Fundación Ideas para el progreso

Making dismissal less costly and reducing salaries would cause the reduction in tax collection and an increase of the expenditure in unemployment benefits which will worsen the public deficit  and will cause an adjustment of about 38 billion, that is 3,500 more than projected by the Government.

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Caldera warns that the reductions in investments for R&D will hobble the productive model change and prevent an increase in the mid and long term of the productivity of the Spanish economy

The labour reform urgently approved by the Government last February, by Decree Law and without any type of consensus with social agents, will cause the relapse of the activity and the employment, destroying between 738,000 and 807,000 jobs only in 2012, which implies the loss of 103,000 to 172,000 extra jobs apart form the official forecast of 635,000 jobs.

This is the main conclusion drawn in the policy analysis paper “The labor reform and the crisis: impacts on the Spanish economy” drafted by the Economics, Sustainability and Welfare of the IDEAS Foundation and which has been presented by the Vice President of the PSOE’s think tank, Jesús Caldera. 

The document contradicts the mains reason given by Mariano Rajoy’s cabinet to justify the labor reform: the need to make the market flexible dismissal less costly in order to encourage companies to recruit more and the convenience to adjust the salaries downwards in order to improve the competiveness of the Spanish economy. 

According to “the current situation characterized by a relapse of the recovery pace in the whole EU and with Spain on the verge of a recession, this radical change of the rules of the labor market will curb further the economic activity.” 

Therefore, based on research carried out by the IDEAS, the macroeconomic impact of the labor reform “will be tragic in the current situation” because “the cut in wages and the more than foreseeable increase of the unemployment rate will decrease more the consumption, which will in turn have an immediate impact on the GDP and public deficit, because there will be a decrease of tax collection, especially VAT and Personal income Taxes and an increase in the unemployment benefits.”  

On the likely evolution of the real wages, the document presents two scenarios of its impact on the GDP and the public deficit. Thus, with only a 2% cut in wages, the Spanish economy will also shrink by 2% (the Government’s forecast is 1.7%) and 738,000 jobs will be lost, representing 103,000 more than the number announced by the Ministry of Economy and Competitiveness, Luis De Guindos. The public deficit will move away from the objective of 5.3% of the GDP required by the EU to the Government and will escalate to 5.5%. 

But, as Caldera explained, with only a cut in real wages of 2.5% “Spain will head towards a 2.2% contraction of the GDP, that is five percentage points above the figure forecast by the Government and the destruction of 807,000 jobs, 172,000 more than the Government’s official forecast.” According to Caldera, “in this scenario, if emigration out of Spain in search of a job is not significant, unemployment will go beyond the threshold of 6 million people by the end of 2012 and public deficit will not be less than 5.6% of the GDP and will prompt an adjustment of 37,901 billion Euros, representing 3,422 extra billion the adjustment projected by the Government to reach the objective to 5.3% required by the EU.”  

And, if the effects on the macro economy are going to be very negative, the paper drafted by the IDEAS explains that, from the microeconomic viewpoint the labor reform will cause serious weaknesses to the labor market. Therefore, according to Caldera, “los cuts the Government is planning to apply to the investments in R&D and subsidies to key sectors, together with a scenario of flexible dismissals will prevent the implementation of the production model change Spain needs to improve its productivity in the mid and long term.”  

Besides, in Caldera’s opinion, the change in labor relations “which establishes a clear imbalance in favor of corporations, will generate uncertainty and decrease the incentives for workers to devote time and effort to acquire specific training for the company and the position they hold.” At the same time, we are missing an opportunity to improve the active employment policies and, “what is more important, the labor reform entails a regression in the progress made in terms of family and working life balance” which, in Caldera’s opinion, “can have important impacts on the rate of women’s activity, one of the factors that contributed positively to the Spanish economic growth in the last expansive cycle.”