By Andrew Hay
Unemployment is rising faster in Spain than in any other developed country, stoking calls for labour reform, but an overhaul is unlikely before 2010 when joblessness may top 20 percent and force the government to act.
In just 18 months, Spain has gone from creating over a third of new jobs in the European Union to laying off 40,000 workers a week as the global crisis tears apart an outdated economy built on disposable jobs in construction and services.
Fearful unemployment problems could lead to a banking crisis, the Bank of Spain and business lobbies want to cut hiring and firing costs and shake up a collective bargaining system dating back to the days of dictator Francisco Franco.
Employees on long-term contracts are shielded by the world's highest redundancy payments, according to the OECD, with compensation of 45 days pay per year worked leading to firing costs around triple those in France and Britain.
To get around this, Spanish firms engage a third of workers on temporary contracts, the highest rate in the EU.
Companies are axing these short-term staff to survive what could be Spain's worst recession since its 1936-1939 Civil War, before moving onto expensive, long-term colleagues.
Unions have threatened a general strike if Prime Minister Jose Luis Rodriguez Zapatero tries to cut worker protection after unemployment swelled to around 15 percent in February, the highest rate of any country in the OECD (Organisation for Economic Cooperation and Development).
Zapatero, whose Socialist Party was punished for the economic crisis with defeat in March 1 regional elections in Galicia, is trying to avoid confrontation with the unions.
He already faces an economic leadership crisis, with veteran finance minister Pedro Solbes expected to step down as early as April after repeatedly saying he is tired of the job.
To keep unions happy, the prime minister has promised hundreds of thousands of jobs from a 70 billion euro ($88 billion) stimulus package and refused to cut firing costs.
That is one way of keeping the lid on social pressure, but rocketing unemployment might threaten to blow it off anyway.
"This reform is going to happen, but not soon enough, it's only going to happen once we get to 4, 5 million unemployed," said economist Rafael Pampillon at Madrid's IE business school.
LACK OF LEADERSHIP
Spain's FUNCAS savings bank think tank estimates unemployment will hit 5 million or 20.5 percent in late 2010, forcing all sides to consider reform.
Rigid labour laws are Spain's greatest structural flaw, according to the Bank of Spain, and could mire it in years of low growth after a decade in which it overtook Italy in per capita income and flirted with the idea of passing France.
Spain built its past 14 years of growth on the creation of 8.5 million, mainly low-skilled jobs held by immigrants, rather than through improvements in productivity, which fell 0.6 percent between 2000 and 2005, according to OECD data.
That has left the euro zone's fourth-largest economy with the second highest dependence on construction of any European Union country, after Ireland, and the second lowest contribution of education to gross domestic product, after Romania.
With a desperate need for job creation, Spain's public employment system is focused on benefit payments, has no nationwide network to aid relocation, and finds work for only 2 percent of the unemployed, newspaper El Mundo reports.
Labour lawyer Esther Sanchez says the government needs to launch a 2009 labour reform focused on retraining and dynamic wage bargaining systems like those of northern Europe.
"We are not leading in the jobs market, we are administering," said Sanchez of the Esade business school.
Zapatero is wary of entering the reform crossfire after Spain's last big labour overhaul of 1993-1994 led to strikes and election defeat for Socialist Prime Minister Felipe Gonzalez.
Bank of America analyst Gilles Moec said Zapatero would be wise to wait until 2011, a pre-election year when unemployment could stabilise and unions may see less threat from reform.
"Why lose the opportunity of doing something good by trying it at a bad time," said Moec, adding that France is still trying to set a minimum wage for young workers after failure of a mistimed labour reform bid during its early 1990s crisis.
