Whether or not Europe is in for a “double-dip“ recession with a second downturn yet to come, the crisis we currently face is jobs. That means that most EU governments will be judged on how well they tackle unemployment, and this holds particularly true for Spain.

The Spanish labour market is in need of reform, and it’s not a new problem. For decades, Spanish society has been resigned to low rates of employment. The country’s highly acclaimed transition to democracy after the Franco’s era was not accompanied by comparable economic improvements. Back in 1975 there were 12.5m people employed in Spain, and 20 years later despite an increase in public sector employment that figure hadn’t changed. Private sector jobs had actually shrunk during this period.

An improvement in Spain’s labour market had to wait until new policies were brought in by the government of José Maria Aznar. I was proud to contribute to those developments at a time when job numbers increased substantially. From 1996 to 2004, the year we lost the general election to José Luis Rodriguez Zapatero’s PSOE socialist party, 5.5m new jobs were created, a figure which had grown to 20.5m by mid-2007. Nowadays, Spanish people are proud of two main accomplishments; the political transition of the 1970s and the economic upturn of the 1990s, both of which were made possible by centre-right governments.

But now things are moving in the other direction. The rate of job losses in Spain is the highest in Europe, and probably the highest in the western World. Nearly 80% of job losses in the eurozone were at one point concentrated in Spain. Although Spain’s Labour Market is so defective that basic reforms are called for, Mr. Zapatero is so concerned with short-term political advantage that he has rejected the need for reform. This approach may enhance the government’s relationship with the trade unions, but it clearly damages the country’s medium-term welfare, especially with regard to those people who currently are unemployed.

A comprehensive labour reform strategy for Spain means we should pay attention to four main areas: First, education. We in Spain spend billions of euros trying to improve the skills of both our working and unemployed populations. The results are far from satisfactory. Because of the shortage of people with adequate qualifications, many vacant jobs go unfilled. Yet we still have the highest unemployment rate in Europe.

The current system needs to be replaced, and at the same time accompanied by strict public spending controls and better performance monitoring. New evaluation procedures and official certification should be introduced in areas like foreign language skills and computer literacy skills.

Labour market mediation also needs to be reformed. The public employment agency is quite efficient at managing unemployment benefits, but performs poorly in terms of labour market matching. Few Spanish people can say that they found a job thanks to the national or a regional employment agency. New forms of partnership between the public and private sector, such as outplacement firms, produce better results.

Collective bargaining for wage and general working agreements are overdue for reform. It is well known that labour bargaining gives better results when carried out on a national or even company basis, yet regional or collective bargaining tends to be the norm in Spain, even though it often ignores the problems of unemployment and absenteeism.

But the most important and most difficult area of reform concerns inequality. The Spanish labour market works on a two-tier basis, split between first-class workers, who if dismissed enjoy very high severance compensation, and temporary workers who have very little social protection. This is a difficult issue that urgently needs attention. Job protection is unfairly divided between these two classes of workers. The system is inefficient, and lay-offs depend almost exclusively on the kind of contract a worker has, as opposed to the skills or the performance of an individual worker.

The reforms I am proposing of course concern the Spanish labour market, but probably have some relevance elsewhere in the EU. For although other European countries may have done better with their own labour markets, overall the results are dissatisfying, particularly when it comes to the relationship between labour markets and the welfare state.

For the most part, welfare systems and labour market reforms should be brought in at national level. However, reforms like those proposed above are easier to implement if there is a coordinated European strategy. The Lisbon Agenda agreed back in 2000 was a missed opportunity because although it was intended to be the first economic package that combined European and national competences, it signally failed to propose significant reforms even though the European Commission had been warning that in many EU members the Welfare State was no longer sustainable.

After a lost decade, we need to re-launch a new strategy for economic reform in Europe. This strategy should genuinely seek to ensure that our economies are the most competitive in the world, and that our social systems become genuinely sustainable. And to repeat my introductory remarks, political success should be measured in terms of jobs and welfare. If we don’t act now it will be the EU that is deemed a political failure.

Commentary

Of course we need reform, but there's no magic wand

The nice thing about Mariano Rajoy’s proposals is that they don’t reflect the whims of a politician but instead are firmly grounded in the debates on unemployment that economists have had among themselves for decades. There are certainly gains to be made from reducing mis-matches between vacant jobs and job-seekers, and the structure of bargaining clearly has an important impact on unemployment levels. So his proposed reforms square well with the conclusions drawn from theoretical and empirical research in our discipline. It is comforting for an economist to hear such views from a political leader.

On the other hand, I was somewhat surprised by Mariano Rajoy’s optimism both on the feasibility of the proposed reforms and the likelihood that they might trigger a process with adverse unintended consequences. We only need to look at recent history for lessons on why the rigidities we complain about are so resilient, and how reforms can go wrong.

Most economists complain about the dual nature of the Spanish labour market – a feature that economies like France, Portugal and Italy share, though to a lesser extent. But we should remember than this structure was introduced in the late 1980s by a government desperate to create jobs after a decade of unemployment rates of about 20%. At that time, a comprehensive reform wasn’t politically feasible because it would have provoked strong opposition from the unions, even though it was those unions which were largely responsible for the rigidities that had led to high unemployment in the first place. The compromise was continued protection for permanent jobs, while making it easier to hire people on temporary contracts.

In the short run, the dual structure was successful because it created jobs. But when in the early 1990s the next recession set in, an important drawback soon appeared – jobs were being destroyed at a faster pace than usual. This wasn’t really surprising as it is easy to get rid of temporary workers by simply not renewing their contract. For this and other reasons, economists have grown wary of the dual contract structure of the Spanish, Portuguese, French and Italian labour markets. In the current recession, temporary contracts surely explain why unemployment has been growing so fast in Spain. But I believe it is only part of the story; the other part being that the structure of economic activity in Spain was heavily biased towards construction, and a painful structural adjustment must now take place with labour being re-allocated to other sectors. It is even possible that temporary contracts may actually prove helpful in speeding that re-allocation process.

Many, however, now advocate eliminating the dual structure and moving towards a single labour contract. I think they forget that this dual structure is the result of a political modus vivendi, and certainly there appears to be no viable political process able to change it. That’s why the dual model has spread over the years from Spain to Portugal, then to France and more recently to Italy. It is hard to see how a single labor contract could reconcile the interests of permanent workers, temporary workers, and employers. If it were more rigid than temporary ones, but more flexible than current permanent ones, temporary workers might benefit but permanent ones would be more exposed. And employers would lose a margin of flexibility in managing their workforces. Everybody may want a single employment contract, but not one that’s the same as everybody else’s.