Spain’s labour market improving but a long way to go

A highly inefficient labour market has been a major weakness for the Spanish economy. Poor labour market regulation has resulted in the abuse of temporary contracts by firms, excessive protection of workers on permanent contracts, and excessive wage indexation. This has resulted in low productivity, insufficient wage flexibility and labour market duality, in turn contributing to a deepening of the real-estate/banking crisis. Recent labour market reforms have addressed some of these shortcomings and helped net employment to recover faster than historical estimates would have suggested.

Spain's unemployment rate started to decline in mid-2013, when the economy exited recession. Initially, the decrease in the unemployment rate was primarily supported by strong net migration outflows. Employment growth took the lead in 2014, registering a solid rise despite GDP growth of less than 2% y/y - a level that, before the crisis and labour market reforms, was insufficient to generate net employment. 

Wage moderation, which started in the midst of the crisis, was further supported by labour market reforms. Together with unit labour costs and compensation per employee, more moderation in wages registered in collective bargaining started in 2012. Indeed, since 2013, the average increase in wages registered in collective bargaining is 0.6% y/y, much smaller than the c.3% y/y recorded in the 2000-08 period. 

Overall labour market reforms, via enhanced wage moderation and flexibility, have helped to support more job-rich growth than in the past. The latest INE Economically Active Population survey surprised positively, with Spain's unemployment rate (seasonally adjusted) dropping 1.2 points to 21.2% in Q3 15, a more than four-year low, while employment rose 3.1% y/y. Job market data also surprised significantly to the upside in November. The number of registered unemployed dropped markedly by 27.1k over the month, the sharpest decline since the creation of the series. 

Unemployment decreased in all activity sectors and the total number of unemployed stood at the lowest level since December 2010. Meanwhile, new social security affiliations rose by 1.62k in November, one of the highest annual increases (3.2%) since 2006.