LABOUR MARKET POLICY IN EUROPE. FACING THE ECONOMIC CRISIS. THE CASE

OF SPAIN

Rafael Muñoz de Bustillo

Characteristics of the economic crisis in Spain

• Comparatively “mild” in terms of lost GDP• But strong reduction in construction • Gargantuan reduction in employment• Large trade deficit

1993-2002

2003 2004 2005 2006 2007 2008 2009 2010 2011

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

Euro Area USA

Spain France

Germany UK

1993-2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Euro Area 2.1 0.8 2.2 1.7 3.1 2.9 0.4 -4.1 1.7 1.6USA 3.4 2.5 3.6 3.1 2.7 1.9 0.0 -2.6 2.8 2.8Spain 3.2 3.1 3.3 3.6 4.0 3.6 0.9 -3.7 -0.1 0.8France 2.0 1.1 2.3 2.0 2.4 2.3 0.1 -2.5 1.5 1.6Germany 1.5 -0.2 0.7 0.9 3.6 2.8 0.7 -4.7 3.5 2.5UK 3.1 2.8 3.0 2.2 2.8 2.7 -0.1 -4.9 1.3 1.7

GDP growth

1996TI

1996TIII

1997TI

1997TIII

1998TI

1998TIII

1999TI

1999TIII

2000TI

2000TIII

2001TI

2001TIII

2002TI

2002TIII

2003TI

2003TIII

2004TI

2004TIII

2005TI

2005TIII

2006TI

2006TIII

2007TI

2007TIII

2008TI

2008TIII

2009TI

2009TIII

2010TI

2010TIII

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

14GDP Construction

GDP and construction rate of growth (%)(seasonally adjusted): 1996-210(3rd q.)

Source: Coontabilidad nacional de España, INE

Employment growth Annual percentage change in total employed population

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

-8

-6

-4

-2

0

2

4

6

-1.8

-6.6

EU(15)

Spain

France

Germany

United Kingdom

Source: Eurostat

Luxembourg

German

y Malt

a

Belgium

Poland

Austria

Slove

nia

Romania

Netherl

ands

Czech Rep

ublic Italy

Finlan

d

United Kingd

omGree

ce

Swed

enCyp

rus

Hungary

EU(15)

EU(27)

France

Lithuan

ia

Bulgaria

Slova

kia

Denmark

Estonia

Latvia

Portuga

l

Irelan

dSp

ain

-0.5

0.0

0.5

1.0

1.5

2.0

-0.28

0.00

0.12 0.14 0.180.23 0.23 0.25 0.28 0.29 0.31 0.33 0.35 0.35 0.38 0.41 0.42 0.44 0.47

0.520.60

0.72 0.73

1.04 1.08

1.78

Employment elasticity to GDP, 2008-2009 (∆% Employ./∆%GDP): the crisis

-6 -4 -2 0 2 4 6 8

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

-0.3

0.600000000000001

-5.9

-0.8

-2.1

0.5

-4.8

-4.1

-2.1

-2.3

0.1

-0.700000000000001

0.1

-4.8 -5.1

1.6

0.2

2.2

-0.5

1

0.4

P-1.8

-2.2

-1.4

-0.4

1.1

-0.700000000000001

GDP Growth (%) 2010

Empl

oym

ent G

rwot

h (%

), 20

10

Double grow-th

GDP growth but employment destruc-tionGDP contraction plus employment destruc-

tion

…and after

Source: Eurostat

2003 2004 2005 2006 2007 2008 2009 2010

-12

-10

-8

-6

-4

-2

0

2

USASpainFranceUK

Current account balance (% GDP)

Policy• Stage I (2008-9): Countercyclical policy based on

– Automatic stabilizers– Ad-hoc discretionary increase of expenditure in

employment intensive sectors.• Plan-E (Spanish Plan to Stimulate the Economy and

Employment): fiscal stimulus through small scale public works, mostly run by local governments

– Maintenance of social expenditure• Extension of unemployment benefits (6 + 6 months)

– Ad-hoc flat income tax rebate (400€ per tax payer)

+ Funds for the restructuration of financial institutions (banks and saving banks).

