Bloomberg News

Spain Cuts Severance Pay on New Open-Ended Job Contracts

February 13, 2012

(Updates with comment from labor minister in fifth paragraph, and comments by economists in ninth, fourteenth.)

Feb. 10 (Bloomberg) -- Spain’s Cabinet approved a law reducing companies’ firing costs and making it easier for them to opt out of wage-bargaining agreements in a bid to tackle the European Union’s highest jobless rate.

The labor-market overhaul reduces firing costs for new job contracts and offers tax breaks to companies hiring unemployed people, Labor Minister Fatima Banez said. It also encourages part-time work, gives priority to wage deals made at the company level, rather than at the sector or regional level, and offers struggling companies more ways to reduce payrolls.

“We want to increase flexibility” for companies, Banez said at a news conference in Madrid today. “Our capacity to compete is hindered by our labor market’s rigidity.”

The changes are part of Prime Minister Mariano Rajoy’s efforts to revamp a shrinking economy. Rajoy, who took office in December, needs to convince investors he can solve Europe’s worst labor crisis while meeting Spain’s budget-deficit pledge to the EU. Close to half of Spaniards under age 25 are out of work and a third of the euro region’s jobless live in Spain, data from the EU’s statistics institute show.

Recession Impact

Unemployment will continue to rise this year as the economy suffers its second recession in as many years and the government deepens budget cuts, Rajoy said on Feb. 8. The Bank of Spain expects the economy to contract 1.5 percent in 2012.

The European Central Bank, the European Commission and the 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.

“This is a very bold move because Rajoy is attacking unemployment from different angles, including labor flexibility, jobless benefits and youth unemployment,” Ludovic Subran, chief economist at credit insurer Euler Hermes SA, said in a telephone interview from Paris. “Rajoy is trying to make sure that negotiating power is decentralized in a way that helps both the employer and workers.”

Severance Pay

Severance pay for new open-ended contracts will be cut to 33 days for every year worked, while remaining 45 days for existing contracts. Small companies will be encouraged to hire the jobless through tax breaks.

The law also gives organizations and entities in the public sector flexibility to fire staff for “economic, technical, organizational and production-related reasons,” the Labor Ministry said in a statement.

The government’s plan comes after 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.

“The legislation tackles a number well-known limitations of the Spanish labor market,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc in London. The measures “might increase the willingness to hire,” he said by e-mail.

--Editors: Jeffrey Donovan, Eddie Buckle

To contact the reporter on this story: Angeline Benoit in Madrid at

To contact the editor responsible for this story: Emma Ross-Thomas at

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