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Flexibility and unemployment in Spain and in Germany

Labor markets issues are very complex. Many economists say, very simply, that a flexible market is better that a regulated one. However, two numbers cast some doubts on this. Look at the Spain: there, according a Deutsche Bank research, some 30% % of all employees and about 80% of all new hires have a temporary labour contract. “As such – wrote Bernhard Gräf – it is cheaper for Spanish companies to terminate jobs by not renewing contracts than to save them by offering short-time work”, the kurzarbeit, special German scheme – funded by the government and negotiated with labour unions – that allows to adjust working hours and wages when demand slumps and thus to secure employment and to avoid the costs of having to rehire staff once jobs are available again. “This is reflected in the huge increase in Spain‘s unemployment rate, [today at 20%]”, Gräf added. In Germany, instead, it has been possible to save jobs offering short-time works: “Barely 200,000 jobs have been lost since October 2008”. The scheme is not perfect: “Unit labour costs soared in Germany on the 5% contraction of GDP”; but the financial health of German companies has helped to absorb this shock.

This is, according to Gräf, the result of flexible working arrangements. However, even in Spain the labour market is flexible. The huge share of temporary labour contracts is the result of a labour market reform, criticized even by market economists favourable to labour market flexibility. “We always said – wrote Vincenzo Guzzo, then at Morgan Stanley, in 2005 – that temporary and part-time jobs were Europe’s corporate response to protective labour market legislation and lack of political efforts and we certainly have not changed our mind. Yet, Spain is in way a bit of an extreme example in the European map. The excessive use of these contracts – three times as many as elsewhere on the continent – is a by-product of the country’s high firing costs and may backfire at some point. Employees may feel even more insecure about their future prospects than in those economies where firing rigidities are low, the first-best labour markets. Such a widespread use of temps has also weighed adversely on productivity and may exacerbate Spain’s loss of competitiveness in the medium term”. Today – it must be added – the costs of the unemployment insurance are a heavy burden on the big Spanish public deficit, which threatens the whole Euro zone.

The first, tentative consequence is then simple. The solution is not flexibility per se, but good rules that allow to adjust labour costs – without losing jobs – during a slump. This seems to be a more realistic and less ideological approach.