Spain: A first assessment of the 2012 labour market reform
The impacts of the 2012 labour market reform have been mixed and not necessarily clear cut. Employers’ representatives have generally welcomed the changes, but suggested flexibility should be further encouraged. Trade unions claim the quality of employment has deteriorated and labour precariousness increased, accompanied by a growing imbalance in income distribution.
The 2012 labour market reform was adopted by the Spanish government in February 2012 as Royal Decree-Law 3/2012 (in Spanish). This unilateral action by the state came after social partners and the government had failed to reach agreement on the text. Law 3/2012 (in Spanish) on urgent measures to reform the labour market was approved by the Spanish parliament in July 2012. The reform included a broad set of changes to labour market institutions and affected key elements such as the degree of centralisation of the collective bargaining system and dismissal costs and procedures.
This article examines the impact of the 2012 labour reform, drawing on a number of sources but in particular from papers in the May–June 2015 issue of Cuadernos de Información Económica (Journal of Economic Information) published by the Spanish Savings Banks Foundation (FUNCAS). The theme of this issue, which is referred to below as the 'FUNCAS report', was a first evaluation of the 2012 labour reform. Another important source has been the evaluation of the impact of the labour reform (3.61 MB PDF) published in September 2013 by the Ministry of Employment and Social Security.
Before the 2012 labour reform
From a contextual perspective, some authors had argued that the Spanish labour market was inflexible and rigid (in Spanish, 216.5 KB PDF), as well as being insensitive to companies’ productivity and competitiveness. Moreover, the majority of collective agreements were signed at industry or provincial level, so in many cases they were not aligned with company-level circumstances. For instance, salary increases agreed in collective agreements were often far from salary restraint, showing a general trend towards progressive salary increases without considering the demands of the production system.
Writing in August 2013, the then Secretary-General of the Spanish Confederation of Employers’ Organisations (CEOE), José María Lacasa, pointed out that the Spanish labour market was characterised by a high structural unemployment rate (in Spanish, 385 KB PDF) regardless of the economic cycle and particularly among young people and women. He also highlighted duality and high rates of temporariness or temporary employment, noting the important differences in working conditions between fixed-term and open-ended contracts (for example, workers with open-ended contracts had a high level of protection against dismissal). A lack of flexibility was again mentioned, particularly affecting collective bargaining and hiring models (that is, employment contracts), together with sector-based and poorly coordinated social dialogue.
According to Law 3/2012, the objective of the labour reform was to develop a framework which would allow efficient management of labour relations, employment creation and employment stability. In addition, the intention of Law 3/2012 was to promote flexicurity by applying measures aimed at stimulating internal and external flexibility, and to achieve a better balance in the use of open-ended and temporary contracts.
As concluded by the research described in the FUNCAS report and an analysis by experts from the Bank of Spain (in Spanish, 326 KB PDF), the most significant changes introduced by the 2012 labour market reform can be summarised as follows.
- Collective bargaining. To increase the degree of decentralisation, the reform stipulated that company-level agreements should prevail in a large number of areas (basic wage, salary supplements, overtime remuneration and the distribution of working hours) as the often contradictory clauses in industry-level agreements were ineffective.
- Company flexibility. To increase companies’ internal flexibility, the reform established more possibilities for unilateral changes to working conditions that exceeded the minimum levels established in a collective agreement. In other words, the reform facilitates the modification of working conditions, promoting functional and geographical mobility, as well as other unilateral changes (as decided by the employer), provided that these respect the minimum conditions of the agreement in force. Moreover, it introduces the possibility of temporarily modifying salary levels where there are proven economic, technical, organisational or production reasons for doing this.
- Opting out. The reform introduced the possibility to opt out of the terms and conditions contained in a collective agreement in force at sectoral, regional or national level. However, opting out is only allowed if the employer and workers’ representatives agree to it.
- Renegotiation of agreements. To encourage faster renegotiation of agreements that have expired, the reform set a maximum limit of one year for an agreement to be valid after its termination. The labour reform therefore put a limit on the so-called ‘ultra-activity’ (ultra-actividad in Spanish) beyond the originally stipulated limit.
