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The following OECD assessment and recommendations summarise chapter 2 of the Economic survey of Spain published on 19 November 2008.
The downturn and the need for structural change require better matching of workers to jobs
The deceleration of economic growth has already resulted in a marked increase in unemployment. This reflects labour shedding in construction and related sectors and an expansion of labour supply, as immigration is still substantial and female labour force participation continues to rise, albeit at a reduced pace. Workers in occupations with low qualification requirements have been affected the most by the rise in unemployment, including immigrants. Sectors which have employed many of these workers, mainly construction, are set to lose importance. The mismatch between qualified workers and available jobs is severe in international comparison, with an unusually large share of highly qualified workers employed in occupations not making adequate use of their qualifications.
Activation strategies for the unemployed can be improved
Effective active labour market policies (ALMPs) play a major role in damping the impact of the business cycle on labour market performance. The government has recognised the importance of such policies, pledging an increase in resources to the public employment services (PES). Spain’s activation policies are sound, with benefit receipt at least formally conditional on satisfying search requirements, but scope for improvement remains. While the central government level is responsible for financing unemployment benefits and part of the PES’ activities, regional governments run the placement services. This split assignment of responsibilities risks weakening incentives for effective placement. Indeed, enrolling some unemployed in ALMPs is used to re qualify participants for benefits, and placement interviews are conducted less frequently than in many other OECD countries. To identify well and poorly performing placement offices the placement results of regional employment services should be benchmarked and linked to some financial reward for success. Not all ALMPs are evaluated, and a large share of such spending is directed towards wage subsidies for offers of permanent contracts to the unemployed, which are subject to large deadweight losses and displacement effects. Wage subsidies for the hiring of the unemployed on permanent contracts should be redirected to those ALMPs targeted at the difficult to place unemployed that prove most effective in moving them into unsubsidised jobs.
While labour tax wedges are not generally high by OECD standards, the tax burden on low wage earners with children is still comparatively high, even after improvements in their fiscal treatment introduced in the 2006 reform of the personal income tax. This adversely affects their employment prospects and contributes to their relatively high poverty rate. As mentioned above, consideration should be given to introducing a means tested in work benefit, whose level would depend on the number of children in the household. Higher child benefits conditional on school attendance could also reduce early dropping out from secondary school (see below).
More should be done to integrate immigrants in the labour market
As outlined in earlier Surveys, immigrants have helped to raise living standards through their large contribution to labour input, reflecting their relatively young age and high participation rates. However, many work in low skill occupations, including in the construction industry, and in jobs that do not reflect their skills. Also, about half are employed on temporary contracts, exposing them heavily to the current economic downturn. About half of all immigrants arriving in Spain are not Spanish native speakers. Incentives for immigrants to acquire local language skills should be raised, inter alia by adapting the national system of language skill certification to labour market needs. Finally, barriers excluding non EU workers from some regulated professions and from public sector jobs should be removed.
Temporary employment by birth status
As a percentage of total, 2005
Source: OECD (2007), International migration outlook: SOPEMI.
A fundamental reform of employment protection legislation is overdue
Stringent employment protection legislation (EPL) for workers on permanent contracts continues to encourage widespread use of temporary contracts. The precarious employment status of young workers, whose levels of qualification are especially high, is strongly related to their lack of access to positions that are commensurate with their skill levels. Measures taken in recent years, notably financial incentives for hiring on permanent contracts and some reduction in severance payments for new hires of young and female workers, cannot address the depressing impact of strict EPL for incumbent workers on worker turnover, including on voluntary job to job movements. This is the fundamental problem EPL poses for these demographic groups. Severance pay for permanent contracts should be made less generous, reducing the difference in the degree of protection between temporary and permanent contracts. One option to fully remove such differences is to create a universally applicable contract.
Housing policy reforms should focus on enhancing mobility
Limited geographic mobility contributes to a mismatch of workers with needed skills, especially among young, highly qualified workers, reducing the returns to education. Low mobility is linked to the stunted development of the private rental market, which is weakened in turn by slow rental contract enforcement by the courts. A more developed rental market could raise housing demand among young and low income individuals. Progress has been made in this direction, and the government is preparing additional legal reforms in order to shorten eviction processes, and the possibility of applying arbitration procedures to rental contracts is under consideration. Indeed, judicial procedures to enforce residential private rental contracts need to be further accelerated. Otherwise, the central and regional governments have embarked on an ambitious joint programme to raise the supply of social housing by 1.5 million units over the next 10 years. While at least 40% of the new units are aimed at the rental market, this programme risks exacerbating mobility barriers, as access is typically available only after a considerable waiting period. Moreover, social housing programmes are poorly targeted at low income households, inter alia because part of social housing is made available for purchase. Means tested cash benefits earmarked for housing costs are likely to achieve better targeting without harming mobility. The recently introduced mobility allowance for the young is a step in this direction. Resources devoted to subsidising social housing should be redirected to means tested earmarked cash benefits. Such steps would more effectively improve the income prospects of the truly needy. Developing new social housing for purchase should be abolished. Finally, the deductibility of mortgage and rent payments from the personal income tax should be phased out.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of Spain 2008 is available from:
For further information please contact the Spain Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by Andrès Fuentes and Eduardo Camero under the supervision of Peter Jarrett. Research assistance was provided by Sylvie Foucher-Hantala.