COMMENTARY

Spring 2010

by Gilles Saint-Paul

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The nice thing about Mariano Rajoy’s proposals is that they don’t reflect the whims of a politician but instead are firmly grounded in the debates on unemployment that economists have had among themselves for decades. There are certainly gains to be made from reducing mis-matches between vacant jobs and job-seekers, and the structure of bargaining clearly has an important impact on unemployment levels. So his proposed reforms square well with the conclusions drawn from theoretical and empirical research in our discipline. It is comforting for an economist to hear such views from a political leader.

On the other hand, I was somewhat surprised by Mariano Rajoy’s optimism both on the feasibility of the proposed reforms and the likelihood that they might trigger a process with adverse unintended consequences. We only need to look at recent history for lessons on why the rigidities we complain about are so resilient, and how reforms can go wrong.

Most economists complain about the dual nature of the Spanish labour market – a feature that economies like France, Portugal and Italy share, though to a lesser extent. But we should remember than this structure was introduced in the late 1980s by a government desperate to create jobs after a decade of unemployment rates of about 20%. At that time, a comprehensive reform wasn’t politically feasible because it would have provoked strong opposition from the unions, even though it was those unions which were largely responsible for the rigidities that had led to high unemployment in the first place. The compromise was continued protection for permanent jobs, while making it easier to hire people on temporary contracts.

In the short run, the dual structure was successful because it created jobs. But when in the early 1990s the next recession set in, an important drawback soon appeared – jobs were being destroyed at a faster pace than usual. This wasn’t really surprising as it is easy to get rid of temporary workers by simply not renewing their contract. For this and other reasons, economists have grown wary of the dual contract structure of the Spanish, Portuguese, French and Italian labour markets. In the current recession, temporary contracts surely explain why unemployment has been growing so fast in Spain. But I believe it is only part of the story; the other part being that the structure of economic activity in Spain was heavily biased towards construction, and a painful structural adjustment must now take place with labour being re-allocated to other sectors. It is even possible that temporary contracts may actually prove helpful in speeding that re-allocation process.

Many, however, now advocate eliminating the dual structure and moving towards a single labour contract. I think they forget that this dual structure is the result of a political modus vivendi, and certainly there appears to be no viable political process able to change it. That’s why the dual model has spread over the years from Spain to Portugal, then to France and more recently to Italy. It is hard to see how a single labor contract could reconcile the interests of permanent workers, temporary workers, and employers. If it were more rigid than temporary ones, but more flexible than current permanent ones, temporary workers might benefit but permanent ones would be more exposed. And employers would lose a margin of flexibility in managing their workforces. Everybody may want a single employment contract, but not one that’s the same as everybody else’s.