- Dismissal costs and procedures. The reform redefined the economic grounds for dismissal, establishing objective circumstances that could justify the termination of a contract; for example, termination is justified if the company reports losses or suffers three consecutive quarters of declines in sales or revenues. The amount of compensation payable in the event of unjustified dismissal was reduced to 33 days per year of service, subject to a maximum of 24 months’ pay; previously this was 45 days and a maximum of 42 months’ pay. In cases of collective dismissal, the need for administrative authorisation was eliminated.
- Entrepreneurs' contracts. The reform introduced a new type of permanent contract, the so-called 'open-ended contract for the support of entrepreneurs' or 'entrepreneurs’ contract', which can be applied by companies with fewer than 50 employees. It has a longer probationary period of one year (that is, during the first whole year, employers do not have to compensate dismissal) and offers several tax incentives.
- Training and apprenticeship contracts. The reform modified and promoted the ‘trainee and apprenticeship contract’ (contrato de formación y aprendizaje) by making its duration and working time more flexible, and linking it to social security discounts. In addition, the age limit of the workers who can sign this type of contract was increased from 25 to 30.
Effects of the 2012 labour reform
Impact on contracts, dismissals and labour duality
Based on data from the Spanish Labour Force Survey (EPA) and the National Social Security Institute (INSS), around 630,000 jobs were lost during the first year (in Spanish, 238 KB PDF) after the labour reform was introduced according to a report by the Trade Union Confederation of Workers’ Commissions (CCOO) published in October 2013. CCOO believes this figure reflects the fact that the labour reform had failed and had not fulfilled its objective of facilitating employment creation. The report looks at how employment destruction in Spain had evolved since the outbreak of the financial and economic crisis, pointing out that initially companies began by dismissing temporary workers. But this adjustment model changed with the 2012 labour reform; the reduction between 2012 and 2013 in indefinite employment, when comparing the second quarters, was the largest year-on-year variation since the beginning of the crisis. Some 66% of the workers dismissed in 2012–2013 had an open-ended contract; the report argues that this is because the labour reform made dismissals easier and cheaper for open-ended contracts. In addition, the report highlights how the labour reform promoted part-time employment, which also affected job quality. Between 2012 and 2013 (again comparing the second quarters of both years), there were 818,800 fewer full-time workers whereas the number of part-time workers increased by 146,000.
A report published by the General Workers' Union (UGT) in February 2014 shows that, according to EPA data, the number of employed workers decreased by 1,049,300 (in Spanish, 1.5 MB PDF) (a fall of 5.9% in employment levels) between the last quarter of 2011 and the last quarter of 2013. A slight increase can be seen in 2012 and 2013 among part-time workers and the self-employed, both considered in the report as precarious forms of employment; for example, the report states that involuntary part-time work increased by 27% in the period considered. Looking at changes in contracting activity, temporary (fixed-term) contracts increased by 31.2% in the period from February 2012 to January 2014. Indeed, 92% of the new contracts registered in January 2014 were temporary contracts, which is the same rate as in February 2012. In addition, the report highlights that, on average, there were 5.76 million unemployed (an unemployment rate of 25%) in 2012 with numbers increasing to 5.99 million in 2013 (an unemployment rate of 26.4%). The proportion of long-term unemployment within total unemployment increased from 27.1% at the beginning of 2012 to 39.2% at the end of 2013. Overall, the report concluded that the 2012 labour reform had neither generated employment nor reduced unemployment. Moreover, it had not been useful in reducing temporariness (that is, labour market duality).
An article in the FUNCAS report by J. Ignacio García Pérez and Marcel Jansen compiles different data and results from several sources including a report from the Bank of Spain (in Spanish, 326 KB PDF) published in 2013, a report by BBVA Bank (in Spanish, 677 KB PDF) published in 2013 and a report published in 2014 by the Organisation of Economic Co-operation and Development (OECD) called The 2012 labour market reform in Spain: A preliminary assessment. Some of the main points highlighted by this article (in Spanish, 290 KB PDF) are as follows:
- The 2012 labour reform introduced flexibility measures and facilitated salary restraint. A structural regression analysis by BBVA Bank tried to predict what would have happened if the salary restraint in 2012 had not taken place. The result shows that salary restraint might have helped to avoid 60,000 dismissals.
