Bank of Spain recommends suspending minimum wage to tackle unemployment

The governor of the Bank of Spain, Luis María Linde, on Friday called for even more flexibility in the labor market than afforded by the reforms approved in February of last year to tackle rampant unemployment, suggesting that new formulas could be found beyond the reach of collective bargaining agreements and, in some circumstances, leaving the statutory minimum wage in abeyance.

In the first annual report presented by the central bank since Linde took office last year, the supervisor also proposed an acceleration of reforms to the state pension system phasing in an increase and the retirement age and changes to the basis on how pensions are calculated. These reforms should be brought forward to ensure the sustainability of the system, the Bank of Spain says.

“The seriousness of the labor market advises maintaining and intensifying reform momentum through the adoption of additional measures to promote job creation in the short term and facilitate wage flexibility,” the report said. “Here it would be worth exploring the possibility of establishing new formulas that would allow, in special cases, temporary departures from the conditions laid down in collective bargaining agreements, or exceptional mechanisms to prevent the minimum wage from acting as a constraint on specific groups of workers with most difficulties in terms of employability.”

The minimum wage in Spain is currently 645 euros a month. Spain’s jobless rate hit a record 27.2 percent in the first quarter, with 6.2 million people out of work, an increase of almost one million since the ruling Popular Party’s labor reform was introduced. The youth unemployment rate also reached a record 57.2 percent.

According to figures released Friday by the European Union’s statistics office, Eurostat, Spain accounted for 31.5 percent of the 19.375 million people out of work in the euro zone in April. Unemployment stood at record highs of 12.2 percent in the single-currency block and at 11.0 percent in the EU. The rate in Spain was 26.8 percent, with joblessness in Portugal 17.8 percent.

Earlier this week, the Paris-based OECD also called for further reforms in the labor market after predicting the jobless rate would hit 28 percent this year when it expects the economy to contract by 1.7 percent. The Organization for Economic Cooperation and Development has long been an advocate of abolishing the widespread practice of including clauses in collective bargaining agreements compensating workers for a loss of spending power as a result of inflation, an arrangement known as indexation. The European Commission also asked Spain to complete an evaluation of its 2012 labor law overhaul by July, and to propose necessary modifications by September. The labor reform made it cheaper and easier for companies to sack workers, allowing firms to pay 20 days’ wages for every year worked up to a maximum of one year’s wages in situations such as falling sales. The reforms also give more flexibility to companies to negotiate collective agreements.

The achievements of the labor reform in internal flexibility and wage constraint are encouraging"

“After five consecutive years of job destruction, the unemployment rate has reached unacceptable levels and the risk of long-term unemployment becoming chronic is a very serious concern, all the more so if the high incidence of youths and the least-skilled in this group is considered,” the Bank of Spain’s annual report said. “The achievements of the labor reform in respect of internal flexibility and wage constraint are encouraging, but the results obtained in fomenting new hires are still not sufficient.”

Figures released Wednesday by the National Statistics Institute (INE) that should that falls in wages in the public sector as a result of salary cuts as party of the government’s austerity drive had extended to the private sector for the first time. Private sector wages in the first three months of this year declined 0.9 percent from a year earlier after an increase of 1.7 percent in the same period a year earlier. In the public sector, wages dropped 0.4 percent after an increase of 0.3 percent a year earlier.

The labor reform also permits wage cuts in the same set of financial circumstances as those which allow for dismissals.

Despite the fall in wages, the central bank said steps needed to be taken to ensure that the situation of wage constraint does not reverse itself. “Further steps should also be taken to ensure that the diminished scope of the wage indexation system is not reversed in phases of economy growth,” the annual report said.

The number of workers covered by wage indexation has been falling from figures of around 60 to 70 percent traditionally to about 45 percent in 2012 and to 33 percent in collective agreements that have been recently signed.

The central bank said wage moderation has allow Spain to recover a “significant part” of the competitiveness it lost during the expansion period prior to the current climate, helping to boost the export sector.

The central bank’s report also echoed the European Commission in calling for the speedier implementation of the gradual increase in the official retirement age from 65 year to 67. The period used for calculating final pensions is also being increased from the contributions made in the last 15 years of working life to the last 25.

“It would be further advisable to bring forward the entry into force of the later retirement age and the lengthening of the period for calculating the regulatory base, both of which were approved in the last pension reform system,” it said.