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A policy initiative by politikon.es

A dual and inefficient labor market constitutes one of Spain's most pressing problems. We believe that the Single Labor Contract is the kind of measure suitable to address it.
Here we explain why.

What is the Single Labor Contract?

1. A single type of labor contract for all the workers. All contracts will be open-term by default, allowing for all the workers to benefit from legal protection -which at present is not properly granted to temporary workers in Spain.

2. A severance pay growing in time to reach the average levels of the present labor market. Average worker protection will thus tend to be same as today, without further precarization of the labor force: but duality will be mitigated

3. An Austrian-style unemployment benefit system: each worker will be the holder of an unemployment account to which the employer will periodically contribute. When unemployed, the worker will be able to use the content of the account. Otherwise, the amount will accumulate and add to the worker’s retirement pension.

4. The Single Labor Contract does not amount to cheaper dismissal of workers. It may entail an average level of protection equal or even higher than the statu quo. Severance costs are a wholly different issue.

This is just an outline. We explain below the problems of the spanish labor market.

The problem

Traditionally, the Spanish labor market has been strongly regulated. There is a core of over-protected labor contracts to which a whole plethora of atypical contracts has been incorporated over time, notably temporary ones. Recurring crises after the crumbling of the corporatist economic model promoted by the Francoist regime have produced incomplete reforms, each one adding now atypical contracts to the list without adressing the real problems of the Spanish labor market. This has been so in part due to the fact that temporary workers are under-represented in Spain’s major unions, whereas open-term, “protected” workers constitute the basis of their membership.

Nowadays, what we see in Spain is a dual structure of open-term, over-protected contracts, and fixed-term, under-protected ones. It is a labor market structure unparalalleded in Europe, which divide workers in “first class” and “second class” and has a vast array of undesirable consequences over the economy. In particular, vulnerable groups such as women, unemployed over 45, inmigrants and young people are affected.

Whereas a “protected” labor market sacrifices productivity and flexibility in favour of reduced volatility, a dual market generates similar levels of volatility (pdf) as a “deregulated” one, but captures none of its benefits. High rates of temporality spell inefficient, high levels of rotation between employment and unemployment. Thus, a dual market represents the worst of both worlds.

Finally, the gap in protection between the two classes of workers damages productivity: companies prefer to sack temporary workers instead of protected ones regardless of their relative productivity. Moreover, fixed-term workers tend to invest less in their own training; and, being a minority (20-30% of the total work force), unions are less responsive to their demands and interests.

The last labor reform passed by the Spanish conservative Government does not address the duality problem in a clear and straightforward enough manner. Instead, a really thorough and ambitious reform is needed.

Why a Single Contract?

1. To put an end to duality between open-term and fixed-term labor contracts.

2. To make human resource management less contingent upon the relative legal protection accorded to each worker, and to allow employers to make decisions based on productivity-related criteria.

3. To let the Government decide the level of protection accorded to each one, and to make the costs of economic fluctuations rest on the whole of society.

4. To cut red tape and reduce costs of human resource management.

Who wins with a Single Contract?

Benefits to...

1. Vulnerable groups.

2. Workers with fixed-term contracts.

3. Everyone: our economy will be more productive, which will reflect positively upon salaries and fiscal income.

4. Everyone: unemployment rates fluctiations will be reduced.

5. It will help the Spanish economy make the transition towards a model less contingent upon low human capital, low added-value sectors.

And who are the losers?

“First class”, open-term workers with enhanced protection will lose part of their present privileges. But they will also benefit from the economic and social advantages brought by the end of the dual market.

Temporary recruitment agencies will also suffer from a diminished market for their services, as will do other agencies and intermediaries due to the cutting of red tape.

By means of conclusion...

Social sciences do not provide us with absolute certainties or easy solutions. No reform of the labor market will make employment grow in Spain in the short term, at least not before we have left recession behind. However, a measure like the Single Labor Contract, which may offer the same levels of worker protection as the current system while mitigating the dual structure, will help lay the basis for a healthy economy and growing employment in the medium term. Furthermore, it will also contribute to a more just and cohesive society, reducing discrimination of vulnerable groups and enhancing equality of opportunities.