Benito Arrunada on the need to reform the Spanish labor market

This EALE blog invites many kinds of postings, concerning both theoretical and policy related issues. The idea is to become a forum for the exchange of wide-ranging ideas touching upon (European) law and economics. Here is a posting concerning the need for labor reforms in Spain. Please feel free to send me something. - Henrik (hl.ino@cbs.dk)

`Labor reform as an ethical imperative´

Prof. Benito Arrunada, Dept. of Economics & Business, Univ. Pompeu Fabra

Spain has the most restrictive labour law of all developed countries. As a result, it also has the highest unemployment.

The rules that weigh down industrial relations today stem from those laid down formulated under Franco. Why are they still alive 34 years after the death of the dictator?

Some people may think that the labour laws are wrong but well-intentioned. I do not believe this. The State, in its zeal to protect workers, is unlikely to have forgotten that a contract is only possible when all parties agree. The problem does not lie in the State’s paternalistic myopia but in the unequal way it treats its citizens.

In Spain, there are two types of worker. On the one hand, the élite which enjoys “placements” in the public sector and large corporations. On the other, temporary workers—mostly young people, women and immigrants—as well as marginal, self-employed workers.

This duality is apparent throughout the Spanish labour market, especially in access to long-term, stable jobs.

More than ever, we need stable jobs, in which workers can gain experience and accumulate knowledge. But stability is reserved for the labour élite. Today’s permanent contracts do not promote long-term relations because employers are obliged to continue paying their workers, whatever their productivity and attitude.

Obviously, employers take precautions. Firstly, they avoid long-term employment, replacing work by capital and long-term by short-term work. When they have no alternative and they have to hire long-term workers, they choose people they can trust, who will be productive even when they have a contract in which abuse is possible. So the people they hire are those able to signal that they will be cooperative in the future. And such signals, considering the calamitous state of education in Spain, are only within the reach of the well-off and the well-connected.

Entrepreneurs are being criticised for not hiring more workers. But it is no coincidence that there are few Spaniards who want to be entrepreneurs, and even fewer who want to be employers. This vocational crisis can be seen even in schools of Business Administration in regions that once proclaimed their entrepreneurial spirit. This is not just because entrepreneurs are viewed with suspicion: in a society that worships money, the fact that young people do not wish to be entrepreneurs suggests that business is not very profitable.

Temporary contracts are also a tool for inequality—not because they are temporary, but because they cannot be extended. This restriction prevents them from being used for long-term relations without the risk of opportunism. Long-term relations are thus reserved for the labour élite which is able to offer the right signals.

What’s more, there is tremendous hypocrisy regarding temporary contracts. Their fiercest critics are often the first to use them for their own employees, as has occurred with some trade unions.

And employers’ organisations are not free from blame. They say they are in favour of making contracts more flexible, but seem to be less than enthusiastic about an equally necessary measure, that of liberalising the negotiation of collective agreements. Perhaps they are afraid of undermining their raison d’être.

The crisis is exacerbating discontent, and these inequalities will end up being intolerable. The privileged half of the country cannot continue to live at the cost of the other half. If it wants to keep its standard of living, it will have to work for it. It is time for popular sovereignty to do away with privileges, and restore the forgotten values of justice and equality of opportunity. Labour reform is an essential first step to achieve the fair and open society that we all want.