Severance costs plunge due to job market overhaul

The government sold the labor reform it introduced in February of last year as a means of making Spain’s job market more flexible in order to create more employment. The unions painted it as a mechanism to make it cheaper and easier to sack workers. Figures released Friday by the National Statistics Institute (INE) seem to side with the unions.

While the jobless rate rose from 22.85 percent at the end of 2011 to just over 26 percent at the end of last year, severance costs for companies in the fourth quarter of 2012 were down 23 percent from the same period a year earlier. The fall in redundancy payments was the biggest last year after declines of 12 percent in the second quarter and 17 percent in the third.

The reform reduced the costs of sacking a worker who is unfairly dismissed to 33 days’ wages per year worked up to a maximum of two years from 45 days and a maximum of 42 months’ salary. However, it also introduced the concept of objective causes such as falling sales to justify layoffs with compensation of only 20 days’ wages per year up to a maximum of one year.

Companies normally start out by dismissing workers on temporary contracts which carry reduced severance pay rights. However, the ongoing increase in unemployment suggests that workers on permanent contracts are now being laid off and that the biggest falls in severance costs occurred during this phase of the deterioration in the labor market.

Overall monthly labor costs in the fourth quarter fell 3.2 percent from a year earlier to 2,598 euros, the lowest figure since the INE began compiling the statistical series in 2000. Salary costs fell 3.6 percent, while other costs, which include items such as social security contributions, were down 1.8 percent. The biggest fall in overall costs was in the service sector, where they declined 4.7 percent.

According to figures released Friday by the European Union’s statistics office Eurostat, Spain was the EU country where hourly wages declined the most in the fourth quarter of 2012. The drop was an annual 4.3 percent, compared with an increase in both the EU and the euro zone of 1.4 percent.

Of the 25 countries for which figures were available, the only other country where salary costs declined was Slovenia, where they shrank 1.7 percent.