Factors influencing Labour Market Performance

Table of Contents:


The main adjustment of labour costs during the initial phase of the Great Recession was supported by public employees, whose wages in 2012 were equal to 2007 (Ortega and Penalosa, 2013). Wages in the private sector only started to exhibit negative growth rates in real terms from 2010 (see Figure 8.10). Since then, real wage growth rates have been lower in Spain with respect to the EU average and with respect to other major European countries (Germany and France, but not the UK).

Growth rate of real wage and salaries in the business sector

Figure 8.10. Growth rate of real wage and salaries in the business sector

According to Ortega and Penalosa (2013), the cumulated reductions in ULC over the last five years would be equivalent to the devaluation of the exchange rate of the peseta between 1992 and 1995. The associated increase in competitiveness has been unable to foster an employment recovery, though.


One of the determinants of labour productivity (and labour market performance) is the quality of labour relations. Given the data available, our measures of the quality of labour relations will combine three different aspects: i) temporary versus permanent contracts, ii) the number of effective hours of work, and iii) the system of collective agreements.

Temporary vs permanent contracts: One of the main criticisms systematically addressed to the Spanish economy concerns the high degree of temporality among employees. As shown in Figure 8.7, panel A, from 1996 to 2006, the share of temporary contracts with respect to total employment was always around 33 per cent.

This particular composition of the Spanish labour force with respect to other European countries is difficult to understand when we consider the strictness of the employment protection—according to OECD (Organisation for Economic Co-operation and Development) indicators—for both temporary and permanent contracts. As shown in Figure 8.11, panel a, temporary workers in Spain are almost as protected as the French ones and much more than German or English temporary workers. According to panel B, workers with permanent contracts in Spain were as protected as French workers and less protected than German workers.

In sum, divergences in employment protection legislation between Spain and other European countries do not seem significant enough to justify the particular composition of the Spanish labour force. The origin of the divergence between Spain and its European neighbours in the contract composition of the employed workforce should rather be searched for in other structural economic differences, such as the size of the gap of the firing costs between temporary and permanent contracts or Spain's economic structure. More precisely, if the Spanish economy has become specialized in activities where employment is linked to a particular season (the summer for most tourism) or to the implementation of a particular project (the construction sector), the large use of temporary contracts will respond not only to the gap between firing costs associated with temporary and permanent workers but also to the particular economic structure of Spain.

Strictness of employment protection for temporary (panel A) and permanent contracts (panel B)

Figure 8.11. Strictness of employment protection for temporary (panel A) and permanent contracts (panel B)

Since 2006, we may observe that the proportion of employed workers with temporary contracts has continuously decreased, while the share of permanent contracts has increased. This evolution responds to a pure composition effect. When the crisis began, firms disproportionately fired individuals with temporary contracts. As a result, the proportion of employed workers with temporary contracts necessarily diminished. By 2012, the share of employed workers with a temporary contract was around 22 per cent (ten percentage points lower than at the beginning of the crisis). We can easily make the link between this evolution of employment composition by type of contract and the downsizing of the construction sector.

The large presence of temporary workers can have major consequences for the productivity of firms.[1] Firms tend to invest less in training for people with temporary contracts, and temporary workers may exert less effort if they expect that the probability of obtaining a permanent contract is low.

In addition, the massive use of temporary contracts may have prevented Spain from fully exploiting youngsters' human capital. Although the share of students with university education was traditionally higher in Spain with respect to other EU27 countries, the gap closed during the expansion. The incentive to follow tertiary studies was low, since the probability of ending up with a temporary job was high and the excess of labour demand made it easy to find a job even without tertiary studies.

In the economy as a whole, the existence of a dual labour market, with permanent workers, employed in more productive and more protected positions, and temporary workers, employed in the less productive and less protected ones, also has consequences in the aggregate level of productivity. The large proportion of temporary workers in the Spanish economy between 1996 and 2006 may have contributed to the low productivity performance of the economy during that period; whereas the reduction in the share of temporary contracts since 2006 could have contributed to the improvement in Spanish productivity since then.

Hours of work: Figure 8.12 shows that the average number of annual hours per employee remained quite stable between 2008 and 2012. Hours of work are not easily an adjustment variable in Spain because firms are, in general, covered by collective agreements at sector level which, among other working conditions, specify hours of work. Only in exceptional cases are firms allowed to propose to workers that they should reduce their hours of work (and thus their wage) in order to avoid job losses. In some cases, firms can adjust the number of hours worked by employing part-time workers. As observed in Figure 8.7, panel B, the share of part-time workers has increased since 2008, particularly men.

Collective agreements system: The collective agreement system is a fundamental mechanism for explaining the working of the Spanish labour market. About 90 per cent of private sector employees see their

Average annual hours worked per employee

Figure 8.12. Average annual hours worked per employee

wage (and, generally, working conditions) set in collective bargaining between trade unions and employers' representatives. This coverage is among the highest in European countries and is clearly superior to that existing in the US or the UK, for example.

The principle of statutory extension establishes that any collective agreement at higher than company level must be applied to all companies and to all workers forming part of the geographical and industry level in question, even though they may not have participated in the bargaining process. Moreover, the ultra-activity of an agreement refers to a principle whereby the agreement remains valid after its expiry, if it has not been renewed.[2] These two principles make it very difficult for a firm to easily adjust to adverse economic conditions.

Overall, the interaction of these principles configures a collective bargaining system characterized by high coverage of employees— almost total coverage, despite low rates of union membership—and the predominance of upper-level agreements (above firm level) where medium-sized firms or socioeconomic groups with less participation in union elections, such as temporary workers, are under-represented.

