Government plan to boost economy and protect unemployed people

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Unemployment insurance coverage has been quite high in Spain over the years. However, the recent rise in unemployment due to the current economic crisis has forced the government to increase subsidies and establish a package of measures to promote employment in the public and private sectors. The government’s agenda to modernise the economy, improve productivity and promote a model for productive change includes a new law on the employment and protection of unemployed people.

Economic crisis leads to rise in unemployment

Before 2008, Spain enjoyed a long period of economic growth. Development was primarily based on the increase in the labour force due to a higher participation rate among women and immigrants. As a result, the unemployment rate declined from 20% of the active population in the early 1990s to 8% in 2007, which was close to the European average. A third of total employment related to temporary work.

However, the current economic crisis has led to a rapid rise in unemployment, up to nearly 3.5 million people in March 2009. The unemployment rate stood at 13.9% in the fourth quarter of 2008, which is the highest rate in the EU27 Member States.

New government measures to alleviate economic crisis

After Spain’s general elections in March 2008, the newly formed government began to increase efforts to tackle the economic crisis – more specifically, under its development plan for stimulating the economy and employment (Plan Español para estímulo de la economia y el empleo), known as Plan E (in Spanish).

Activities in construction sector

One of the government’s first major objectives was to alleviate the downturn in construction through a number of measures. In this regard, the government announced the following measures: investments in public building projects and civil engineering carried out by the central administration; an increase in protected housing; incentives for renovating buildings to make them more energy efficient; incentives in the housing rental market with provisions for owners and tenants; support in the form of mortgage relief; and an increase in the availability of land by the central administration.

Efforts to boost employment

A second wave of measures was directed mainly at credit and liquidity support. When the new government was formed, it was already clear that the increase in unemployment would require the development of tools to ensure the survival of certain groups of people without unemployment insurance or any form of assistance. It would also be necessary to tackle long-term unemployment. Spain increasingly takes the option of a policy of demand support, although this tends to increase the budget deficit. About 80 measures were introduced during 2008 as part of the government’s ‘Plan to boost the economy and employment’, and activities have continued into 2009.

Among the measures adopted, different extensions of unemployment benefits have been introduced, as well as initiatives to increase production and, where possible, to provide work for unemployed people.

Funds set up to boost economic growth

The government’s development plan includes a Local Investment Fund (Fondo Estatal de Inversión Local), worth €8 billion and the Special Fund for the Promotion of the Economy and Employment (Fondo especial del Estado para el estímulo de la economía y el empleo) worth €3 billion. This includes €800 million for the automotive industry, €500 million for environmental projects, €500 million for research and development and €400 million to upgrade police and civil guard stations. Furthermore, the government is planning an agenda of reforms to modernise the economy, improve productivity and lay the foundations for a model for productive change. Under the plan, the central government will allow local governments to increase their permitted budget deficits from 0.05% of gross domestic product (GDP) to 0.5% of GDP, thus facilitating the injection of a further €5.8 billion into the economy.

Income support for unemployed people

Among the measures of income support for unemployed people, the latest are included in Royal Decree Law 2/2009 (in Spanish, 238Kb PDF) of 6 March 2009 ‘for the maintenance and employment promotion and protection of unemployed people’. The law extends benefits to workers in special situations: for example, those who are temporarily laid off will now be able to collect unemployment benefits. The law also provides for subsidies for companies that hire an unemployed person as well as lower social security payments for companies that reduce employees’ working hours instead of dismissing workers. Incentives will also be provided to companies that hire workers on a part-time basis, as the incidence of part-time work is still low in Spain.

Commentary

The economic policy implemented in Spain not only focuses on the demand side. It also takes into account the supply perspective. The economic crisis is not only regarded as a step backwards with regard to development, it is also considered as a time of opportunity to correct the path of development, to cultivate activities with a higher added value and to improve overall productivity.

The question remains regarding the importance of and attention focused on the demand and supply sides, and how both can be integrated. Under the current circumstances, the government’s budget deficit is expected to be quite substantial and the level of productivity is estimated to be very low.

Esteban Villarejo, CIREM Foundation

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