Central bank links lower wages to PP government’s labor reform

Regulator sees no indication that new rules have led to increase in long-term contracts Economy seen emerging from recession this quarter

The Bank of Spain on Thursday concluded what has already been evident to many workers, which is that one of the effects of the labor reform introduced last year has been to push wages down.

“The initial results point to a deepening of the process of wage moderation after the approval of the [labor] reform of 2012,” the central bank said in its September economic bulletin.

The labor reforms drawn up by Popular Party (PP) Labor Minister Fátima Báñez have made it easier and cheaper for companies to sack workers and to negotiate wage cuts. The psychological impact of rampant unemployment has also had an impact of wage moderation, which has helped Spain recover some of its competitiveness and boost exports; a process known as internal devaluation. The jobless rate in the second quarter was 26.3 percent, second only to Greece within the European Union.

The central bank said it is difficult to gauge the impact of the reforms because of the recession. Institutions such as the OECD and the IMF had argued that prior to the reforms wages had been insensitive to the impact of the recession, with nominal wages rising two percent annually.

Labor costs have now have fallen for the past three quarters

According to figures from the National Statistics Institute (INE), labor costs per hour in the second quarter declined 0.3 percent from the same period a year earlier after adjusting for seasonal factors and differences in the number of days worked. Labor costs have now have fallen for the past three quarters.

The government had argued that the reforms were necessary to tackle the dual nature of the Spanish labor market, with workers on permanent contracts being well protected while those on temporary contracts enjoyed little protection. However, the central bank said there was no indication that the reform had caused an increase in permanent contracts, with the proportion of temporary workers in the labor force still very high at 23 percent.

The central bank also noted that the measures of internal flexibility introduced by the labor reform had been used almost exclusively by large companies. It also believes that the process of decentralizing collective bargaining had not been reflected in a greater number of agreements at the company level, but may have resulted in more wage moderation at the sector level.

In its bulletin, the Bank of Spain agreed with other observers that the Spanish economy is due to emerge from its longest recession in some 50 years in the third quarter. “The information available would be consistent with a stabilization, or even a slight advance, in output in the period July-September,” the report said.

In an interview with the Wall Street Journal published earlier this week, Spanish Prime Minister Mariano Rajoy said GDP would grow between 0.1 and 0.2 percent on a quarterly basis in the third quarter.

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