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Spain is wanting to copy Germany’s layout for the labour market

Spain wants to copy Germany’s setup, but success is not guaranteed.

The Spanish labour market destroys much more employment than the rest of European countries when the economy deteriorates (although it creates more jobs when the economy grows), an anomaly that weighs down long-term growth and productivity. Given this deficiency, Nadia Calviño, vice president of Economic Affairs, has assured that she wants to end these trends and seek an adjustment by hours rather than workers, a mechanism similar to the one that was launched during this crisis with the ‘Ertes’, but that goes “beyond” the temporary nature of this measure, through internal adjustments in the companies, said the minister.

This type of adjustment would give greater stability to the labour market, but its isolated application (although tempting due to the results achieved in countries like Germany) in an economy like the Spanish one would not be easy. Differences in the composition of both productive structures and different labour markets can impede a result as successful as the German one. In countries like Spain, where the unemployment rate in the last 20 years seems like a roller coaster, it is normal to look enviously at the ‘supernatural’ stability of unemployment in countries like Germany.

In Germany, between 2007 and 2013, the hours worked per employee fell by 4.3 per cent, while the unemployment rate fell from 8.7 per cent to 5.2 per cent (yes, unemployment fell during the crisis), according to the OECD database. In Spain, the hours worked per employee did not move slightly, what’s more, they increased the first years of the crisis while destroying millions of jobs, and the unemployment rate went from 8.2 per cent to 26.1 per cent, an increase of almost 18 percentage points. At first glance, hourly adjustments seem more desirable than quantities or workers.

These adjustments become relevant in economic crises through short-term employment systems (known in Spain as Ertes), which in one way or another has been used in Germany since 1910, according to a document that analyzes the behaviour of the German labour market during the Great Recession. These schemes fit almost perfectly into the German production system, not only in times of crisis but also during expansionary cycles, where internal flexibility in companies (always under the legal framework of collective bargaining) allows adjustments (of hours and wages) that maintain the competitiveness of the economy and the strength of the labour market at almost all times.

Applying this system to Spain can have positive aspects (especially compared to what there is currently), but perhaps the result would not be as good as in Germany. Spain has a different production system, in which sectors such as tourism, hospitality or construction have greater weight, and a labour market with excessive prominence of temporality, which can reduce the efficiency of this internal flexibility in much of the business tissue.

One wonders if this setup would have been as efficient (as it was in Germany) in Spain during the 2008 crisis, after the bursting of the housing bubble that forced a massive reallocation of human capital (workers) in the labour market, which was never completed (many construction workers have not returned to work on a regular basis). If the demand for housing did not return to pre-2007-2008 levels (as it did not), a reduction in hours for construction workers would not have prevented the dismissal of the vast majority, or the closure of companies.

In sectors with high temporality in employment (such as tourism) and which are very sensitive to the economic cycle, this measure could simply prolong the agony and slow down the reallocation of resources towards the upward sectors. Now, with the COVID-19 crisis, there is a risk that something similar will happen with tourism, so hourly adjustments instead of workers may not give the expected result.

One of the problems of the Spanish labour market is the abusive use of temporary contracts, which is precisely where all the destruction of employment is centred in the first months and years of the crises. In 2006 there were 5.2 million temporary contract workers in Spain, while in 2013 the number had been reduced to 3.2 million due to the devastating effects of the Great Recession and the European sovereign debt crisis. As long as this duality and inequality exist in the labour market (with temporary workers having fewer rights), it will be difficult to end adjustments for quantities or workers. Reducing the variety of contracts and the convergence of their rights could alleviate the situation.

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