A Cracked Foundation For Spain’s Economy

A Cracked Foundation For Spain’s Economy

Carolyn Bigda

Once known as the “poor man of Europe,” Spain finished the twentieth century with a burst of dramatic economic growth. Between 1997 and 2000, the country boasted an annual growth rate of 4%, and reduced its unemployment rate from over 20% to less than 14%. According to a July 2000 IMF report, “Decisive management of macroeconomic policies, together with structural reforms and wage moderation, have contributed to an unprecedented combination of strong output and employment growth with price stability.”

The IMF singled out the recent labor-market reforms instituted by Prime Minister Jose Maria Aznar and his right-wing Partido Popular (PP) as “steps in the right direction.” Key to these “steps” were 1994 and 1997 reforms loosening restrictions on temporary and part-time employment contracts, and generally lowering employers’ labor costs. Since then, Spanish businesses have turned enthusiastically to temp and part-time employment as a way to increase their competitiveness and profitability, and unemployment has come down.

Just a year after the IMF’s gushing report, however, the threat of economic stagnation has begun to expose the negative side of Aznar’s reforms. According to London’s Financial Times, economic growth is expected to decline to less than 3%. Why is the economy now slowing under programs that before had supposedly sent it skyrocketing? Part of the answer lies in the explosion of temporary and part-time employment.

Stereotypes of Europe’s “enviable” (if you re an employee) or “excessive” (if you’re an employer) labor protections do not hold in Spain. One our of every three Spanish workers is a temporary contractor and these workers — the majority of them women and young people — are typically denied the benefits enjoyed by the permanent workforce. For instance, regular employees who are laid off receive severance pay of 33 days for every year worked, while temporary workers receive little or nothing.

Temporary contracts provide the flexibility desired by employers, who want to hire and fire according to changes in demand for their products. They serve as loopholes for businesses in “rigid” labor markets, allowing them to stay competitive by shifting the cost of layoffs onto the worker. According to the European Industrial Relations Observatory employers often practice “chain fixed-term contracts and the rotation of temporary contracts” — illegal under Spanish law — essentially creating a labor force of permanent “temporary” workers. The workers are permanent enough that employers do nor incur retraining costs, but are technically under temporary contract, so they do not get benefits. These arrangements are hardly unknown in the United States. In California’s Silicon Valley, for example, such workers are commonly referred to as “permatemps.”

Aznar tried to appease the backlash against temp employment — and its abuse by employers — by announcing labor law reforms that were supposed to promote permanent employment contracts. In both his 1997 and March 2001 reforms, however, the strategy has been to lower employers’ severance costs — efforts which have only given employers more leverage over permanent employees without re ducing the abuse of temporary contracts.

Though not as prevalent as temporary contracts, part-time employment in Spain lacks protections and stability as well, especially compared to other countries. In Finland, for instance, where part-time work is becoming the focus of labor reforms, a reduced work week is being tried as a positive new “norm” (see Ellen Mutari and Deb Feigart, “Finland Experiments with a Six-Hour Work Day,” p. 32). In Spain, Aznar redefined part-time employment in his 1994 reforms as any number of hours less than a full-time contract, allowing businesses to pay reduced benefits for people who are essentially full-time employees. Furthermore, part-time work is widely stigmatized, as it prevails in low-skilled service jobs dominated by women. It does not provide a significantly better alternative to temporary work.

Initially, these labor reforms spurred growth and job creation, as employers took advantage of increased flexibility and reduced labor costs. Many unions and workers were satisfied just to have jobs. Today, however, prices are rising faster than wages, and low-wage jobs have become unacceptable. This June, strikes erupted in airports throughout Spain’s Balearic Islands as workers demanded wage increases, halting the flow of the country’s most lucrative commodity: tourists.

Spain’s economy has grown most dramatically in tourism and other service industries. The increase of employment in these sectors — which maintain a high percentage of temporary and part-time jobs — has done little to instill consumer confidence or generate a broad-based mass market that would sustain economic growth. Though long-term unemployment is declining, the greater likelihood of short-term unemployment is inhibiting consumption and weakening the economy.

In March 2001, Aznar and the Partido Popular implemented a new wave of labor reforms, lowering severance costs from 45 days’ pay for each year worked to the current 33 days’, and ending restrictions on part-time work hours and shifts. While Aznar acted independent of “social partners” (employers and unions), the reforms clearly tilted in favor of business.

Unions are calling, instead, for a reduction in temporary jobs and the institution of a 35-hour work week, which, following the example of Finland and other European countries, would increase the number of jobs and still maintain stability. Unfortunately, the Spanish government seems more inclined to concede power to employers in hopes of generating quick growth. If Spain’s rate of economic growth continues to decline, low wages and reduced social benefits will leave Spaniards with little financial cushion to restart the economy.

Does this sound familiar, America?

Resources: IMF, “Spain: 2000 Article IV Consultation Discussions, Concluding Statement,” July 20, 2001; European Industrial Relations Observatory on-line (eironline), Antonio Martin Artiles, “Social Partners assess NAP,” June 2001, Teresa Torns, “Part-time employment: a new feature of the Spanish labour market,” March 1997, Professor Manuel Ramon Alarcon, “The 1997 labour reform in Spain: the April agreements,” June 1997; World Socialist Web Site, Vicky Short, “Spanish Prime Minister Aznar spearheads drive to deregulate Europe’s economies,” November 1, 2000; DIW Berlin, Economic Bulletin, Camille Logeay and Joachim Volz, “EMU Economic Growth Leads to Job Creation, February 2001; Financial Times, “Survey — Spain: Hopes for higher pay in spite of higher prices,” Vicki Bakhshi, June 6, 2001; Financial Times Information, Global News Wire, El Mundo, June 17, 2001; International Reform Monitor, “Reform of the law regulating temporary employment agencies.”

Carolyn Bigda is a Dollars & Sense intern and an undergraduate at Northwestern University.

COPYRIGHT 2001 Economic Affairs Bureau

COPYRIGHT 2001 Gale Group