The Spanish government approved changes in labor policy Friday designed to reduce the cost for employers of dismissing staff, as well as create new incentives for companies to hire the young and the previously jobless.
Soraya Sáenz de Santamaría, Spain’s deputy prime minister, described the changes as a watershed moment for a labor market that has suffered from rigid rules limiting the ability of employers to adjust their work forces to changes in demand.
“There will be a before and an after” these changes, she told reporters after the meeting of the cabinet. She added that the changes would lay “the foundations to return to job creation,” even if the impact would not be immediate.
Economists predict that Spain’s unemployment rate will rise in coming months after reaching 22.8 percent in December, more than double the E.U. average. The rise in joblessness has been particularly brutal for young people, with almost half of those under 26 now unemployed.
With the country now entering its second recession since the start of the financial crisis, the jobless rate is likely to reach 24.6 percent next year, according to a forecast made earlier this week by the economics research department of BBVA, a Spanish bank.
Rigid labor market legislation has been identified by the World Bank and others as one of the main reasons why Spain’s jobless rate has soared since the onset of the world financial crisis.
José Manuel González-Páramo, Spain’s representative on the executive committee of the European Central Bank, recently noted that the cost of letting employees go is so onerous in Spain that “many times companies prefer closing down rather than downsizing.”
The new rules will cut severance payments to 33 days per year of employment from 45 days. Severance packages will also be capped at a maximum of 24 months, half the previous limit. The changes are also designed to discourage companies from relying on temporary workers, forcing employers to switch such staff to permanent contracts after two years, rather than three years at present. The new rules also reduce severance payments for civil servants.
The legislation encourages small enterprises, in particular, to hire young employees by allowing companies with a maximum of 50 workers to claim a corporate tax break of €3,000 for each new hire under the age of 30. Should the new hire have been previously jobless, he or she will still also be able to collect 25 percent of previous unemployment benefits for a limited time, while 50 percent will go to the employer.
The new rules also facilitate layoffs for companies in financial trouble, allowing employers who can show three consecutive quarters of losses to pay only 20 days of severance per year of employment.
Companies will also be able to drop out more easily from collective bargaining agreements and strike their own deals with their staff.
Ms. Sáenz de Santamaría said the changes, which the government approved by decree, will nonetheless be discussed in Parliament, where the government holds a majority.
Luis Garicano, a professor at the London School of Economics, described the changes as “promising,” while lamenting the fact that the government did not go further in removing the distinction between temporary and permanent workers by establishing a single contract.
“I do see this as a bit of a lost opportunity to eliminate the extreme duality that has really hurt the labor market by having temporary workers alongside others who have a quasi civil servant status,” he said.
Mr. Garicano also said that subsidies should have been targeted more specifically at training young and unemployed people, given that Spain has one of the Continent’s highest school dropout rates, alongside Turkey and Portugal.