OECD calls on Spain to make layoffs even cheaper

Despite the labor reforms introduced by the Spanish government in February last year, the OECD suggested in a report released Wednesday that severance pay remains high and that more cuts are needed to tackle high unemployment, which stands at 26 percent.

The report also recommends that the government rein in the discretionary power of labor courts to declare dismissals null and void to “extreme cases.”

In a presentation of the report in Madrid, the Organisation for Economic Co-operation and Development’s labor director, Stefano Scarpetta said redundancy payments in Spain were still “generous.”

“Spain remains one of the OECD countries with the most generous severance pay requirements,” the report said. “The OECD suggests reducing over time the severance costs for large employers to align them closer with OECD and European averages.”

The conservative Popular Party government commissioned the OECD to draw up the report to show Spain’s European partners.

Scarpetta said if the costs of dismissal remain high, firms will prefer to hire temporary rather than permanent workers. But the report said the government’s reform had encouraged firms to hire more permanent workers, by around 30 percent on average.

“Spain’s on the right track to gradually reduce unemployment. The reforms are already making an impact”

The labor reform cut severance pay for permanent workers from 45 days of wages for each year of service to 33 days, and the maximum amount from 42 months’ salary to 24 months. It also introduced a series of so-called “objective causes” such as falling sales and technological and organizational changes that, through labor force adjustment plans (EREs), allow companies to carry out collective dismissals with severance pay of only 20 days’ wages for very year worked up to a maximum of one year’s salary.

“Spain’s on the right track to gradually reduce unemployment. The reforms are already making an impact,” the report said. “But further efforts to better support job seekers and to provide firms with greater options to adjust in difficult times are still needed.”

Workers have also seen their wages fall as a result of an internal devaluation process to enhance the country’s competitiveness. According to official figures released Tuesday, wages have fallen for the past four quarters in a row.

“There is no question that wage moderation is painful for workers,” Scarpetta told a news conference. “If it is a way to protect jobs, it is something that needs to be done.”

The OECD estimated that more than half of the 3.2-percent fall in labor costs in the business sector between the end of 2011 and the second quarter of 2013 was due to the government’s labor reform package.

The Paris-based organization expressed surprise that there had not been a great deal more collective dismissals in the wake of the reforms and attributed this to the amount of time courts take to rule on lawsuits filed against EREs.

“Other measures the government could take include further reducing the judicial uncertainty concerning collective dismissals, for example by treating unfair collective dismissals in the same way as unfair individual ones, which is the practice in most OECD countries,” the report said.

Collective dismissals declared null and void by a labor court require the company to readmit workers and pay their wages for the period between the time they were dismissed and the date of the court ruling. This is not the case for individual dismissals.

The report also said more could be done to get the jobless back to work. “Half of all unemployed people have also been out of work for 12 months or more, more than double the level before the crisis,” it said. “Further action is therefore required to boost job creation, promote the reintegration of the unemployed back into jobs and make further progress in reducing the still widespread segmentation of the Spanish labor market.”

The OECD said the level of unemployment benefits is not necessarily a deterrent to get the jobless back to work, noting that there are model countries with high unemployment benefits with very efficient job-search services.

In response to the report, Labor Minister Fátima Báñez said there would be no further major overhaul of legislation governing the labor markets. “The labor reform is already in place, and what we’ll do when necessary is to make adjustments in order to allow it to deploy its potential to create jobs,” she said.