How well is Spain's labor market doing since the crisis?

“Spain is not in an economic crisis.” These were the now immortal words of Spain’s then-President José Luiz Rodriguez Zapatero in response to the turmoil which swept through the world economy in 2007–2008 and led to the worst recession Spain has seen for decades.  

The Spanish economy boomed throughout the early 2000s, as inward investment from the rest of the EU and low interest rates fed a colossal housing bubble. With the onset of the global financial crisis, the music abruptly stopped. The housing bubble popped spectacularly, GDP nosedived and the unemployment rate soared to over 25%, the highest in the EU. Youth unemployment reached an eye-watering 50%, prompting an exodus of skilled young professionals, with many moving to the colder climes of northern Europe in search of work.

Worryingly, the unemployment rate hit similar heights during the 1990s, and had struggled to dip below 8% even at the peak of giddy economic optimism in the mid-2000s. This hints at deep-seated structural problems in the Spanish labor market, rather than a mere passing phenomenon.

As people’s jobs and livelihoods evaporated during the crisis, popular unrest built. This was encapsulated by what came to be known as the 15-M movement in 2011, which saw millions of Spaniards gather on the streets to protest against their leaders.The Popular Party (PP) rode this wave of discontent to a landslide victory in the 2011 national elections, and embarked on an overhaul of the labor market to get people back to work.

Six years down the line, signs of progress are visible. The unemployment rate, while still painfully high, has dipped. Some of the young people who left the country in droves during the crisis are venturing home. The country is held up by European Institutions as a vindication of liberal policy prescriptions. However, the labor market is far from perfect, and continues to suffer repeated criticism from both domestic and international observers.

To examine the Spanish labor market—and particularly how it serves young people—in more detail, we spoke to Raymond Torres, Director of Macroeconomic Analysis and Forecasting at Funcas, and Associate Professor at the University of Geneva.

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Raymond Torres is the Director of Macroeconomic Analysis and Forecasting at Funcas, and Associate Professor at the University of Geneva. Until January 2017, he led the research department of the International Labor Organization. Prior to that, Raymond was the Head of the Employment Analysis and Policy Division of the OECD Economics department, where he led research projects on the Spanish economy, among other subjects. FocusEconomics recognized Funcas as the best overall forecaster of the Spanish economy in its 2016 and 2017 Analyst Forecast Awards.

Raymond is on twitter: Follow

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FE: How do you evaluate the success of the Partido Popular’s labor market reforms?

Raymond Torres: The reforms carried out in 2012 were important for changing the business climate, thus nurturing a job-rich recovery. Over the past three years, employment has expanded rapidly, almost as fast as GDP. This has helped make important inroads into overly high unemployment. However, some of the key imbalances have not been altered, notably a high degree of labour market duality and working poverty, notably for youth. 

FE: What are the main structural weaknesses in the Spanish labor market? 

Torres: The Spanish labour market tends to over-react to economic cycles. In recessions, it tends to lose a disproportionate number of jobs. The opposite occurs in expansionary phases, which are highly job-rich. Successful performers like Germany enjoy a more stable employment situation, thus facilitating the task of economic and labour market policies. The procyclicality of employment in Spain reflects the high incidence of precarious contractual arrangements as well as the limited recourse to job-sharing in the face of recessions.

FE: Is the Spanish labor market failing young people?

Torres: Young people are especially vulnerable to the structural weaknesses of the Spanish labour market. They tend to enter the labour market with short-term jobs, and thus face unstable conditions and high unemployment. In addition, unlike in the most successful countries, there are relatively few opportunities to combine education with work experience. Many young people are over-educated vis-à-vis the kind of jobs which are available in the labour market.     

FE: How has the economic situation of young people in Spain evolved since the financial crisis? 

Torres: Young people were more affected by the crisis than their adult counterparts. There were times when the unemployment rate of youth thus exceeded 50%. In addition, the majority of those who managed to obtain employment were poorly paid and faced precarious conditions. One salutary reaction, however, is that many young people have preferred to prolong education rather than entering a depressed labour market, which might pave the way to better job prospects in coming years. With the recovery, the employment position of young people has improved significantly, without however reverting to the pre-crisis situation.

FE: Are temporary contracts a help or a hindrance for young people starting their careers? 

Torres: A temporary contract can be useful for acquiring work experience and making a first step in the labour market. However they can become dead-ends, with young cycling from one temporary job to the other, with unemployment spells in between. The challenge for Spain is to make temporary jobs stepping stones into more stable positions.  

FE: What more could the government do to boost purchasing power and labor market participation rates, particularly among young people?

Torres: A multi-faceted approach is needed. This means, first of all, stronger linkages between education and labour markets, with a view to facilitating transitions. Secondly, barriers to stable job contracts should be tackled, including in terms of combatting abuse of temporary contracts and “false” self-employed (which are proliferating in the digital economy) and making legislation more predictable for enterprises that want to create stable jobs. Third, there is scope for boosting the effectiveness of active labour market policies, which would be especially beneficial for young people. This is feasible: in all these areas, good practices exist.

FE: Do you think that there will be significant reforms to the labour market over the next few years? 

Torres: As in other countries, the recovery has reduced pressure over the need for further reforms. However the positions of employers and trade unions are now closer concerning the need for avoiding low-wage traps, improving active labour policies and the role of the public employment service and the importance of addressing skill gaps. Pensions are another area where calls for reform have emerged from all sides. Therefore there may be room for a tradeoff between reforms that tackle labour market dualities with improvements in wages and protection against unemployment. The issue is whether the government will be in a position to seize this opportunity, given the many pitfalls that are typically associated with labour market reforms.

FE: How would you evaluate the role of unions in Spain? Are they effectively fulfilling their mandate of protecting their employees' welfare? 

Torres: As in other countries, Spanish unions have faced significant challenges as a result of the period of internal devaluation which followed the sovereign debt crisis. This has meant not only losses in wages and jobs for many workers, especially those on temporary contracts, but also a limited bargaining space. Enterprise federations, too, underwent a difficult period of credit restrictions, forcing many otherwise viable businesses to scale down their operations, and affecting their ability to seat at the bargaining table. In sum, the depth of the crisis did not leave much room for manoeuvre for either unions or employers. The recovery, however, opens up new avenues for social dialogue. Let's hope that the main actors will seize them.            

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Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.

Author: Oliver Reynolds, Economist

Date: October 23, 2017