Monday, April 19, 2010

A Very Laboured Reform

With so much expectation having been created around the issue of reforming the Spanish labour market, the government is struggling to find a set of measures which allows them to get support of both employers and trade unions. Add to this the very different ways in which things are presented to the financial markets compared to the presentation used for domestic consumption. That's why the draft reform proposals that were released last week could hardly be more ambiguous when it comes to the finer details of what may happen.

There are two potential strands to the reform being pushed by the government. One is to try and make an already existing type of contract the standard one for future permanent employees. This contract, which has a lower level of compensation in case of dismissal than that which many workers currently have, is already available for almost all categories of employees except male workers who are already in work. It hasn't been used very much and so the government sees making this available for all new contracts as one possible reform. The issue of how they get employers to use this instead of temporary contracts is still not clear.

Then comes what they call the "Austrian model". The floating of this proposal caught many people by surprise and in the end it hasn't had a very warm welcome from anyone. The idea is that each employee has a personal fund which increases throughout their time of employment and which is used to compensate them when they are sacked. If they don't get sacked at any point then the fund pays a supplement to their pensions on retirement. The idea is that workers carry the fund with them from job to job, so that they have no fear of losing compensation benefits by changing their employer.

It all sounds quite reasonable, but there is of course one tiny detail still to be resolved. Who pays? If the employers have to pay into the fund then they are going to object to the proposal, even though such an idea effectively spreads out the cost of dismissals over good times as well as bad. Obviously, if it's the employee who has to meet the cost from their salary then it represents a significant reduction in employee benefits and is very unfair to those who work in the worst paid and most insecure professions because they are unlikely to ever receive money from the fund when they retire. So much for putting an end to the "dual" labour market.

The government didn't want to focus too much on any of these details because it still doesn't have the agreement of either unions or employers. The warmest reception initially came from inside the employers association, until Gerardo Díaz Ferrán poured some cold water on the idea. Díaz Ferrán, whose own business empire is shrinking rapidly, is still sticking close to the positions of the Partido Popular who do not want the government to achieve any sort of agreement anyway. The PP loudly calls for a reform to be made, at the same time as it carefully avoids spelling out what they think such a reform might contain. We have our suspicions, but no confirmation will be received this side of a general election. In the end, if there is no other agreement, the government will probably attempt to impose the new standard contract.


moscow said...


Here in Moscow headscarves were back in fashion and increasingly so - or they were until the bomb blast in the metro. Now it's back to free-flowing hair.

With respect to labour reform: it seems finally the governmnet is readying itself to do something. It is a step in the right direction. However, it shouldn't be a surprise. Zapatero has been taking steps towards liberalisation and de-regulation ever since he took over office. This will come as a surprise to many, and particularly, to those who think he is just a one-dimensional socialist. It is just that his steps have been all baby-steps, and therefore, less noticeable. Unfortunately, the problem is, that is far from enough.
A real labour reform: 20 days severance with a maximum payment of one year for all in exchange of scrapping short-term contracts. Then there is the issue of how of the accumulated future possible severance the employee may be allowed to carry from one company to the next, and who is reponsible for financing that. It would be better if the state assumes all or, at least, part of the responsiblity.

Graeme said...

Moscow, the wonderful thing about the cause of economic liberalisation is that its proponents appear to apply no failure threshold of any kind to it. As long as there is still a little sign somewhere in the world saying "please do not step on the grass", that will be the cause of all problems and liberalisation the solution. That's why the proposed answer to the problems of the last couple of years is more of the same. As for the people who think that Zapatero is a one-dimensional socialist, most of them occupy dimly lit zones of the political spectrum where it is not safe to walk alone.

moscow said...

The ideological gap between us is too big for us to agree on this issue. Going more liberal in the USA, even Britain, would be simply absurd. All that could be liberalised or de-regulated in these countries was already or has already been de-regulated. I cannot and will not try to convince you on this one, but I still believe Spain needs a dosis of (economic) liberalism albeit combined (if possible) with a further (moderate) expansion of the welfare state.

Andrew said...

