Spain: Labour market reform causes controversy

The government has forced through, in the form of a Decree, the third labour market reform in five years. These latest measures concentrate on reducing the costs of employment and tightening the conditions surrounding eligibility for unemployment benefits. However, trade unions have reacted with hostility, believing that this is an unacceptable infringement of workers' rights, and have threatened a general strike on 20 June.

Background - previous labour market reforms

Labour market reform has been a key element of government policy over the past five years. Although the Spanish labour market has improved its performance in recent years - unemployment has fallen from 19.9% at the end of 1997 to the current rate of 12.9% - the jobless total remains significantly above the EU average of 7.6%. Further, the labour market suffers from a number of specific problems such as a high proportion of fixed-term contracts. Since 1997, there have been two labour market reforms, the first of which involved the social partners fully in terms of shaping the content.

The first labour market reform, which took place in 1997, concentrated on reducing the cost of hiring new workers. Its centrepiece was the introduction of new, open-ended contracts of employment, which were subject to payments for unfair dismissal that were lower than the statutory rate of 45 days' pay per year of service, up to a ceiling of 42 months' pay. It was thought that this provision was more or less single-handedly responsible for employers preferring to hire workers on fixed-term contracts, rather than open-ended contracts. This way, they were able to avoid any obligation to pay unfair dismissal compensation, should the situation arise.

The second labour market reform, which took place in 2001, concentrated on encouraging open-ended employment by widening the categories of worker that could be hired on the open-ended contracts introduced in the 1997 reform. The 2001 reform also sought to make employment more flexible by measures such as the abolition of the definition of part-time work and measures allowing the social partners to negotiate on tailoring fixed-term and part-time contracts to individual situations.

Trade unions strongly criticised the 2001 labour market reform, claiming that the government had taken on board the views of the employers to a greater extent than those of the trade unions. In particular, the government was criticised for publishing its reform package in the form of a Decree rather than waiting for social partner consensus, as had been the case in 1997.

The 2002 reform proposals

The government announced in March 2002 (Spain: Next labour market reform) that it was working on a third labour market reform proposal. Conscious of the fact that in Spain unemployment remains well above the EU average, it stated that, this time, it would concentrate on reducing the cost of employment, modifying the social protection system in order to encourage unemployed people to re-enter the labour market, increasing productivity and improving regional and occupational mobility.

Accordingly, its proposals were issued on 17 April (Spain: Government issues labour market reform plans) in a document entitled Measures to reform unemployment protection and the basic employment Act. The main rationale behind the proposals was the belief that the current system does not do enough to encourage unemployed people to seek work. They concentrate on three main areas:

  • widening the criteria under which unemployed people may have benefits cut if they do not accept job offers;

  • eliminating the payment of salary during cases of unfair dismissal; and

  • reforming the current social security regime operating in the case of agricultural labourers in Andalucia and Extremadura.

    For details of the reforms, see the box below.

    Trade union opposition

    However, trade unions have strongly opposed the government's proposals. The customary 1 May demonstrations attracted greater numbers than in previous years, and one of the focus points was protest against the plans. Unions believe that the measures will severely disadvantage unemployed people. Furthermore, the proposal to cut salary payment during unfair dismissal cases is described by the unions as "the most radical measure", which, they believe, will make it cheaper and easier for companies to dismiss workers. They also argue that employees will be intimidated and discouraged from bringing claims of unfair dismissal if their salary is not automatically paid.

    The CCOO and UGT trade union confederations sent a formal letter to prime minister José María Aznar on 8 May, asking him to withdraw his government's proposals. They pointed out that, as things stand, around 43% of unemployed workers are not covered by the benefit system and, as the system is some €3,000 million in surplus, the emphasis should be on extending coverage, not reducing it. They stated further that it is "insulting" to suggest that unemployed people would rather draw benefits than work.

    In answer, Prime Minister Aznar adopted a conciliatory tone, asking the unions to come to the negotiating table to "explore points of common understanding". However, stressing that it was vital that the unemployment insurance system be modified, he maintained that the benefit system should not be a subsidy but rather play an active part in getting people back into the labour market. He also stated that it was imperative to combat what he sees as a high level of benefit fraud.

    The trade unions disagree, believing that the government's view of benefit fraud is disproportionate. They continued to oppose the reforms and so the government finalised the measures with the Council of Ministers on 24 May in the form of a Decree (5/2002), which came into force on 27 May. The trade unions are incensed, and have called the first general strike for eight years on 20 June.

    Employers have generally welcomed the proposals. The central employers' organisation CEOE has stated its belief that the reforms are necessary and that further discussions are needed on the financial structure of the unemployment benefit system. However, the CEOE has warned the government that the deterioration of relations between the government and the unions is not good for the economy.


    Main elements of the government's labour market reform

    Unemployment benefit reform

    The definition of what is deemed to be an acceptable offer of employment to an unemployed worker is widened. It can be either an open-ended or a temporary contract, up to 30km, or two hours' travel (there and back), from the person's place of residence, entailing travel costs of up to 20% of salary. The offer can be for a job in the same or a different profession as that of the unemployed worker, as long as the worker is deemed physically and, from a skills point of view, able to adapt. The salary of the job on offer may also be lower than the unemployed worker's previous salary.

    If the unemployed worker refuses a first offer, unemployment benefit will be reduced for three months. If a second offer is refused, benefit will be reduced for six months. Benefit will be stopped entirely after refusal of a third offer.

    There is provision for workers over the age of 52 to continue to receive part of their benefits if they find a job.

    Finally, the special benefit RAI, payable to people who are difficult to place in the labour market, is extended to a greater number of people, including over-45s who have been out of work for a month.

    Abolition of pay during unfair dismissal cases

    Currently, employers are obliged to pay a maximum of 60 days' pay to employees while they are contesting their dismissal as unfair. If the case continues for longer than 60 days (the average length of unfair dismissal cases is four months), the state pays the employee for the remainder. The government abolishes the obligation on both the employer and the state to pay the employee during this time. This has been a long-standing demand from employers. It is estimated that it will save a total of €480,000 million a year for the state and employers. In compensation, employees will be able to claim unemployment benefit from the first day of leaving the employer if the employee has made social insurance contributions for 12 months. If the employer subsequently takes back the employee, it must pay back to the state authorities the cost of the unemployment benefit received by the employee. This represents a considerable saving for the government - it is estimated that over the past five years there have been between 100,000 and 200,000 cases of unfair dismissal.

    The PER agricultural benefit system

    The special PER benefit system, which operates in the agricultural sector in Andalucia and Extremadura, was originally set up to guard against unemployment. However, the government believes that it has not been particularly successful and that circumstances have now changed. Accordingly, it has announced that the system will not admit new workers nor will it cover day workers who have not used the system for the past three years. This means that the system will gradually be eliminated. The system currently has 230,000 beneficiaries who are entitled to benefit for six months, totalling €4,724 for over-60s and €2,363 for those under the age of 52.

    A new contributory system for the whole of Spain will be put in place, giving a right to three months' benefit after one year of contributions.