Echoing the aforementioned BBVA predictions, Rajoy has stated that the country’s employment numbers will likely rise before falling. That warning may sound dour for those hoping for a rebound this year, but it may just buy the new government some time and tapered expectations to allow for his labor reforms to start showing progress. Once that time is up, it’s difficult to imagine even his supporters in Madrid and Brussels to stay quiet for very long.
Image: Libre Mercado