Research Dept. News
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Monthly Report, num 345 - April 2011
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Spain: overall analysis - Labour market
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The Labour market is still in the doldrums
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The rate of decline of total employment speeds up by two tenths of a percentage point to 1.3%.
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In spite of more dynamic economic activity over the last few months, the labour market has yet to see any improvement. The latest data available for February were worse than expected, causing us to downgrade our forecasts slightly. For 2011, our forecast is therefore higher by two tenths of a percentage point both for unemployment, up to 20.4%, and for the average rate of decline in employment, to 0.5%.
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In fact, the economy has yet to recover sufficiently to create jobs, as shown by the decrease in the total number of people registered as employed with Social Security for February, namely 14,745 (almost 38,000 once seasonally adjusted). This led to a decline in the labour market's recovery, as the rate of decline in the year-on-year employment rate accelerated, up two tenths of a percentage point to 1.3%. Moreover, this drop in the total number of employed was a shock because a slight increase was expected in employment for this month.
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With regard to registered unemployment, this grew by 68,260 people in the month of January (around 21,000 seasonally adjusted), a higher increase than expected. Registered unemployment therefore rose for the second month in a row, halting the more favourable trend of the last few months of 2010. Nonetheless, the year-on-year rate of growth fell by four tenths of a percentage point to 4.1%.
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The weakness in the labour market might result in a slower recovery.
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One consequence of the rather unfavourable trend in the labour market is that activity might end up recovering more slowly. Within this context, it's important to assess the effect of the recent labour reforms, in force since July 2010, which aim to ensure that the progress made by the economy is translated into new jobs. With this aim in mind, one of the goals of the new legislation is to reduce the dual nature of the labour market, between employees with permanent and those with temporary contracts. Although it's still too early to measure the legislation's effects, as agents have to become familiar with its specifics, the figures show that, for the moment, the proportion of temporary contracts has not changed and is still over 25%.
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Precisely one of the main measures in the labour reforms was to encourage the use of Contracts to Promote Permanent Employment (CFCI in Spanish), whose severance pay is 33 days per year worked in the firm (instead of the 45 days previously established for permanent contracts). The graph below shows that this kind of contract increased substantially at the end of 2010, motivated by the chance to convert temporary contracts prior to the reform into CFCI contracts before 31 December. However, since January 2011, the number of CFCI has fallen sharply and this, for the time being, prevents us from making any conclusions regarding whether the measures adopted to stimulate this kind of contract are working.
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The dual nature of the labour market continues.
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It should also be noted that part of the reform has yet to be implemented, such as the incorporation of the Austrian model, which consists of taking out an insurance policy, chargeable to the firm's Social Security contribution, that covers part of the severance pay and can be accumulated up to retirement. Moreover, other significant reforms, such as collective bargaining, are still being negotiated.
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The recovery in tourism might help to create jobs over the next few months.
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Another factor that might slow up the recovery in the job market is the poor prospect for employment in the construction industry. February's figures continue to show sharp falls in employment in this sector, 9.7% year-on-year, and the pace of job losses is likely to remain high in 2011. This will make it difficult to reduce the unemployment rate. However, at the end of 2012, this process of job losses should finally abate, as activity in the sector is expected to stop declining.
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On the other hand, as the months go by, some employees in the construction industry should be able to relocate to other jobs, especially in the services sector. Within this context, of note is the relatively improved tone of employment in the tertiary sector during the second half of 2010. In spite of a slight dip in services employment in the first two months of 2011, moderating its year-on-year growth rate to 0.2%, this sector is expected to absorb some of the jobs lost in construction over the next few months. This might be due to the good outlook for tourism this year, as shown by the figures for the number of nights spent in hotel establishments, up by 4.6% in January compared with the same month last year. Moreover, while the instability continues in the countries of North Africa, Spain could benefit from a redistribution of both national and international tourism.
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Another factor that will determine the pace of recovery in the job market over the coming months is how far wages will adjust. In Spain, these tend to react slowly and very moderately to changes in the economic cycle. This leads to greater employment volatility in relation to changes in GDP than in other advanced countries, as adjustments are made via job losses rather than wage variations. In fact, as can be seen in the graph above, real wage costs per worker took time to fall and didn't do so until the third quarter of 2010, after two years of economic recession. However, the figures are finally showing significant wage constraint.
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Real costs per worker fall.
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Wages are expected to continue moderating, although the extent of the adjustment will depend on the extent of wage indexing. Unlike Spain, in several European countries wages are linked to core inflation. This limits the impact of rising oil prices on wages and helps productivity to improve.
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Job creation will continue weak throughout the year.
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In short, the labour market is likely to pick up gradually throughout 2011, although jobs will not be created until 2012. There are some factors that might slow up this adjustment. Firstly, if the inflationary trend continues, households' purchasing power could be affected, hindering the recovery in consumption. As a consequence, the improvement in activity, and employment, might slow up. Secondly, a rise in interest rates could reduce the incentive to consume and thereby slow up activity, although this effect is expected to be quite limited. However, not all the risks are unfavourable, as the better performance shown by sovereign debt in the last few weeks might have a positive effect on the adjustment in economic activity and thereby boost job creation.
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