Media Briefings

Unemployment in Spain: Why it's so Much Worse Than In France

  • Published Date: August 2012

Despite similar rates of unemployment in Spain and France before the economic crisis, nearly one in four members of the Spanish workforce are now jobless compared with one in ten of their French counterparts. According to research by Professor Juan Dolado and colleagues, published in the August 2012 issue of the Economic Journal, these contrasting experiences have arisen from key differences in the labour market institutions of the two countries related to the use of temporary workers.

Both countries have promoted temporary contracts as a way to achieve greater labour market flexibility. But Spanish regulation of temporary contracts has been much laxer, to the extent that a third of employees in Spain were temporary before the crisis struck, two million of whom have since lost their jobs.

The main reason for the high share of temporary workers in Spain relative to France is the wide gap between the costs of firing employees on permanent and temporary contracts. The researchers calculate that had Spain’s share of temporary contracts been the same as in France, the rise in unemployment could have been almost halved.

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The Great Recession that began in 2008 stands out among previous slumps for its depth and scale. And yet for Spain, the story has an eerily familiar feel. To follow the path of the Spanish unemployment rate is to embark on a wild ride, with bursts to around 20% in the mid-1980s and again in the mid-1990s.

Now compare Spain with France. Both countries share similar labour market institutions – in terms of severance pay, unemployment benefits, wage bargaining, etc. – and they had almost identical unemployment rates of around 8% just before the crisis. But while the French unemployment rate has only risen to 10% during the slump, the Spanish rate has surged to almost 25% today.

Is there any difference in the labour market institutions of these two countries that could help explain such a wide divergence? Samuel Bentolila, Pierre Cahuc, Juan Dolado and Thomas Le Barbanchon argue that there is one key difference. According to their calculations, if its share of temporary labour contracts had been as in France, Spain could have had an increase in its unemployment rate of just 9 percentage points rather than the actual increase of 16.5 points.

France and Spain are among those European economies that have most strongly promoted temporary contracts as a way to achieve labour market flexibility. But temporary employment is much more important in Spain than in France. Historically, 33% of its employees are on temporary contracts – a rate that has fallen to 24% today as a result of the destruction of almost two million temporary jobs since the summer of 2007 – whereas the French rate is around 15%.

The authors point out that despite the institutional similarities between the two countries, two factors can jointly help account for a significant part of the divergent unemployment experiences: the larger gap between the firing costs of workers with permanent and temporary contracts in Spain; and laxer Spanish regulation of the use of temporary contracts.

Standard economic theory predicts that facilitating temporary job creation leads to an ambiguous effect on unemployment, since both job creation and job destruction should rise. But the research points out that if the gap in firing costs is high enough, the increase in job destruction will dominate.

Why? Because the higher this gap, the more employers are led to use temporary contracts in sequence – especially if there are few restrictions on their use – rather than converting them into permanent contracts. As a result, a high firing-cost gap is likely to lead to a disproportionately high rise in unemployment during downturns, which is mainly borne by temporary workers.

To check the relevance of this mechanism, the authors develop a theoretical model of a dual labour market with both permanent and temporary contracts. Ending the former entails high severance pay and long delays, whereas the latter can be either transformed into permanent contracts at their expiration or quickly terminated at little or no cost.

The authors use their model to calculate by how much Spanish unemployment would have increased had Spain adopted the (much lower) French firing-cost gap before the recession started. They find that the rise in Spain’s unemployment rate could have been 45% lower.

Overall, these results provide some support for several European policy initiatives to reduce sharply the negative effects of labour market duality, which fall especially hard on young people. This might be done through the simultaneous suppression of most types of temporary labour contract and the introduction of a single labour contract with severance pay that gradually increases with seniority in the job.

Notes for editors:Two-tier Labour Markets in the Great Recession: France versus Spain’ by Samuel Bentolila, Pierre Cahuc, Juan Dolado and Thomas Le Barbanchon is published in the August 2012 issue of the Economic Journal.

Samuel Bentolila is at CEMFI in Madrid. Juan Dolado is at the Universidad Carlos III de Madrid. Pierre Cahuc and Thomas Le Barbanchon are at the Ecole Polytechnique in Paris.

For further information: contact Romesh Vaitilingam on +44-7768-661095 (email: romesh@vaitilingam.com); or Juan Dolado via email: dolado@eco.uc3m.es