Spain’s new labour market: a success story for free marketeers

Diego Sánchez de la Cruz // 18.07.2016

 

The introduction of a higher degree of flexibility in the Spanish labour market has created one million new jobs during the last two years. After years of massive layoffs, the liberal reform of 2012 has proven once again that market alternatives provide better social outcomes.

 

Moving away from collective bargaining and lowering the costs of hiring and firing were two preconditions for growth. Before the reform, half the Eurozone’s new unemployed workers were Spaniards. Now, job creation has climbed above 3 per cent, way above the Eurozone average of 1 per cent. As a result, one out of every three new jobs is created in Spain.

 

Before and after the labour market reform, Civismo warned that this was the only way to curb unemployment, which climbed above 25 per cent during our recent crisis. The rigidity of our previous framework meant that labour costs were rising non-stop, in spite of a mounting recession. If Spain had adopted a flexible paradigm in 2008 instead of 2012, we could have saved a total of three million jobs and unemployment rates today would be below 12 per cent.

 

Following the path of internal devaluation has yielded great results. Now, our labour cost for one hour of work is slightly above 20 euros, as opposed to 30 in Germany. Our productivity gap with the leading economies of the world has also narrowed and our exports have skyrocketed to record levels.

 

Between 2014 and 2014, 40 per cent of all permanent jobs signed in the Eurozone were arranged in Spain. While 160,000 Spaniards were signing a contract for a permanent job, 150,000 French workers were losing that status and joining the unemployment lists. It is no surprise, therefore, that the French government is looking to import some of the basic elements of Spain’s labour market reform.

 

The speed of permanent job creation is surprisingly high. Only three months after our growth numbers left negative territory, figures for permanent contracts were rising. In the 1990s, Spain needed 18 months of growth in order to enjoy its first month with rising numbers of permanent job contracts.

 

Also, the weight of permanent contracts as a percentage of all contracts has increased from 68 to 75 per cent between 2008 and 2015, while the number of temporary jobs that last less than three months only affects four percent of all workers.

 

Salaries are also improving and low inflation is boosting the purchasing power of Spanish workers. In 2015, household consumption increased by 1,4 per cent, the first year of growth since 2008. Also, private debt has fallen from its peak of 200 to a new low of 150 per cent of GDP. This means that Spaniards are no longer borrowing to spend, but they are rather saving to spend – a shift that significantly improves the fundamentals of our demand cycle.

 

Free marketeers should take a close look at Spain’s new labour market and compare the current framework with the previous one. The results clearly show that the 2012 reform was a success. Ideas have consequences and, for the Spanish market, to finally move away from intervention to freedom has had the wonderful consequence of creating more than a million new jobs.

 

Diego Sánchez de la Cruz is CEO of Civismo. 

EPICENTER publications and contributions from our member think tanks are designed to promote the discussion of economic issues and the role of markets in solving economic and social problems. As with all EPICENTER publications, the views expressed here are those of the author and not EPICENTER or its member think tanks (which have no corporate view).