Bloomberg News

Rajoy Tackles Spain 23% Jobless in ‘Litmus Test’ of Resolve

February 13, 2012

(Updates with comment from de Guindos in seventh paragraph.)

Feb. 10 (Bloomberg) -- Prime Minister Mariano Rajoy will announce changes to Spain’s labor laws today in a test of his two month-old government’s resolve to revamp the shrinking economy and tackle the Europe Union’s highest jobless rate.

Ministers will brief reporters at about 2 p.m. in Madrid after the Cabinet meets. The “balanced” measures will improve “flexibility” for companies and bolster training for workers, Labor Minister Fatima Banez said yesterday.

“Any marked deepening of recent labor market and collective wage bargaining reforms will be the litmus test of Rajoy’s determination to overhaul Spain’s economy,” said Raj Badiani, an economist at Global Insight Inc. in London.

Rajoy, who faces a regional election in Andalusia next month, needs to convince investors he is prepared to confront unions and resolve Europe’s worst labor crisis as part of his plan to restore the economy to growth. After winning the national election on pledges of creating jobs, he also needs to convince young people suffering from a 49 percent jobless rate to remain in Spain to stem an exodus of workers.

“We’re seeing the alarming phenomenon of significant emigration by Spanish graduates who are having to seek a living beyond our borders,” Rajoy told Parliament on Feb. 8. “It doesn’t seem reasonable that while in Europe the unemployment rate rose from 7.6 percent to 10.4 percent during the crisis, in Spain it rose from 8.2 percent to 22.9 percent.”

Struggling Companies

Rajoy said the same day that unemployment will continue to rise this year as the economy suffers its second recession in as many years and the government deepens budget cuts. A third of the euro region’s jobless live in Spain, data from the EU’s statistics institute show, and the Bank of Spain expects the figure to increase as the economy contracts 1.5 percent.

The labor revamp will be “extremely aggressive,” Economy Minister Luis de Guindos told EU Economic and Monetary Affairs Commissioner Olli Rehn, newspaper ABC reported today.

It aims to give struggling companies ways to reduce payroll costs without firing staff, and encourage part-time work and professional training, Banez told a parliamentary committee on Feb. 7. It will also reduce the “duality” of the labor market, which gives workers with open-ended contracts as many as 45 days severance pay for each year worked at a company, while 25 percent of contracts are temporary.

“Rajoy has done the right thing in making jobs the priority but he now has to go all the way and give small and medium enterprises more power to negotiate working conditions directly with employees,” Ludovic Subran, chief economist at credit insurer Euler Hermes SA, said in a telephone interview from Paris.

Can’t Devalue

The European Central Bank, European Commission and International Monetary Fund have all called for changes to laws that allowed labor costs to rise as much as 5.8 percent in 2009 even as unemployment surged. New rules are the only way to improve productivity as the nation can no longer devalue its currency, Bank of Spain Governor Miguel Angel Fernandez Ordonez said on June 21.

“The main area in need of deep reform is the highly dysfunctional Spanish labor market,” Antonio Garcia Pascual, chief southern European economist at Barclays Capital in London, wrote in a report on Jan. 26.

The measures should reduce the “excessive segmentation” between permanent and temporary workers, increase flexibility in working conditions and bolster incentives for the unemployed to seek work, he said.

Andalusia, Unions

Some of those steps risk riling voters before the March 25 election in Andalusia, which has the highest jobless rate in the country at 31 percent, and may prompt opposition from Spain’s unions.

Speaking to Finnish counterpart Jyrki Katainen before an EU summit on Jan. 30, Rajoy was caught on microphone saying the overhaul would provoke a strike. Unions held their first general strike in eight years in 2010 after the former Socialist government cut firing costs for struggling companies.

Still, unions and employers reached an agreement last month to sever the link between wages and inflation for the next three years and tie 2014 salaries to economic growth. Unemployed Spaniards also want labor laws to be changed, according to a poll published by El Mundo newspaper on Feb. 7.

More than 55.8 percent of unemployed youths would accept a job paying less than the minimum wage, while 62.8 percent back the creation of jobs paying 400 euros per month for 15 hours of work per week. Across all age groups, 65 percent would accept half the current level of severance pay, the poll showed.

--Editors: Emma Ross-Thomas, Jeffrey Donovan

To contact the reporter on this story: Angeline Benoit in Madrid at abenoit4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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