19781979

19801981

19821983

19841985

19861987

19881989

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

20102011 I

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

57.9

36.5

77.5

60.0

Unemployed workers receiving unemployment compensation (all sources) as percentage of all unemployed : 1978-2011 (1st Q.).

Source: MTIN, INE

• Stage II. The great U turn. Priority is given to:– (a) Reduction of public expenditure and increase of

revenue in order to accomplish a very intense reduction of public deficit from 11.1 to 3% in 4 years (2010-2013).

• 5% reduction of wages of public employees.• Increase in VAT (from 6 to 8% and from 16 to 18%)• Elimination of the €400 tax rebate, increase in marginal

income tax rate (from 43% to 45%, +175.000 euros), phase-out of housing tax credits.

• Freeze on increase in retirement pensions in accordance with the CPI in 2011

– (b) Pro-market labour reform.– (c) Pension reform

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100

10

20

30

40

50

60

EU (27 ) Expenditure EU(27) Revenue Spain Revenue

Spain Expenditure

Fiscal Policy: Spain vs EU(27)%

GDP

Source: Eurostat

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 201020

25

30

35

40

45

50

Germany Revenue Germany Expenditure Spain Revenue Spain Expenditure

Fiscal Policy: Spain vs. Germany

% G

DP

Source: Eurostat

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 201020

25

30

35

40

45

50

55

-10.3

-9,3

UK Revenue UK Expenditure Spain Revenue

Spain Expenditure

% G

DP

Fiscal Policy: Spain vs. UK

Source: Eurostat

Results: -Stagnation of the economy, now only fueled (if mildly) by exports.

- Estimates of the fiscal consolidation: -2.2 percentage points in 2011 and -1.5 in 2012

IMF (2011): regional Economic outlook. Europe, p. 22

(b) Labour reform

• Reduction of dismissal costs and criteria. • Reform of the collective bargaining system, in particular

to allow firms to opt out of collective agreements.• Reinforcement of active labor market policies, and

enhanced links between vocational training, businesses, and the general education system.

• Reduction in payroll taxes for part-time employment of the young and the long-term unemployed.

• Reduction of the promised increase of MW (800€ by 2012, instead 641,40€ after 2011 rise)

A primer on dismissal costs• The previous “boom” and the crisis shows that the Spanish

market is quite flexible (external flexibility)*

* In 2007 16.6 millions of labour contracts were signed (total number of employees: 18.6 millions )

Sour

ce: E

uros

tat

1996 2000 2001 2002 2003 2004 2005 2006 2007 2008 20090

0.5

1

1.5

2

2.5

2

1.21

0.6630000786904150.763561988214242

0.7087666776798580.673513535515090.7222295398409370.753406563343985

0.889495175803129

1.14508070546104

1.57

Dismissal cost as percentage of total labour cost

Source: Encuesta anual de coste laboral. INE

1,09

1,51

1,13

0,170,140,13

0,96

1,58

0

0,2

0,4

0,6

0,8

1

1,2

1,4

1,6

1,8

Malta

Finlan

diaSue

cia

Dinamarc

a

Letonia

Norueg

a

Luxem

burgo

Polonia

Portug

al

R. Che

ca

Estonia

Ruman

ía

Lituan

ia

Bélgica

España

Hungrí

a

UE (27)

UE (25)

Eslova

quia

Eurozo

na (1

3)

Aleman

iaGrec

ia

Croacia

Bulgari

aIta

lia

Austria

Dismissal costs as % of total labour cost . UE, 2004

Source: Eurostat

OECD Employment Protection Legislation Index, EPL:

Max Spain Min

Temporal LUXEMBOURG: 3.75 3.5 CANADA: 0.25

Regular PORTUGAL: 4.17 2.46 US: 0.17

Collective ITALY: 4.88 3.13 JAPAN: 1.5

OVERALL PORTUGAL: 3.15 2.98 US: 0.21

13.7

86.3

2008-2010QI Employees

Open ended Temp

22.1

10.767.2

2008-2010QI

Self-employed

Open ended

Temp

Destruction of employment by type. Spain 2008-2010 QIII

Another paradox?