4m unemployed, lack of international competiveness, rigidity in the labour market, massive expansion in recent years of public sector employment, 25% of the economy black, corruption endemic. So Graeme what are your solutions?

Economic liberalisation does create wealth. The debate should be about regulation, how you divide the spoils and the role of the state.

AS some say Spain needs an internal devaluation but it also needs a change in political attitudes - politicians, at national and, particulary, at local level should be there to swerve the elctorate not themselves and their buddies. You bang on about PP in Madrid and much of what you say can be applied to PSOE in Andalucia.

This such a great country with history, scenery and ordinary folk who are friendly and fun loving. Why do so many of them accept being screwed!

Graeme said...

Andrew, the point I'm making - and its not just me that makes it - is that the neoliberal "revolution" has had its chance and been found wanting. The problem is that its supporters just refuse to acknowledge any signs of failure. Larry Summers - hardly a radical - was wailing at Davos a few weeks ago about how high unemployment is amongst key sectors of the US workforce compared to the 1960's. Not likely to be a result of too much regulation is it? What happens if we liberalise Spain and unemployment hits 5 million. Who will the liberalisers blame? The last public sector employee?

As for alternatives, it's noteworthy that virtually none of the poorer or richer countries that have developed in a durable and lasting way have done so by following the Washington consensus. Indeed, there are plenty of cases where developed countries have sold these ideas on a "do as we say, not as we do" basis. Just look at the trade talks.

The whole public sector thing in Spain is a bit of an urban legend. On figures I've seen Spain is more or less average on the number of public employees and the proportion of GDP dedicated to public services in Spain compares unfavourably with many other European countries. Finally, I bang on about the PP in Madrid because I live here, because I like it and because - why not acknowledge this - I think people expect me to do it!

Andrew said...

Please don't confuse neo-liberal with economic liberalisation. I mean it in an old fashion way. No protectionism by rich countries, the recognition of competitive advantage and free movement of labour as well as capital.

I agree that Spain does not have an exceesive public sector compared to some countries but the rate of growth is excessive.

The point about Madrid/Andulcia is that whoever is in power has a tendency to abuse it and it constantly suprises me that, certainly at the local level, Spaniards don't kick out the incumbents with greater frequency thus making less possible to take advantage. Whether its the PP in Madrid or PSOE in Andalucia.

I repeat my question - what are your solutions?

Graeme said...

Ah yes, I remember those classes in classical economics. The examples usually started with something like "Let's assume that all companies are the same size and that there is no foreign trade". No wonder it fell out of fashion.

As for solutions, that's why I raised the issue of countries that have found success by turning their backs on the ideas of liberalisation. Some of the Asian "tigers" built their economies with huge levels of state intervention. The problem is that in Europe the EU has fallen into the hands of those who regard state help in directing investment as taboo. If we wait for the Telefonicas or the likes of Diaz Ferran to show us the way we could be in for a very long wait. In the meantime Spain is stuck with an over dependence on low productivity tourism and construction. The market ain't sorting it out.

moscow said...
This comment has been removed by a blog administrator.
moscow said...


You see,in a way you are absolutely right. No economy in the world (perhaps with the odd exception to every rule that is Britain) has achieved development or indutrial growth without statism of some form or another. Thus Germany under the Kaiser, the Japanese under their Emperor, Russia under Stalin, China and Mao&Deng, Spain and......Then again Britain had the advantage of first mover and did everything it could to force free trade down everyone else's throat....the Americans had a civil war because Britain opposed the north's protectionism and supported the south (slavery&free trade made for a profitable pairing). I mean, you've got a point. However, why is it that once countries reach the developed democratic stage they seem to prefer liberalism and the market economy?

Troy said...

If the current 'rigid' laws fail to protect most workers, it frightens me to think what could happen.

For all those who think 'poor' companies here in Spain, a closer look is indeed in order and one that is easy to prove.

Simply walk over to your nearest bank around 7pm. Your pick, BBVA, Santander, Caixa, whichever. Look in the window at that dim light in the back and tap on the window. I'm sure you'll see a 30's something person raise their head. If they are so kind as to answer the door, ask them if they are working within their contracted hours, then ask them what will happen if they don't work those 'extra hours'. I'm sure we all know the answers to both questions.

