Labor Insiders vs Outsiders: The Challenges of Spain’s Labor Market

In Spain, coping with Great Depression-level unemployment that has broken through the psychological 20 percent barrier is a delicate matter. Tracing the meandering policy path of the Socialist government, which began with fiscal stimulus and then morphed into austerity, reflects the challenges. One of the factors bedeviling the government’s decision-making during this time has been the complexity of Spain’s labor market. More than most countries, and increasingly as unemployment began climbing in the aftermath of the economic collapse, Spanish workers are polarized into two segments—those with secure employment (insiders) and those without it (outsiders). Each of these constituencies demands radically different interventions in the economy.

“Insiders, such as labor union members and public employees, strongly prefer employment protection schemes that protect their jobs,” says Professor Mariely Lopez-Santana of George Mason University, who studies Spain’s labor markets. “Whereas outsiders such as the unemployed or those with temporary employment favor policies that reduce labor protections to pry open more jobs.” Historically, socialist and social democratic governments have maintained or expanded employment protection schemes because labor unions are a core part of their political base. Outsiders usually don’t have sufficient political power to influence parties and electoral outcomes; recent immigrants, who are the weakest politically, have been especially affected by unemployment during the crisis, as have young people, giving rise to the Indignados camped out in Madrid and other cities’ main squares. However as unemployment rose and more insiders started joining the ranks of outsiders, the pool of outsiders increased. Suddenly Spain’s Socialist government was faced with a difficult choice: should its policies support the insiders or outsiders? Damned if you do, damned if you don’t.

After initially enacting various stimulus measures to boost the Spanish economy and create jobs, concern about 20 percent unemployment caused the Zapatero government to begin scaling back some of the employment protections and expanding policies designed to help the outsiders. The government passed measures which were highly unpopular among the insiders and the Socialist’s traditional allies in labor unions and the public sector, including making dismissals easier and less costly. The government expanded the conditions for which a person could be dismissed, and drastically reduced the amount of severance pay received by employees who lost their jobs. By law that severance had amounted to a very generous (especially by U.S. standards) 45 days of salary per year of employment – typically thousands of dollars in severance for each laid-off employee -and now it was reduced to 33 days. The government also raised the retirement age from 65 to 67. The government’s rationale for doing all of this, which could be justified on the basis of universal values such as fairness and equality, was to open up the labor market to more outsiders and create more jobs by reducing burdens on businesses as a way to entice them to invest more.

Leftist critics, whether in Spain or beyond, saw it differently and accused the Socialist government of selling out its core principles and constituencies. Yet it was hard to deny the downward trajectory of the economy that prompted the government’s interventions. Indeed, wherever I traveled in Spain, businesses complained of sales being down and fears of a dwindling future. Some of the business owners complained forcefully about the rigidity of regulations that made it difficult to trim their workforces during a downturn, including the generous severance payouts. One small business owner with eight employees told me he would have to pay about $14,000 per employee to lay off two workers that he couldn’t afford any more because his sales were down 40 percent. “Please explain to me how my business is to survive,” he asked me, “under the weight of all those employees that I no longer can support. Most of my friends and neighbors are business owners. The talk at our table when we get together is that we are all struggling to find some way to survive.”

Despite the government responding to these complaints by trimming the amount of these severances by 25 percent, many small business owners say even that amount makes them reluctant to hire more people. This has led to other coping strategies by both employers and employees, including an increasing number of people working without a contract at all, essentially under-the-table on the grey market, which allows them to skirt the law on severance pay. In fact, says Professor Lopez-Santana, many people claim that the unemployment rate actually is lower than the official 20 percent because so many workers have opted for under the table work without a contract, and so don’t show up in official figures (this is presumably true as well of official figures showing unemployment over 40 percent among young people). Responding to this, the Spanish government passed legislation to create incentives for employers to turn employees into “regulars” with fixed contracts. But the economy is starting to get into that grey area where it becomes more difficult to measure things like unemployment, which is a precarious place for a contemporary economy to be.

Whatever the true unemployment figures, it’s clear that there are no quick fixes, despite inflammatory rhetoric from all quarters. The economics profession itself is split over the best policy course, not only in Spain but for all the developed capitalist economies. Economists like Paul Krugman are calling for renewed stimulus spending of even greater scale, while other economists call for more slashing of government spending. But what is clear is that working through an economic collapse of this magnitude has its own time frame that can be nudged along by specific policies but can’t be rushed. It takes time for both the public and private sectors to deleverage and pay off their high levels of debt. And Spain is trying to recover from a housing market collapse of epic proportions (for-sale signs are so much in abundance that I joked to one acquaintance that they have become one of Spain’s national trees).

But Spain’s recovery also is mixed up in the broader problems of the eurozone and sovereign defaults which right now are shaking Europe at its roots, and won’t be definitively settled for several years. That causes many to question Spain’s further involvement in the eurozone, and propose a return to Spain’s previous currency, the peseta. But the complexities and precarious unknowns of such a course are so immense that it has little real traction.

Even with government spending cutbacks, Spain still has had fairly generous unemployment benefits, as well as the aforementioned severance pay, tax deductions and other supports for families and individuals. Families are motivated to help each other, especially parents assisting their young adult children by drawing upon savings (though complicating this structure, many of the older workers best positioned to help their families have the “insider” jobs that are increasingly precarious). All of these factors appear to be mitigating the pain. But when I asked Jose Ignacio Torreblanca, director of the Madrid office for the European Council on Foreign Relations, “How long can the social and family pillars hold out, how long can they play this role?” he looked at me gravely and said, “One year, more or less. Then, if the economy hasn’t begun to pick up, we’ll see what happens. But I don’t think it will be good.”

Steven Hill

Steven Hill is a U.S. journalist and author of seven books, including Raw Deal: How the Uber Economy and Runaway Capitalism Are Screwing American Workers. He is currently in residence at the Berlin Social Science Center.