The reform received new impetus from an EU agreement last week on measures to boost employment, competitiveness and budget discipline among euro-zone countries. Germany had demanded the measures—which it sees as a way to address some of the root causes of the euro zone’s sovereign-debt crisis—in exchange for its support to expand the size and scope of the region’s bailout facility.
Spanish Prime Minister José Luis Rodriguez Zapatero, who presides over the euro zone’s largest troubled economy, has promised to overhaul a wage bargaining system that makes it easier to lay off workers than adjust their wages in an economic downturn. The government has given unions and business leaders until Friday to agree on changes, though it has indicated it could give them a bit more time before it legislates without them. The overhaul is the second part of a reform of labor laws that last year lowered Spain’s high dismissal costs, which economists viewed as a powerful disincentive for hiring.
“We have done a labor-market reform, which was positive, but insufficient,” said Salvador del Rey, partner at law firm Cuatrecasas, Goncalves Pereira. “If there are no changes, the reform will not be too useful.”
At more than 20% and rising, Spain’s unemployment rate is far and away the highest in the developed world. In addition, economists say, the country’s rigid wage bargaining system has contributed to one of Europe’s highest labor-costs growth rates, undermining the competitiveness of Spanish industry.
Collective wage bargaining agreements, many of them indexed to inflation, locked Spanish companies into healthy salary increases even during the depths of the economic crisis. In 2009, Spanish gross domestic product contracted by 3.7% and the economy shed 1.4 million jobs. But wages negotiated by collective wage bargaining agreements— which cover about half of the work force and influence the other half— rose by 2.3%.
“The lack of sensitivity to labor-market conditions is one of the reasons why in Spain the adjustment in the use of labor during the recession has occurred mainly via job cuts,” said Citigroup economist Giadi Giani.
To address this problem, unions and business leaders are discussing ways to limit the automatic renewal of existing wage deals if the two parties fail to reach agreement on a new one, thus avoiding situations in which wages are governed by agreements that originated in a period of very different economic circumstances. One solution could be to call in third-party arbitration to help hammer out a new deal when talks break down.
Similarly, talks are exploring new ways to adapt wage deals to changes in inflation, economic growth or a company’s individual prospects. Last week’s EU agreement calls on countries to “review” the practice of indexing salaries to inflation, which critics say boost inflationary pressures and undermine the competitiveness of economies where they are used. Spanish government officials have said Spain’s reform won’t likely eliminate the inflation indexation but will look for ways to improve links between salaries and company profitability. One way could be greater use of variable compensation schemes.
Finally, the talks will explore ways of better adapting wage deals to the needs of individual companies, by, for example, making it easier for them to opt out of industry- or province-level agreements. “We need to adapt our regulations to the needs of those who best know [market] conditions and are best able to respond to them,” said Pedro Ramirez, head of legal and labor issues for Spanish car manufacturer Seat SA, a unit of Germany’s Volkswagen AG.
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