How Spain Wound Up with One of The Worst Job Markets in the World

Spanish Job Center Ahead Of Employment Figures
Jobseekers wait outside the shuttered entrance to an employment center before opening in Madrid, Spain, on Wednesday, July 23, 2014. While unemployment figures tomorrow will show that about a quarter of the workforce remains jobless, the government expects GDP to gain 1.2 percent this year after shrinking as much in 2013. Photographer: Angel Navarrete/Bloomberg
Photograph by Angel Navarrete—Bloomberg via Getty Images

Soon after Spain’s December 20 national elections, the next Prime Minister will have to deal with one of the country’s great recurring problems: how to stop Fernando de Zavala Carvajal from leaving.

De Zavala had built a fairly impressive resume by 2012. A Spaniard by nationality and fluent in English from attending high school in the U.S., De Zavala held internships at Ernst & Young, JPMorgan, and L’Oréal while studying economics at Madrid’s Universidad Carlos III.

And so, despite Spain’s economic crisis, he was confident that he would find a job when he returned to Madrid after finishing college at New Zealand’s University of Otago. But after interviewing with 14 companies—many multiple times—all he got was a bank that said it wanted to hire him but couldn’t say when, where, or in what job, and an engineering firm that said it would have a job for him … in six months.

“I just wanted to do something,” says De Zavala, 26. “You can imagine that my self esteem was not very high.”

So De Zavala got on a plane to Shanghai, where he’d been offered an unpaid internship at the local branch of the Spanish Chamber of Commerce.

A two-track economy

It’s perhaps little surprise that Spain’s unemployment rate shot up after its real estate bubble popped in 2008. But the slowness of its return to normal levels and the rates of youth and long-term unemployment have been persistent thorns in Spain’s side. Despite its status as one of the fastest growing EU economies, Spain’s unemployment rate is 21.6%, the highest in the EU after Greece, and 47.7% of Spaniards under 25 in the job market (i.e. not studying) are jobless.

A good part of those problems can be blamed on one thing: Spain’s bizarre labor contracts.

“Spain can brag of having the worst labor market on the planet,” says Javier Díaz-Giménez, professor of economics at IESE Business School. “It’s very hard to find labor markets that have been able to break the 20% unemployment barrier three times in the last 30 years.”

For economists like Díaz-Giménez, the causes are as obvious as they are intractable. Historically, Spanish workers have had open-ended labor contracts that are very rigid and very generous when it comes to layoffs. Under the dictatorship of Francisco Franco, laid off workers received 60 days of pay for each year worked; today, even after a host of labor market reforms, they still get 33 days per year (or 20 if the employer is losing money).

Such labor rules have helped create an economy that is less than dynamic, to put it nicely. And so, to give companies some flexibility without angering unions and workers, Spain’s government liberalized the use of temporary contracts in 1984. Lasting a maximum of two years (after which the employee has to move on or be hired permanently), the contracts offer little protection, low layoff payouts, and usually dismal pay.

The two-track labor market, or “duality,” has split Spanish workers into castes and has created a system where companies have little motivation to bring on young people—or anyone, really—as permanent employees. It also encourages employers to create precarious, one-off jobs and discourages them from investing in training, because such employees are temporary. So far this year, almost 92% of the 15.4 million labor contracts signed in Spain have been temporary; about one in four contracts are for seven days or less.

The system also creates a volatile market where employers dump their temporary employees at the first sign of economic downturn. That’s why Spain’s unemployment has spiked much more than other European countries, says Marcel Jansen, a professor of economics at the Universidad Autónoma de Madrid. “Duality is one of the main causes of the dismal performance of the Spanish labor market.”

Spain’s labor market has also skewed its economy toward industries that are best served by temps, says José Ignacio Conde-Ruiz, deputy director of the Foundation of Applied Economic Studies (FEDEA). It is no surprise that tourism and construction—both heavy users of temp workers—have long been star industries in Spain. Almost one in four employed Spaniards are on temporary contracts, 10 points higher than the EU average and higher than every EU country but Poland.

The single contract

In 2009, Díaz-Giménez and Jansen were among a group promoting labor market reform through what was known as the Manifesto of the 100 Economists. The central idea was to end labor market “duality” by all but eliminating temporary contracts and putting every worker on the same unified contract. This contract would offer workers more protection than the temporary contracts but less layoff money than the current long-term agreements, maybe 10-12 days per year worked, says Díaz-Giménez.

The idea seems to be gaining political traction. The economic guru of the upstart Ciudadanos party, Luis Garicano, signed the Manifesto. And the party—which will likely have great influence in Spain’s parliament after the December elections—has a single contract in its economic platform.

Meanwhile, political parties are beginning to pay attention to Spain’s other giant labor problem—the need to train and aid the 2.1 million people who, according to Jansen, have been unemployed for over two years and lack marketable skills.

“Clearly, this is a system of labor relations that is completely dysfunctional, that must be radically reformed,” says Díaz-Giménez. “[But] it will be really difficult to change unless we get a truly reformist political party that has weight in parliament.”

Home in Shanghai

About six months after leaving Spain, De Zavala got a call from the engineering firm he’d interviewed with. They wanted to offer him a job at a processing plant two hours from Riyadh, Saudi Arabia, for about €1,800 ($1,900) a month.

But it was too late. After his internship at the Spanish Chamber of Commerce ended, he’d found an account manager job at a Shanghai-based Internet startup, which paid him more.

A few months later, he and a friend founded IntuuChina, a relocation firm that matches young people with internships and jobs in China. So far, they have placed 286 people, 35% of whom are from Spain.

“I think the best move I did was to move,” he says, lamenting the state of his home country. “They haven’t been flexible, they haven’t been able to adapt to give young people a chance. In the long term, it will mean Spanish companies are outdated and extremely boring to work with.”

That failure has at least had one positive effect, according to De Zavala.

“The positive side is that there’s been a boom in entrepreneurship in my generation,” he says. “That’s the silver lining in this whole sad story.”

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