One of the key features that characterizes the Spanish system of collective agreements is the distribution of the level of negotiation. Collective agreements between trade unions and firms' representatives can be negotiated at the most decentralized level (or firm level) or at a higher level of centralization, such as economic sector level, with different geographical areas of application: municipality, provincial, regional, or national. The majority of collective agreements are signed at the level of the productive sector, with a geographical scope at province level. That is, the Spanish collective agreement system is characterized by an intermediate level of centralization. Working conditions of more than 50 per cent of employees are negotiated at province level. This situation has barely changed since 1990.

The next level, covering the second largest number of workers, is the national one, followed by regional agreement levels. Finally, only 10 per cent or under are traditionally covered by agreements signed at firm level. Only large firms (with an average of 300 employees) engage in collective agreements at firm level, while small businesses are primarily affected by agreements at sector level with a provincial scope.

Collective agreements not only set wage increases and other aspects related to working conditions, but they also fix the minimum wage that all firms covered by the agreement must respect. The final remuneration of workers will differ from this minimum depending on the application of allowances for different issues, but undoubtedly these minimum wage levels are the main factor behind the observed wage structure in Spain. Previous studies, such as Izquierdo, Moral, and Urtasun (2003) and Bentolila, Izquierdo, and Jimeno (2010), have shown that the wage distribution arising when collective agreements are signed at province level is more compressed than the distribution arising when wages are set at firm agreement level (or even at national level).

Several labour reforms have been implemented since the beginning of the crisis in order to improve the ability of the firm to react. The nature of these reforms differed between 2009 and 2010. In February 2009, the government approved a reduction in social charges paid by firms facing economic difficulties. The firm had, in exchange, to maintain the number of employees at least for one year after the economic difficulties had been overcome. The generosity of conditions giving access to unemployment benefit was improved. Charges associated with parttime contracts were also reduced. The generosity of the unemployment benefit system was again increased by law in October 2009.

The labour market reform of 2010 included some major changes:

• Opting out from wage conditions established by the collective agreement signed at a level higher than the firm is facilitated when the firm is facing economic difficulties.

  • • Reduction in the number of working hours owing to economic difficulties. Workers suffering a reduction in the number of worked hours are compensated by the unemployment benefit system for wage losses.
  • • Firing costs associated with temporary contracts are increased. Moreover, after three years in the same firm temporary workers must be transformed into permanent ones.
  • • Firing costs associated with permanent contracts are reduced. It is also made easier for firms facing economic difficulties to fire workers.

From 2010, we observe wage moderation and a reduction in ULCs. Moreover, wage dispersion across firms is increased, which should have favoured a better reallocation of workers across firms. Whether this is a direct consequence of the reform or results from the expiration of a previously signed collective agreement (that had been approved by the beginning of the crisis, when there was uncertainty about the duration of the crisis) is difficult to determine. That is, even without the reform we may have observed a moderation in wages, since the structure of collective agreements does not seem to have been essentially modified following the reform.

In spite of the reduction in ULCs and firing costs, no recovery has been observed in employment creation (particularly in permanent job creation). Moreover, the reduction in the temporality rate is due to the increase in temporal job destruction. Only the share of part-time jobs seems to follow an upward trend, suggesting that firms are using this type of contract to adjust the number of worked hours.

In 2011 an additional reform of the collective system was approved. The objectives of this reform were threefold: a) to promote better management of collective bargaining closer to the firm, and a sector negotiation more adapted to the particular economic situation of the activity sector; b) to introduce higher levels of dynamism and agility both in the negotiation processes of collective agreements and in their content; and c) to adapt the system of collective bargaining to what qualifies as 'new or renewed business realities', including new rules of legitimacy in negotiation of agreements and in promoting internal flexibility.

Another labour market reform was approved in March 2012, but it is still too soon to evaluate its effect. This reform provided for temporal job agencies the same status as placement agencies. Firing costs were reduced, training on the job programmes were promoted, firms were allowed to split at least 10 per cent of the daily working hours irregularly throughout the year, it was possible to reduce the number of worked hours in case of economic difficulties, the ultra-activity principle was reduced to one year, and additional causes justifying the opting out of a firm from a collective agreement signed at a level higher than the firm were introduced. THE DEMOGRAPHIC COMPOSITION The demographic composition of a country is likely to influence the way the economy and the labour market perform during a crisis. In addition, the demographic composition itself is likely to be transformed during a long crisis period, since we expect births to fall, mortality to increase, and individuals to leave the country.

As shown in Figure 8.13, panel A, during the years preceding the crisis (2002-8), Spain was one of the main receivers of immigrants in the EU (even above Germany). Since the beginning of the crisis, however, immigrant inflows have decreased, together with an increasing number of natives leaving Spain.

These flows may explain the increasing importance of the age group between thirty and forty-nine years of age before the crisis and its decreasing importance since 2010 (see Figure 8.13, panel B). The share of this working age group rose by more than seven percentage points between 1991 and 2008. Spain entered the crisis with a large mass of working age population (the proportion of individuals between thirty and forty-nine was essentially equal to the proportion of individuals aged under thirty). This may be suggestive of the progressive specialization of the Spanish economy in labour-intensive industries during the years preceding the crisis (the construction sector represented 17 per cent of total employment by 2007). The sharp reduction in the thirty to forty-nine age group during the crisis is likely to have been the result of changes in the structural composition of the Spanish economy.

  • [1] See, for example, Aguirragabiria and Alonso-Borrego (2009), Alonso-Borrego (2010), andDolado, Ortigueira, and Stucchi. (2011).
  • [2] See Izquierdo, Moral, and Urtasun (2003) for details.
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