- Using data from February to December 2012, the OECD report analysed the effects of the reforms and how different indicators of the labour market would have evolved if these reforms had not been applied. Based on its estimates, the report concluded that the number of contracts signed had increased by 8% as a result of the reforms and that the transition from unemployment to employment had increased by 24%. However, the same analysis with data up to the end of 2013 was not so optimistic. For instance, the transition from employment to unemployment did not experience significant increases, being only noteworthy among companies with fewer than 25 employees, with a 10% increase.
- According to INSS data, the temporariness rate of the Spanish labour market fell by more than 6.4 percentage points between 2008 and 2015. However, this decrease is not linked to an increase in open-ended contracts but to the dramatic termination of temporary contracts. The adjustment in temporary work took place particularly between 2008 and 2012. From 2012 onwards, the temporary employment rate has remained stable at around 23.5%.
Effects on salaries and social dialogue
In another article in the FUNCAS report, Daniel Fernández Kranz analysed the Continuous Sample of Working Lives (MCVL) database, studying salary changes among 98,960 men aged between 18 and 55 for the period 2008 to 2013 (in Spanish, 297 KB PDF). He compared the data of ‘stayers’ (that is, those who preserved their job during the period analysed) and the ‘movers’ (those who changed jobs and perhaps also experienced periods of unemployment). Between 2008 and 2013, salaries decreased much more among the movers (17% reduction) than among the stayers (1.6%). However, stayers’ income dropped rapidly from 2012 onwards, with 5% loss in only two years. This finding suggests that the 2012 labour reform has facilitated internal flexibility on salaries. Looking in detail at the increase in the number of men working part-time, it seems that the growth in part-time is linked more to movers than to stayers; in 2008, part-time work among stayers (3.1%) was slightly lower than among movers (5.2%). However, this difference increased over the period considered. Thus, in 2013, the proportion of movers working part-time was 11.6%, three times higher than the rate for stayers (3.8%). The labour reform therefore appears to have favoured salary flexibility, but the effects on working time flexibility have been less.
The article by García Pérez and Jansen in the FUNCAS report also offers some significant findings on the effects of the 2012 labour reform on salaries and social dialogue. Some of the main points they make are highlighted below.
- All reports show that salary adjustments increased after the 2012 labour reform. However, it is difficult to distinguish (or assess separately) whether salary moderation is a consequence of the labour reform or a consequence of the Agreement for Employment and Social Dialogue 2012–2014, signed by social partners at national level in January 2012, which recommended salary restraint.
- An analysis by the Bank of Spain indicated that decreases in real salaries were detected for the first time since the beginning of the crisis in 2013. However, a later study by the Bank of Spain pointed out that the previous study had not taken the composition of the workforce into account. During the crisis, employment destruction was much more intense among workers with low salaries. After eliminating the effects of the composition of the workforce, it can be observed that first wage reductions were seen in 2010. In 2012, however, the drop in salary levels was higher and real salaries decreased by 2%.
- During the crisis, there had been a significant increase in salary inequality. Between 2008 and 2013, salary levels in the first decile of salary distribution decreased by more than 20%, whereas there were slight increases between the sixth and ninth deciles. These trends reflect the increasing flexibility of real salaries in past years.
The impacts of the 2012 labour reform on social dialogue (in Spanish, 351 KB PDF) are examined in an article in the FUNCAS report by Miguel Malo. Although the reform tried to promote company-level agreements, Ministry of Employment statistics show that the relative importance of these agreements did not increase with its implementation. In 2006, 75.7% of collective agreements were company-level agreements compared with 77% in 2014; the agreements covered 11% of workers in 2006 compared with 8.9% in 2014. Moreover, available data seem to indicate that provincial-level agreements had lost importance, mostly in favour of agreements at national or autonomous community level, rather than in favour of company-level agreements; data for 2013 and 2014 are, however, provisional. One reason for this could be that, although the 2012 legislation seeks to promote company-level agreements, small and medium enterprises (SMEs) may not be interested in negotiating company-level agreements due to a lack of resources.