Source: LFS, INE

Source: OECD

16-19 20-24 25-29 30-39 40-45 50-59 60-690.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.078.8

55.5

42.1

31.225.3

17.6 15.9

FemaleMale

Temporary employment rate by age. 2008 1Q

Agriculture Industry Construction Services Total0

10

20

30

40

50

60

7061.3

21.9

51.3

2730.1

Temporary employment rate by sector. 2008 1Q

Huge rise in youth unemployment

• Open ended contract ≠ contract for life.– According to our analysis of longitudinal data, in

2007, at the height of the economic boom, around 42% of unemployed workers with previous work experience had had a full time open ended contract in the past.

– According to Toharia and Cebrian (2007), 41 per cent of permanent contracts signed in 2004 were not still valid one year later

With the reduction of redundancy payments we will create million

of frightened jobs

(b) Labour reform

• Reduction of dismissal costs and criteria. • Reform of the collective bargaining system, in particular

to allow firms to opt out of collective agreements.• Reinforcement of active labor market policies, and

enhanced links between vocational training, businesses, and the general education system.

• Reduction in payroll taxes for part-time employment of the young and the long-term unemployed.

• Reduction of the promised increase of MW (800€ by 2012, instead 641,40€ after 2011 rise)

• The new issue of linking wages to productivity (Merkel’s proposal)

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

50

55

60

65

70

75

EU (15) Spain USA Japan

W L wWage shareGDP productivity

Source: Ameco

Productivity per hour, EU (15) = 100

Fuente: Eurostat, Labour productivity per hour worked

Bulgaria

Romania

Latvia

Lithuan

ia

Poland

Estonia

Hungary

Czech Rep

ublic

Portuga

l

Slova

kia

Cypru

s

Greece

Slove

niaMalt

a

UE (27)

Italy

United Kingd

omFin

land

Spain

Denmark

Swed

enUE(1

5)

Austria

Irelan

d

German

yFra

nce

Netherl

ands

United St

ates

Belgium

Norway

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

96.7

110.0

117.3117.7

2001 2009

WEF. Thursday, 28 January 2010

(c) Pension reform1. Untimely reform.

2. Social Security in superavit even during the crisis.

3. Relatively low spenditure on pensions. Pensions not particularly generous

4. Purpose: to reduce the future increase in pension expenditure

5. Changes:- Extension of the standard retirement age from 65 to 67- More stringent conditions to achieve full pension

- From the 15 to the 20 last years - From 35 to 37 years

Reduction of future income of pensioners

Latvia

Irelan

dCyp

rus

Bulgaria

Estonia

Slova

kia

Icelan

d

Lithuan

ia

Romania

Norway

Luxembourg

Czech Rep

ublic

United Kingd

omSp

ainMalt

a

Slove

nia

Finlan

d

Hungary

Denmark

Belgium

Poland

EU (2

7)

Swed

en

UE (15)

Netherl

ands

Switze

rland

German

yGree

ce

Portuga

l

France

Austria

Italy

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

9.3

11.7 11.912.3

13.6

15.0

Public expenditure on pensions (%GDP)(2008)

Disability pension, early-retirement due to reduced capacity to work, old-age pension, anticipated old-age pension, partial pension, survivors' pension, early-retirement benefit for labour market reasons.

