L ABOUR M ARKET P OLICY IN E UROPE. F ACING THE E CONOMIC C RISIS. T HE CASE OF S PAIN Rafael Muñoz de Bustillo

Characteristics of the economic crisis in Spain Comparatively “mild” in terms of lost GDP But strong reduction in construction Gargantuan reduction in employment Large trade deficit

Euro Area USA Spain France Germany UK GDP growth

GDP and construction rate of growth (%)(seasonally adjusted): (3 rd q.) Source: Coontabilidad nacional de España, INE

Employment growth Annual percentage change in total employed population Source: Eurostat

Employment elasticity to GDP, (∆% Employ./∆%GDP): the crisis

…and after Source: Eurostat

Current account balance (% GDP)

Policy Stage I (2008-9): Countercyclical policy based on – Automatic stabilizers – Ad-hoc discretionary increase of expenditure in employment intensive sectors. Plan-E (Spanish Plan to Stimulate the Economy and Employment): fiscal stimulus through small scale public works, mostly run by local governments – Maintenance of social expenditure Extension of unemployment benefits (6 + 6 months) – Ad-hoc flat income tax rebate (400€ per tax payer) + Funds for the restructuration of financial institutions (banks and saving banks).

Unemployed workers receiving unemployment compensation (all sources) as percentage of all unemployed : (1st Q.). Source: MTIN, INE

Stage II. The great U turn. Priority is given to: – (a) Reduction of public expenditure and increase of revenue in order to accomplish a very intense reduction of public deficit from 11.1 to 3% in 4 years ( ). 5% reduction of wages of public employees. Increase in VAT (from 6 to 8% and from 16 to 18%) Elimination of the €400 tax rebate, increase in marginal income tax rate (from 43% to 45%, euros), phase- out of housing tax credits. Freeze on increase in retirement pensions in accordance with the CPI in 2011 – (b) Pro-market labour reform. – (c) Pension reform

Fiscal Policy: Spain vs EU(27) % GDP Source: Eurostat

Fiscal Policy: Spain vs. Germany % GDP Source: Eurostat

Fiscal Policy: Spain vs. UK Source: Eurostat

Results : -Stagnation of the economy, now only fueled (if mildly) by exports. -Estimates of the fiscal consolidation: -2.2 percentage points in 2011 and -1.5 in 2012 IMF (2011): regional Economic outlook. Europe, p. 22

(b) Labour reform Reduction of dismissal costs and criteria. Reform of the collective bargaining system, in particular to allow firms to opt out of collective agreements. Reinforcement of active labor market policies, and enhanced links between vocational training, businesses, and the general education system. Reduction in payroll taxes for part-time employment of the young and the long-term unemployed. Reduction of the promised increase of MW (800€ by 2012, instead 641,40€ after 2011 rise)

A primer on dismissal costs The previous “boom” and the crisis shows that the Spanish market is quite flexible (external flexibility)* * In millions of labour contracts were signed (total number of employees: 18.6 millions ) Source: Eurostat

Source: Encuesta anual de coste laboral. INE

Dismissal costs as % of total labour cost. UE, 2004 Source: Eurostat

OECD Employment Protection Legislation Index, EPL: MaxSpainMin TemporalLUXEMBOURG: CANADA: 0.25 RegularPORTUGAL: US: 0.17 CollectiveITALY: JAPAN: 1.5 OVERALLPORTUGAL: US: 0.21 Destruction of employment by type. Spain QIII Another paradox? Source: LFS, INE Source: OECD

Temporary employment rate by age Q Temporary employment rate by sector Q Huge rise in youth unemployment unemployment

Open ended contract ≠ contract for life. – According to our analysis of longitudinal data, in 2007, at the height of the economic boom, around 42% of unemployed workers with previous work experience had had a full time open ended contract in the past. – According to Toharia and Cebrian (2007), 41 per cent of permanent contracts signed in 2004 were not still valid one year later

With the reduction of redundancy payments we will create million of frightened jobs

(b) Labour reform Reduction of dismissal costs and criteria. Reform of the collective bargaining system, in particular to allow firms to opt out of collective agreements. Reinforcement of active labor market policies, and enhanced links between vocational training, businesses, and the general education system. Reduction in payroll taxes for part-time employment of the young and the long-term unemployed. Reduction of the promised increase of MW (800€ by 2012, instead 641,40€ after 2011 rise)

The new issue of linking wages to productivity (Merkel’s proposal) Source: Ameco

Productivity per hour, EU (15) = 100 Fuente: Eurostat, Labour productivity per hour workedLabour productivity per hour worked

WEF. Thursday, 28 January 2010 (c) Pension reform 1. Untimely reform. 2. Social Security in superavit even during the crisis. 3. Relatively low spenditure on pensions. Pensions not particularly generous 4. Purpose: to reduce the future increase in pension expenditure 5. Changes: - Extension of the standard retirement age from 65 to 67 -More stringent conditions to achieve full pension -From the 15 to the 20 last years -From 35 to 37 years Reduction of future income of pensioners

Source: Eurostat

Source: Own analisis from SILC data

Fuente: European Commission (2009): The 2009 Ageing Report: Economic and budgetary projections for the EU-27 Member States ( ); Bruselas: European Commission.The 2009 Ageing Report: Economic and budgetary projections for the EU-27 Member States Public expenditure on pensions (%GDP)

Impact on average pension of the extension of the number of years (from 15 to 20) used to calculate the retirement pension Source: own analysis from SS administrative data (2005)

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Spain Unemployment rate by gender

Unemployment by age group (thousands) (%)

Temporary employment during the crisis: Decrease in total employment

(3) Empleo Empleo (miles) en España UE

78% < 6 meses Duration: