Spanish Labor Revamp Cuts Firing Costs, Changes Bargaining Rules

Spain’s government cut firing costs, changed wage-bargaining laws and ruled that jobless people on benefits will have to offer community service in an overhaul of labor rules aimed at tackling the 23 percent unemployment rate.

The decree, which comes into effect immediately, gives priority to wage deals made within companies, rather than at industry or regional level, and makes it cheaper and easier for struggling companies to fire workers, the government said yesterday.

Businesses won’t have to seek government approval for group firings, while unions will no longer be able to cling during a downturn to wage agreements made during a boom. The decree bolsters training and offers tax rebates for small companies that hire from among Spain’s 5.3 million unemployed.

The People’s Party won the national election on Nov. 20 on a pledge to create jobs in a country that’s home to a third of the euro region’s unemployed and where 49 percent of young people are out of work. Prime Minister Mariano Rajoy is risking the ire of unions as he tries to convince voters and investors he can cut the highest jobless rate in the European Union and steer the shrinking economy back to growth.

“Steps have been taken that are historic turning points in Spanish labor relations,” Salvador del Rey, a law professor at Instituto Internacional Cuatrecasas and the ESADE business school in Barcelona, said in a telephone interview. “We have been discussing these issues for years.”

‘Radical’ Elements

Reducing severance pay, scrapping the need for government approval of mass firings and changing the rules on wage- bargaining so that old deals aren’t perpetually rolled over are the most “radical” elements, del Rey said. Until now, old wage deals remained valid until a new accord could be approved, removing the incentive for workers to agree to new conditions during a downturn.

The decree also clarifies the conditions under which struggling companies can fire workers and reduces incentives for workers to challenge dismissals in court. It offers companies more ways to reduce payrolls without firing staff by making it easier to opt out of collective wage deals.

The European Central Bank, the European Commission and the International Monetary Fund have all called for changes to laws that allowed labor costs to rise as much as 5.8 percent in 2009 even as unemployment surged. New rules are the only way to improve productivity as the nation can no longer devalue its currency, Bank of Spain Governor Miguel Angel Fernandez Ordonez said on June 21. Spain’s economy is in a recession and the Bank of Spain expects a contraction of 1.5 percent this year.

‘Very Bold Move’

“This is a very bold move because Rajoy is attacking unemployment from different angles, including labor flexibility, jobless benefits and youth unemployment,” Ludovic Subran, chief economist at credit insurer Euler Hermes SA, said in a telephone interview from Paris. “Rajoy is trying to make sure that negotiating power is decentralized in a way that helps both the employer and workers.”

Severance pay for unfair dismissal of people on new open- ended contracts will be cut to 33 days for every year worked from 45. Workers fired for “objective economic reasons” will get 20 days severance pay, and that condition can now be applied to public-sector workers who don’t have civil-service contracts.

The plan also aims to reduce benefit fraud and stop people claiming jobless pay while working at the same time, the Labor Ministry said. Forcing those receiving subsidies to offer “services” may make it harder for them to work in the underground economy, while allowing town halls and regions to offer services they can’t otherwise afford amid plunging tax revenue. The government didn’t say what tasks unemployed people will be asked to do.

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

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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