Tag Archives: Unemployment

Rajoy, Reform and the Burden of Employment Expectations

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

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Getting to the Bottom of Spain’s Daunting Unemployment Numbers

Of the many bits of bad economic news Spain has received this past year, including finding deficits were higher than expected and growth rates much lower, perhaps no other figure has proven as weighty and daunting as the country’s unemployment rate. Reports released at the end of January saw that number rise to 22.9 percent adding another dismal headline to the Rajoy government’s first official month. Nearly 5.3 million out of work with declines in available positions across the board, from services to the country’s still collapsing construction sector.

Capturing the dour outlook of the country’s current situation, The Atlantic’s Derek Thompson sadly summarized the statistics facing the new prime minister, noting “The overall unemployment rate is in the mid-20s, industrial production and services activity have both cratered, construction indicators like cement consumption have been devastated after doubling between 1998 and 2007, retail is in a free fall, and export growth (most of which go to Europe) is falling is slowing.”

Amid all the other sour news facing the new government and their recovery efforts, 22.9 percent stood out, dwarfing the rates of fellow EU member states, even those thought to be perilously close to very dark territory. Among those countries most troubling in the eyes of Brussels, Berlin and the global markets, Italy registered 8.9 percent, Portugal 13.6 percent and even Greece – so worrying to so many, managed to come in under Spain with 19 percent.

Still, while weakened by slow to stagnant growth, Spain has remained an economic force in Southern Europe, especially when compared to damaged economies in Greece and Portugal. So, the exploding rate of job-searchers does not make as much sense when viewed in the larger context of the Euro crisis. Sure things are bad from Barcelona to Cadiz, but does 22.9 percent really reflect the state of the Spanish job market? To be clear, the unemployment number broadcast to the world is undeniably important to how the country’s current economic challenges are perceived by outside forces. Indeed, the consequences are far-reaching, chipping away at the country’s fragile confidence and spreading the blame across the economy, including applying higher and higher borrowing rates to banks, no matter how sound an institution might actually be. However, upon closer inspection the number that looms so heavily over the country’s ability to rebound does not really tell the whole story.

First, Spain’s traditional approach to reporting work on a local and national level go a long way to explaining why the country’s numbers remain so high in relation to the rest of Europe, even in the best of times. After rebounding from a 1993 jobless high of 24.5 percent, Spain was driven by a booming construction sector and cheap borrowing opportunities brought about by further integration into the Euro economy. Building on that fresh access to capital and real estate development that dwarfed efforts in Italy and Portugal, Spain emerged as force of growth in Europe, though even then, as the economy exploded, unemployment remained high, bottoming out at a 2006 low of 8.1 percent.

The reason for this inconsistency of economic performance and fiscal statistics comes down to two factors as far as economists are concerned. First, Spain has historically had a sizable under-the-table market of unreported or part time workers that are not counted as a part of the country’s workforce. In an OECD study conducted in 2006 Francesca Froy and Sylvain Giguere found that Spain’s unregistered job market accounted for almost 22 percent of the country’s GDP in 2002. While recent policies aimed at bringing more of these positions into the light have been introduced, it’s difficult to imagine that they have been successful enough to erase any impact on the country’s jobless numbers.

More recently, others have pointed to the country’s conservative tradition of over reporting unemployment numbers as a way to explain its high numbers in comparison to Greece or Portugal. Vanessa Rossi, an economist at London’s Chatham House think tank, told the Voice of America, “The Spanish unemployment rate might actually be slightly lower than these figures,” adding “That’s quite in contrast to many other countries that have the opposite problem – they under-report unemployment.”

Second, and perhaps more importantly, the 22.9 figure does little to truly show who is most affected by Spanish unemployment. For that, the more important number is 48.6, representing the number of jobless between the ages of 16 and 24. To be sure, this is the number that plays most heavily into the country’s ability to not only avoid a second recession, but also ensure long-term productivity and competitiveness.

Despite being the country’s most educated workforce in the nation’s history, Spain’s young workers have found themselves locked out of a labor market that strongly favors older workers thanks to the high cost of firing employees. Overly equipped for the few jobs available or under-employed in positions with little pay, many are shifting their attention towards Northern Europe and the United States. While Spain may have experienced this sort of emigration during past economic slow-downs, they have never risked the type of brain-drain of their best and brightest as they do now.

Again, this is not an attempt to downplay the importance of this number. No matter how its broken down or explained, the effect is the same, leaving investors and regional regulators with waning confidence in the ability of Spain to grow out of the hole it is currently in. Instead, this closer look at Spain’s job numbers is meant to provide more focus on how solutions can and should be applied by the new government, implementing targeted approaches rather than policies aimed at the population as a whole.

Image: Reuters

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Lost Generation(s)?

As the reality of austerity cuts and high unemployment for the foreseeable future takes hold across Southern Europe, its worth asking just what is going to happen to the millions of young people entering the labor force at this moment and in the years until the region can get back on its feet. While the numbers of unemployed across the region are dispiriting, the numbers among the young are terrifying, reaching nearly 45 percent in some corners of the Northern Mediterranean. Its difficult to see how this situation will remedy itself in the near future – even if the economies of Greece, Italy and Spain rebound quicker than predicted, labor laws in the region still tend to favor older workers, with the young and energetic left to scramble for the short-term contracts that leave them with little choice and even less stability. Making matters still worse is a region top-heavy with aged populations who will be difficult to convince that the safety nets they expected to enjoy all their professional lives are barely possible even in good times and pure fantasy in an environment when the workforce meant to pay for it can’t seem to find a job to  pay for an apartment, let alone their retirement. Its going to take some tough and unpopular choices and sacrifice all around and in the long run, its going to take a wave of leadership that can convince those with the reigns to loosen their grips and hand them over to a younger work force who can do more than just sustain.

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