Spain cuts severance costs in new labour reform

Reform also provides incentives for hiring young workers
||Last Updated: 02/14/2012

MADRID (Reuters) — Spain has cut severance pay for workers and watered down collective bargaining rights, giving more power to employers as it attempts to kick start its moribund jobs market and slash Europe's highest unemployment rate.

The centre-right government said it would abolish contracts allowing severance packages of 45 days' pay for every year worked to employees deemed to have been unfairly dismissed — a common finding by Spanish employment tribunals. Instead, employers firing staff will have to offer just 33 days' pay per year, or 20 days if the business is facing losses over a sustained period.

It capped severance pay at the equivalent of two years' wages, almost halving the limit from a previous three-and-a-half years and said it would allow employers to ignore wage deals negotiated across sectors in times of crisis. Such collective bargaining agreements are often linked to inflation.

Labour reform is seen as key to Spain's efforts to persuade markets it is able to slash its budget deficit and boost the competitiveness of its fragile economy. Unemployment is running at 23 per cent, and one-half of young workers are without a job.

The measures, taken unilaterally by the government after a pact between unions and business leaders failed to unlock some key issues, are likely to trigger a general strike.

Labour reform is seen as key to Spain's efforts to persuade markets it is able to slash its budget deficit and boost the competitiveness of its the measures. "It will mark a before-and-after in labour legislation in our country. The objective is to lay the foundations to grow again and create work."

The government said it would try to end a two-tier labour market that favours an older generation of workers with robust benefits who are very expensive to let go, but gives few rights to generally younger workers on temporary contracts.

Analysts said the reform may not have gone far enough, but largely welcomed the steps taken.

"This is not automatically going to create work, but it is going to generate confidence. The announcement of the 33 days is still high by European standards. The ideal would have been to make it 20 days," said lawyer Eduardo Ortega Figueiral.

The government, swept to power in November on a wave of voter anger about the economy, also said it would encourage the use of part-time contracts. The reform will also provide incentives for firms to hire younger workers.

Analysts doubt unemployment will fall significantly this year or next, however, meaning the costs of mass joblessness are likely to continue dragging on the economy.

Yet Raj Badiani, economist at consultancy IHS Global Insight, said that if the new laws had been more radical then unemployment levels could have crept even higher. He said the reductions in severance pay was a prudent move given the accelerating job losses.

"It would have been a big gamble to have cut this more aggressively given firms are desperate to cut labour costs given they need to price very competitively to prop up the inflow of new business," he said, adding he hoped to see it brought down to 20 days (per year worked) when the labour market had stabilized in a few years time.

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