Spain would register unemployment close to 10% today if the labor reform had been approved in 2008

Spain was -and still is in many respects- one of the countries with the most labor rigidity in the world. Under this particular corset, the average unemployment rate was around 18% from the beginning of the 80s until the beginning of the last decade and, after the bursting of the housing bubble -where growth and job creation were unreal and, therefore, unsustainable -, unemployment has once again risen above the 20% threshold, at the head of the developed world, together with Greece.

Despite these disastrous and obvious results, many politicians and analysts nevertheless defend this particular model, thus launching harsh criticism of the relative flexibility that the labor reform approved by the PP in 2012 fostered. BBVA Research is now dismantling these attacks through a report in which it analyzes the effects that this regulatory change has had on the labor market. Specifically, the study answers two basic questions:

Historical destruction before the reform

The first thing that stands out is that in Spain, both working hours and wages, far from falling, rose from 2008 to 2011, unlike what What happened in other countries affected by the crisis, so that the collapse of the economy did not result in salary adjustments, but in massive layoffs.

Specifically, since the beginning of 2008, the drop in domestic demand (consumption and investment) caused an "accumulated decline in GDP of 9.3% up to mid-2013". But the collapse of the economy was not reflected in a reduction in working hours and even less in wages, since the average real remuneration per employee (discounting inflation) grew by 8.2% between the first quarter of 2008 and the fourth of 2011 .

Result? The rise in labor costs, together with little competition in the productive market, tax increases and the increase in regulated tariffs, "made it difficult for prices in the economy as a whole to adjust despite the reduction in domestic demand , which resulted in a lower demand for employment".

As a consequence, employment fell by 19% and unemployment increased by 18 percentage points, to exceed the threshold of 26% at the beginning of 2013.

The reform saved 900,000 jobs

The labor reform was approved at the beginning of 2012 and came into full force in the middle of the same year. This change in regulation marks a before and after in the evolution of the labor market, since it introduces certain flexibility mechanisms (company agreements, reduction of dismissal costs, etc.) that, until then, were non-existent.

From that moment on, "both the number of hours worked per employee and labor costs moderated their growth or decreased, facilitating the adjustment of the labor market," according to the study. Firstly, this greater flexibility slowed down the rate of job destruction, despite the impact of the recession and the high risk premium, and secondly, it accelerated the creation of jobs since the end of 2013, when the GDP began to pick up.

The report -signed by Rafael Doménech, Juan Ramón García and Camilo Ulloa- concludes that if the labor reform had not been approved, "an additional 910,000 jobs would have been lost" by the end of 2015 and "the unemployment rate would have been 5.1 percentage points higher than that currently observed", that is, above 25%. In addition, in the long term, another 1.5 million jobs would have been lost.

It could have saved another 2 million jobs

One of the most striking facts, however, is that if Spain had opted for labor flexibility since the start of the crisis, in 2008, "it would it would have avoided the destruction of nearly 2,000,000 jobs in the long term and the unemployment rate would be 8 points lower today," he clarifies. In other words, unemployment would currently be around 12.9% compared to the 20.9% registered at the end of 2015.

Despite the positive effects of the reform, the report also warns that additional measures are necessary given the structural weaknesses that persist in the labor market, such as high temporary employment, long-term unemployment, the mismatch between supply and demand or a rate of structural unemployment "still very high", close to 15%.