Spain Central Bank Sees Minimum-Wage Cut as Recovery Tool

May 31 (Bloomberg) -- Spain’s central bank said the country’s economy needs more labor flexibility in order to recover, even though it has regained about 65 percent of the competitiveness it lost during the credit bubble.

“After five straight years of job losses, unemployment has reached unacceptable rates and the risk of chronic long-term unemployment is very worrying,” the Madrid-based Bank of Spain said in its annual report today. “The gravity of the labor market’s situation makes it advisable to maintain and deepen the reform momentum through the adoption of additional measures that promote the creation of jobs in the short term and wage flexibility.”

Spanish Prime Minister Mariano Rajoy is counting on exports to haul the euro-area fourth largest economy out of a sixth year of slump as the deepest budget cuts in the Iberian nation’s democratic history have undermined domestic demand amid a 27 percent unemployment rate. Exports reached a record high last year after the government changed rules to help companies cut labor costs.

“Gains in competitiveness, supported by moderation in unit labor costs, as well as Spanish companies’ greater ability to access international markets, have turned out to be the most solid support elements for the economy in this new phase of recession,” the Bank of Spain said.

Hiring Obstacle

The central bank is proposing a temporary suspension of collective bargaining agreements or mechanisms to prevent the minimum wage from being an obstacle to the hiring of people with the greatest difficulty in finding a job. Steps should also be taken to ensure wages aren’t linked back to inflation when growth returns, according to the report.

Unit labor costs in the Spanish private sector have fallen by 7 percentage points since they peaked in 2009, the report showed. That’s wiped out two-thirds of the loss of competitiveness against the rest of the euro region since monetary union began. Taking public-sector pay cuts into account, all the losses have been made up, according to the report.

The government should also take additional budget measures to secure a further boost in the nation’s credibility, Governor Luis Maria Linde said in a speech published on the Bank of Spain’s website.

The report recommended bringing forward an increase in the legal retirement age and extending the career period taken into account to calculate pensions.

The Bank of Spain said the government still faces a “very significant” adjustment in order to embark on a lasting reduction of public debt. “The strength and sustainability of the recovery will depend on the pace and extent of adjustments,” it said.

To contact the reporters on this story: Angeline Benoit in Madrid at abenoit4@bloomberg.net; Patricia Laya in Madrid at playa2@bloomberg.net

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