Perhaps one doesn't even need to go for a walk to do this. Just ask the person on the other end of the line when they phone you from the bank after 5pm.

This is what I find so ridiculous. EVERYONE knows that things like this go on. Union inspectors could seriously walk into ANY institution like that around the country and find flagrant violations...but they don't.

If they actually hired more workers, perhaps so many of these 'extra' hours wouldn't be needed?

Spain is completely incapable of regulating such matters, liberalize things and just imagine how bad things will get.

Andrew said...

The market isn't sorting it about because the market is distorted by protectionism (agriculture and jobs), over regulation (such as setting up a business) and cronyism.

Set the people free!

Graeme said...


Woud you like regular or large fries with your unregulated labour market? One other feature of the liberalisers creed is never to look back and try and wonder why we got the regulation in the first place.


Companies like to build their markets with state help and protection, but they don't like it that others get the same treatment - so once they're strong enough they become proponents of liberalisation. Until, of course, they get into trouble. That's why we have people like Díaz Ferrán who built his business empire on what the Spanish state would sell cheaply to him. He then rejects firmly any kind of state intervention - except for that needed to keep his businesses afloat.

moscow said...

@Graeme, I haven't got the slightest idea how your riposte relates to my question, but I am getting used to this sort of treatment by bloggists. Plus ca change....

Graeme said...

Oh, well perhaps I answered it too indirectly. What I was trying to say was that economic elites favour liberalisation and free markets when they feel its in their interests to do so. Which is often when they are strong enough to deal with it or to get advantage from it by imposing it on weaker competitors. I don't buy the argument at all that economic liberalisation and democracy go hand in hand - any more than Pinochet did or the Chinese government does. Nor am I actually convinced that it is more than just a, potentially catastrophic, phase we are going through.

moscow said...

@Graeme. The chinese liberal? When were you the last time in china? Tried to change money in a bank lately there? China is very very far from being a liberal and free market economy. They are not maoist any more, that's for sure.
The chilean case is a bit of an exception. I think Pino was a despicable baboon, but it all ended in him leaving voluntarily. I bet had he gone the opposite way, Chile would still have his regime in place.

Graeme said...

I never had any problems changing money in China, I haven't tried it recently because I have a bank just 5 minutes walk away from home. The Chinese example is very relevant to this discussion for two reasons. One is because it very firmly knocks on the head all that "end of history" tosh that was so popular a few years ago and which tried to claim that capitalism and dictatorship were somehow incompatible. The second reason for its relevance is because, as you rightly say, the Chinese economy is not a liberal free-market one and has been doing very well indeed by NOT following the prescriptions of the free marketeer liberals.

So the question is whether it will move more in the future towards that kind of model, and whether such a move will influence the degree of non-economic freedom enjoyed by its citizens. I would argue the opposite to you, the free market model not only doesn't lead to an increase in democracy, it actually concentrates power more in the hands of the few. The current global crisis is a very good example of this, as institutions with no direct democratic accountability of any kind enforce decisions affecting the lives of many in the name of repairing the damage that those same institutions did so much to cause. Meanwhile the rest of us get a chance every few years to vote for our local version of the Liblabservatives. The Chinese leadership may not find such a model as abhorrent as you think.

moscow said...


Well you know an awful lot more than a lot of people - as you are able to predict China's future.

China's economic model is statist capitalist (for want of a better name), or a market economy with a very heavy state hand. And it has achieved remarkable growth by liberalising its economy in the last 30 years. "Liberalising" that is, from the lowest of the lowest of bases, by moving away from Maoism (one of the most dreadful political system human kind has seen). In the process chinese society has become an awful lot freer. I repeat: it has embraced capitalism and in the process of moving towards a market economy and it's people have reached a degree of freedom they never enjoyed before in their entire history. If taken literally what I am writing renders obsolete your whole line of argumentation because it would imply that freedom comes with the move to a market economy. All of which does not mean that China is a free country. It is like Russia, a dictatorship, only that both Russians and Chinese enjoy today more liberties than they ever did and - with almost mathematical neatness - thanks to capitalism?
I beg your pardon, What has been knocked on its head?