Source: Eurostat

EE BG LV UK BE LT CY FI CZ ES DK SE SK RO GR NO IE DE PT SI NL IT PL IS AT LU HU

-6.00

-5.00

-4.00

-3.00

-2.00

-1.00

0.00

1.00

-5.21-5.07

-4.94

-3.62-3.37

-3.09 -3.05 -3.00 -2.88 -2.79 -2.74-2.55 -2.48

-2.18 -2.17 -2.13 -2.04

-1.67 -1.59 -1.49 -1.47-1.25

-1.06 -0.94

-0.58 -0.56

0.18

% of Total equivalent income in households 65 + - % of population 65 + (2008)

Source: Own analisis from SILC data

8.48.9

9.5

10.8

13.2

15.515.1

0

2

4

6

8

10

12

14

16

18

2007 2010 2020 2030 2040 2050 2060

% d

el P

IB

Gasto público en pensiones (% del PIB) (2007-2060)

Fuente: European Commission (2009): The 2009 Ageing Report: Economic and budgetary projections for the EU-27 Member States (2008-2060); Bruselas: European Commission.

Public expenditure on pensions (%GDP)

-5,26 -5,39

-6,87-7,21

-0,07

-2,57

-6,58

-5,54

-8

-6

-4

-2

0<500 500-750 750-1000 1000-1250 1250-1500 1500-1750 > 1750 Total

%

Impact on average pension of the extension of the number of years (from 15 to 20) used to calculate the retirement pension

Source: own analysis from SS administrative data (2005)

Merci pour votre attention

1987TII

1988TI

1988TIV

1989TIII

1990TII

1991TI

1991TIV

1992TIII

1993TII

1994TI

1994TIV

1995TIII

1996TII

1997TI

1997TIV

1998TIII

1999TII

2000TI

2000TIV

2001TIII

2002TII

2003TI

2003TIV

2004TIII

2005TII

2006TI

2006TIV

2007TIII

2008TII

2009TI

2009TIV

2010TIII0

5

10

15

20

25

30

35

Total Male Female

Spain 1987-2011. Unemployment rate by gender

1987TII

1988TI

1988TIV

1989TIII

1990TII

1991TI

1991TIV

1992TIII

1993TII

1994TI

1994TIV

1995TIII

1996TII

1997TI

1997TIV

1998TIII

1999TII

2000TI

2000TIV

2001TIII

2002TII

2003TI

2003TIV

2004TIII

2005TII

2006TI

2006TIV

2007TIII

2008TII

2009TI

2009TIV

2010TIII0

10

20

30

40

50

60

70

24.55

21.29

54.28

65.12

43.5241.27

32.11

27.24

total from 16 to 19 from 20 to 24 from 25 to 29

1610.4

2537.5

644.2

118.2

From 16-29From 30-49From 50-5960 +

Unemployment by age group (thousands)

32.8

51.7

13.1

2.4

(%)

Temporary employment during the crisis:

Decrease in total employment

Spain

Swed

en

Lithuan

ia

Poland

Luxembourg

Bulgaria

Denmark

Slove

nia

Finlan

d

EU (1

5)

Romania

Slova

kia

EU (2

7 )Ita

ly

Belgium

Turke

y

German

y

United Kingd

om

Czech Rep

ublic

Austria

Croati

aFra

nceMalt

a

Cypru

s

Netherl

ands

Latvia

Greece

Estonia

Portuga

l

Hungary

Irelan

dFYR

M

-10

-8

-6

-4

-2

0

2

4

6

Change in temporary employment rate, percentage points: 2009 IV Q - 2007 I Q

(3) Empleo

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

0

5000

10000

15000

20000

25000

10881

20356

18473

7689

11987

10317

3192

8537

8156

Total Masculino Femenino

Empleo (miles) en España 1986-2010

UE

< 1 mes; 3.8

1-3 meses; 54.34-6 meses;

19.8

7-12 meses; 16.5

13-18 meses; 0.6 19-24 meses; 1.5 25-36 meses; 1.7 > 36; 1.9

78% < 6 meses

Duration: