Spain makes major changes to labor system

Spain’s new conservative government announced drastic changes to the country’s labor system Friday, in some cases altering contract terms that have been untouched for 50 years, in a bid to bring down Europe’s worst unemployment rate.

Under the new labor rules, companies doing business in Spain will be able to hire and fire workers more freely, negotiate pay independent of national contract mandates and score tax breaks for hiring people younger than 30. Severance packages long deemed among the most generous in Europe will be cut by more than a quarter, from 45 days’ pay for every year on the job to 33. Temporary workers, a full third of the Spanish workforce, will be entitled to permanent status, with better pay and benefits, after two years rather than the current three.

The Cabinet approved the measures by decree Friday, meaning they will go to lawmakers for a yes-or-no vote without the option of amendments. The ruling Popular Party holds a commanding majority in the parliament, which may ensure quick passage.

Nearly one in four workers in Spain is unemployed; the rate tops 50% for people in their early 20s.

“The reform will provide the framework to allow the creation of stable employment as soon as possible,” Labor Minister Fatima Banez told reporters after the Cabinet meeting.

But many economists, and even Prime Minister Mariano Rajoy, acknowledge that the unemployment rate may first rise in the short term. For example, before companies begin hiring people they may first take advantage of the smaller severance packages to lay off workers who had been too expensive to let go.

“Unfortunately the figures will not improve this year,” Rajoy said in a speech to the parliament Wednesday. “They are going to get worse.”

But he has been under pressure to reassure markets that Spain is getting its house in order and that Europe’s fourth-largest economy will not need a bailout.

The new labor rules also weaken collective bargaining, a longtime goal of Rajoy’s business-friendly conservatives, who took control after a landslide victory over the Socialists in November. Many Spanish work contracts date to the 1960s, when the country was under the politically repressive but pro-labor regime of dictator Francisco Franco.

Under the old system, “there are these super-protected workers with permanent contracts and long tenures, and then there is this other caste of totally temporary, extremely precarious [laborers] with virtually no rights,” said Javier Diaz-Gimenez, a professor of economics at Spain’s IESE Business School.

The reforms seek to close that gap, he said.

But Rajoy risks the ire of trade unions. At a European summit in Brussels last week, he was caught on an open microphone predicting that a general strike would be called in Spain once the public got word of the labor reforms.

Frayer is a special correspondent.