Working paper 1/2018. Some Unpleasant Labor Arithmetics: A tale of the Spanish 2012 Labor Market Reform

25 January 2018

The 2008 economic and financial crisis and its posterior EU banking and sovereign debt dimensions highlighted some unresolved structural issues in the Spanish labor market, exacerbating unemployment issues. Duality between permanent and temporary workers, excessive rigidities in wage setting and collective bargaining arrangements and extreme volatility, particularly in employment, stand amongst the most commonly cited structural dysfunctionalities. This chapter aims at analyzing the macroeconomic impact of the 2012 labor market reform, aimed at mitigating these institutional flaws and achieving a more efficient and resilient labor market. The analysis looks at three overarching stylized facts: (i) the Wage Curve; (ii) the Beveridge Curve; and (iii) Okun’s Law. Overall, the main findings of the econometric approach provide evidence of significant structural gains that are in line with the descriptive analysis. The reform has encouraged wage moderation, reduced labor market frictions and increased the resilience of the labor market to negative shocks. Paradoxically, however, the results also hint to an exacerbation of the duality problem in the labor market. The Spanish experience also shows that a) (unwanted) side effects can potentially limit the effects of a reform, b) early implementation might be the right choice, even during a recessionary period, when reform appetite can be larger and c) support from social partners and national ownership can help specially to absorb the (short run) transition costs. Working paper 1/2018.

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