Graeme said...

Moscow, I don't see anywhere in my comment where I make any predictions at all about China's future. It's true that people in China have more freedom than before, but arguable that you can attribute this directly to capitalism. To do so is to practice a very crude economic determinism. Freedom is not just about the number of brands of mobile phone that you can buy and on the crucial measures of liberty China has not fundamentally changed - ask anyone who has tried to challenge the political hegemony of its rulers. In the case of Russia you could actually argue that things have deteriorated in the last 15 years, whilst the robbery of the country's resources by a tiny minority has been consolidated.

The idea of capitalism as a force for liberty and progressive change may have had some validity around the time of the French Revolution, but it's become a bit rusty since then. Capitalism and fascism or military dictatorships have coexisted very happily in too many different situations.

moscow said...

@Graeme,no freedom is not about mobile phones, but the Chinese are gaining personal freedom year on year even if from outside things look often different. On Russia you are totally off-beam. Honestly, I think it is better you continue focusing on Aguirre and 'her' Guertel. You have a poor grasp of international issues.

Graeme said...

Oh Moscow, a patronising response that contains neither facts nor argument. Then you complain if I don't answer your comments.

Andrew said...

What or who are 'the economic elite'? I would understand capitalist elite. Let us not confuse capitalism and economic liberalism - they are not synonomous.

Capitalism is a structure. Many capitalist prefer a statist model to a liberal model thus protecting their privilege. Free trade, open markets etc demonstrably lead to more efficient use of resources thus are environmentally sensible. They reduce net poverty and redistribute, over time, to developing nations. Of course that means there are losers. Liberal economics would not protect the privileged position of US cotton growers to the disadvantage of growers in Africa and India.

Over protected employment is inefficient of people and resources and is essentially protectionist. The losers in this model are spanish consumers and developing country workers. In the short term!! Long term the competitive advantage will out OR we will all be worse off.

Governments in richer countries should put in place policies to massage change by enabling the growth of more skill centred employment and providing social safety nets for the inevitable losers.

There aren't many cordwanglers left in western europe but perhaps you would prefer that there were?

Graeme said...

Andrew, I know there are different models within capitalism. That was one of the things I was debating with Moscow before he stomped off back over the steppes. The other issue we were dealing with is how poorer countries have developed precisely by ignoring what you advocate. In an unequal world far removed from the textbooks of classical economics, underdeveloped countries get slaughtered when they open up their markets and end up as raw material suppliers - if they are lucky enough to have them.

I can't take seriously the argument that free trade and open markets are either environmentally or otherwise efficient with resources. The reason is that I see stories every day that tell me the opposite. The pursuit of unregulated private interest leads to massive environmental destruction - from the heavily polluted rivers of Nigeria to the Mexican factories set up across the US border to avoid regulation. Private interest means you go for what you want regardless of the environmental cost or the destruction of other resources. Or you simply use up everything and then switch to something else when that resource runs out. Of course, you can then buy a double page spread in the Sunday papers to boast about how green you are.

Andrew said...

History shows other models to be less environmentally aware than democratic nations. Perhaps I should combine the economic and poluitical model. Nigeria is not a liberal economy nor has been consistently democratic. It is certainly corrupt.

It is true that capitalist entities have a poor record of taking advantage of illiberal regimes and it is a shame that more has not been done in the democratic home countries to control behaviour in 3rd countries.

However the evidence for the advantages truly free markets in wealth creation is strong. I cannot see protectionism like the Common Agricultural policy as other than distortion in favour of the favoured at the expense of the poor farmers in developing countries.

Indeed there is evidence that developing counties own protectionism costs them even more.

On more philisophicl note, I have just started to read Amartya Sen "The Idea of Justice" which apart from challenging my intellect is challenging my ways of thinking. He groups Hobbes, Locke,Rousseau, Kant in one camp - 'social contract'. And, to my amazement, Smith, Wollstoncroft. Bentham, Mill and Marx in the other camp -' reducing injustice'. I find the juxtaposition of Smith and Marx quite challenging!

I suspect you and I might be in more agreement about ends than we are about means!