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Spain Firing Aid Reversal Risks Jobs, OECD’s Bassanini Says

Spain’s labor overhaul risks running out of steam after the government scrapped aid that encouraged small companies to hire permanent staff, according to an Organization for Economic Cooperation and Development economist.

The 2012 overhaul, which made it cheaper to fire workers and easier to reduce wages, extended subsidies for small companies cutting staff. The measure, which brought the cost of firing permanent workers closer to that of temporary staff, was scrapped on Jan. 1 this year.

“One of the most effective provisions of the labor reform has been taken out,” Andrea Bassanini, a senior OECD economist who led a government-commissioned report into the labor overhaul last year, said in a phone interview yesterday.

Prime Minister Mariano Rajoy changed labor rules less than two months after coming to power in 2011 and credits the measures with attracting foreign investment and spurring the recovery from two recessions. The unemployment rate has eased from its peak of 27 percent, even as it remains the second-highest in the European Union. (UMRTEMU)

Jobless claims rose by 113,097 this month from December to 4.81 million, the smallest increase for January since 2007, the Labor Ministry said today. In seasonally adjusted terms, the number fell by 3,907, the Ministry said. Of the 1.26 million contracts signed this month, 92.2 percent were temporary, compared with a portion of 91 percent in January 2013.

Temporary Contracts

In the report the OECD presented in December at the government’s request, the Paris-based group said the jobless rate would be higher had Rajoy not changed labor laws in 2012. The government has taken additional steps since then to encourage part-time work and improve active labor market policies, Bassanini said.

Still, the OECD has called for further measures to reduce unemployment and to bridge the gap between those on open-ended and temporary contracts. The government is shying away from “painful” measures such as easing rules on collective dismissals and reducing severance pay, Bassanini said.

“It’s dangerous to remove something that’s working, especially if you’re not planning to do much more,” he said. “The number of additional permanent jobs created since the reform could fall to 18,000 or 16,000 a month from 25,000.”

‘Harmonize Legislation’

The government, fighting to rein in its budget deficit, says it’s cutting the subsidy as it doesn’t want to use public money to fund firings by solvent companies. The facility known as Fogasa that pays the aid was designed to compensate workers affected by bankruptcy proceedings.

Deputy Labor Minister Engracia Hidalgo today said she has no knowledge of the methodology used by Bassanini and denied to comment on his numbers. “The government has considered that the time has come to harmonize legislation in this respect with that of neighboring countries after the worst period of the recession has past,” she told reporters in Madrid.

Small companies cutting permanent staff will have to offer 20 days of severance pay for every year worked compared with 12 days with the subsidy. That compares with 11 days compensation for temporary contracts.

The move undermines the government’s efforts to encourage companies to hire workers on an open-ended rather than temporary basis, Bassanini said. Almost a quarter of Spanish workers are on temporary contracts, according to data from the National Statistics Institute.

“It reduces the likelihood the government will succeed in its goals of expanding permanent employment,” Bassanini said.

To contact the reporter on this story: Angeline Benoit in Madrid at abenoit4@bloomberg.net

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

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