Qualitative assessment of the effects of the reform
From the point of view of employers’ organisations such as CEOE, the 2012 labour reform is an important step in the modernisation of Spanish labour legislation. But as pointed out by José María Lacasa, while CEOE values the flexibility introduced in the labour market, it thinks some aspects could have been improved. CEOE favours further encouragement of flexibility (in Spanish, 385 KB PDF), with a more ambitious reform that reinforces flexibility options. CEOE also welcomes the importance attributed to company-level agreements and the greater opportunities to opt out of collective agreements that are in force, though in this case, CEOE believes there should be much more stimulation of flexibility.
In an article in the FUNCAS report, Federico Durán López concludes that the structure for social dialogue has not changed in practice (in Spanish, 216.5 KB PDF) and that collective agreements are still an important ‘source of rigidity’ for Spanish labour relations. Moreover, he maintains that the limit on the so-called ‘ultra-actividad’ imposed by 2012 labour reform was only theoretical and that many judges would have interpreted the new legislation in a favourable way for employees He suggests they would have allowed longer validity for already terminated agreements by arguing that those agreements are regulated by previous legislation.
In addition, the article by García Pérez and Jansen in the FUNCAS report points out that, following the reforms, it is easier for companies to find alternatives to dismissals because they have increased internal flexibility. However, it seems that large companies are the ones benefiting most from the reforms as it is easier for them than for SMEs to negotiate company-level agreements or temporary opt-outs from the terms and conditions in sectoral and provincial agreements. The authors also explain that the measures in the 2012 law are not enough to end labour market duality; there is still a large gap in protection levels and dismissal costs between temporary and open-ended contracts in Spain. They argue that there has been no effort in the reforms to solve the main problem of Spain's labour market, which is that most temporary contracts cover activities that are not actually temporary.
Interestingly, the article by Malo in the FUNCAS report concludes that in a country where there are plenty of small and micro companies (as is the case in Spain), promoting company-level agreements could be a disadvantage rather than an advantage. Employers in small companies may not be able to devote resources to social dialogue processes, and few small companies have workers’ representatives.
However, the CCOO report from October 2013 states that the 2012 labour reform is having a dramatic effect on the Spanish labour market, causing severe employment destruction. There is a serious deterioration in the quality of employment and part-time work is increasing, while a high proportion of part-time workers would prefer to work full-time. CCOO considers the 2012 labour reform an absolute failure, arguing that it has brought labour precariousness and worsening of living conditions. Similarly, the UGT report from February 2014 points out that Spain is suffering from high unemployment levels and labour precariousness, which are leading to income reduction and lower purchasing power, as well as a significant imbalance in income distribution. As a consequence, poverty is increasing and the quality of life is deteriorating.
The first assessment of the 2012 labour market reform in Spain does not offer a clear-cut result and the messages are quite contradictory, depending on the point of view of the analyses, particularly those conducted by the social partners. Overall, it is clear that the legal changes have increased salary and organisational flexibility, leaving more room for negotiation at company level and for avoiding dismissals. However, employers' organisations consider the level of flexibility allowed for in the reform is still insufficient. It is also unclear whether the aim of increasing decentralisation of collective bargaining has been achieved, since most small companies do not have the necessary resources to establish their own agreements. In addition, diverse judicial interpretations mean that the measures intended to solve the issue of the ultra-activity of existing collective agreements do not seem to be fully effective.
The reform has not contributed much to the creation of employment. Despite a clear improvement, especially during the past year, the unemployment rate was still 22.4% in the second quarter of 2015 compared with 24.8% in the third quarter of 2012 when the reform came into force. Most of the sources consulted agree that the reform has not succeeded in diminishing the duality in the labour market (permanent versus temporary employees) or reducing employment precariousness (the proportion of temporary employees has remained stable since 2012). On the contrary, working conditions have tended to deteriorate (in terms of salary or working time), particularly for those workers who have had to change jobs (often after a period of unemployment). In that sense, there is an increase in salary inequality.
It is possibly still too early to make a full assessment of the 2012 labour market reform because its outcomes have been conditioned by the negative macroeconomic situation in Spain and in Europe in general. Now that some of the framework conditions seem to be improving (a contained public budget deficit, reduction of austerity measures, increased economic activity levels), this could be the moment to see the real potential of the reform to have a positive impact on the labour market, facilitating employment creation without causing a deterioration in working conditions.