Oct. 30 (Bloomberg) -- Unemployment among young people in Spain rose above 40 percent in September as Europe’s former motor of job creation remained mired in recession.

Unemployment among people under the age of 25 climbed to 41.7 percent from a revised 40.9 percent in August, the European Union’s statistics office said today in an e-mailed statement. The rate in the euro region was 20.1 percent and 10.4 percent in Germany, the report said. Overall, Spanish unemployment rose to 19.3 percent.

Spain, suffering from the collapse of its construction industry as well as the global crisis, contracted again in the third quarter even as the euro region probably emerged from recession. Unemployment is eroding support for the Socialist government of Prime Minister Jose Luis Rodriguez Zapatero, who trails the opposition in opinion polls.

“The tragedy for the economy” is that these young people are “the best-educated generation Spain’s ever had,” Gayle Allard, an economics professor at IE business school in Madrid and a labor-market specialist, said in an interview. As overall unemployment continues to climb, further youth job losses will depend on whether they drop out of the labor market, she added.

Worrying Figures

Finance Minister Elena Salgado said on Oct. 22 that unemployment figures may be “more worrying” in the last three months of 2009 as the third quarter is traditionally “somewhat more favorable” for employment.

Spain entered the crisis with the highest rate of temporary employment in the EU, according to Eurostat, making it easier for employers to lay off staff when the recession hit. The proportion of temporary contracts among young people was about twice the rate among the overall population, according to the Organization for Economic Cooperation and Development.

European Central Bank Executive Board member Jose Manuel Gonzalez-Paramo and Bank of Spain Governor Miguel Angel Fernandez Ordonez, among others, have called for changes to Spain’s labor market. Spain’s permanent workers are among the most expensive to fire in Europe, according to the World Bank.

“The image we see in the mirror of the Spanish economy is so terrifying that anyone who denies that the institutions of the labor market in Spain are defective is deceiving themselves,” Gonzalez-Paramo said on June 19.

Polarized Society

Zapatero’s government has repeatedly refused to cut firing costs, underscoring a “polarization” in society, said Allard. “You can’t talk about labor-market reform here without getting a general strike,” she said.

Spain, once a motor of job creation in the euro region, accounts for about half of the rise in unemployment in the past year in the 16 countries that use the single currency, Eurostat data show. Its jobless rate has more than doubled in two years.

The International Monetary Fund forecast this month that Spain’s unemployment rate will exceed 20 percent next year, threatening to further undermine support for the government. Spain’s opposition People’s Party extended its lead over the ruling Socialists to five percentage points, the most since Zapatero was first elected in 2004, according to an Oct. 12 poll in newspaper Publico.

Rising joblessness is also swelling the budget deficit as the government has extended jobless benefits and implemented stimulus measures worth 2.3 percent of gross domestic product. The shortfall will climb to 9.5 percent of GDP this year before narrowing to 8.1 percent in 2010.

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

Last Updated: October 30, 2009 08:13 EDT