How Spain can escape the unemployment trap

Despite the growing unemployment crisis in Spain – recent indicators have confirmed that the rate has reached 27% – the government is yet to take the decisions needed for adequate reform.

Last year’s labour market reform was all about relaxing redundancy costs. This, however, overlooked the root of the problem – how to facilitate the hiring of workers and to make the labour market in Spain more economically competitive.

The government appears to be providing short-term solutions, overlooking the fact that this is a structural crisis; addressing unemployment in Spain requires profound structural labour market and educational reforms.

Education and training in particular seem to get little attention. Firstly, Spain has a 30% dropout rate at the high school level and a 50% dropout rate at the tertiary level, among the highest in Europe. This creates a backlog of young people with few or no qualifications who are unemployable in the long term.

Secondly, the quality of training programmes provided is also not up to par. According to results published by the Programme for International Student Assessment (PISA), Spain ranks low in terms of quality, only above the Czech Republic, Slovakia and Austria within the European Union.

Thirdly, there is a mismatch between education supply and labour demand, with limited vocational training. This gap also leads to the dissatisfaction of employees when they are employed in positions that they consider they are overqualified for.

In addition, universities have been slow in adapting to the changing context. Although they have done well in continuing to provide basic research, they haven’t adapted fast enough to link research to the needs of the economy and in improving the quality of training. There must be a greater match between the training provided by universities and real life and employment needs.

Employers have a role to play in the current crisis. Over the past 15 years in Spain, they used labour market regulations to their short-term advantage, offering mostly temporary contracts to new recruits and hiring workers relatively cheaply. This system did not provide incentives for on-the-job training; worker skills depreciated quickly as a result. The situation, however, can be easily addressed by the implementation of regulations aimed at establishing a single contract for all workers. This will avoid the complexities brought by the existing multitude of types of contracts, simplify the system for recruitment, and allow the entry of more highly qualified recruits – the young – into jobs with a greater prospect of increasing productivity.

Spain would also greatly benefit from increasing the role of employers in training. On-the-job-training will be absolutely critical moving forward, given the constant need for individuals to adapt to the new skills that are required in the workplace. Overall, there is a need to almost start from scratch.

In the long term, migration will also become a problem. Although this represents a minority of the population, people with high qualifications are already starting to leave the country in droves to find employment elsewhere. This is already creating a brain drain, which will harm the Spanish economy in the long term, as these highly skilled workers are unlikely to return in the near future. Those with mid-level qualifications will most likely stay and find opportunities once the economy picks up. But the transition period may be relatively long.

Those with little or no training will also stay in Spain as they don’t have skills to sell and would not be able to compete with other cheaper workers from other parts of the world. This category of people will augment long-term unemployment and will increasingly connect youth unemployment with long-term unemployment, a phenomenon which is rare elsewhere in the world. The consequences of this atypical situation on the Spanish welfare system could be huge.

The coming years will be difficult for Spain, but the situation is not hopeless. Contrary to what some people think, Spain’s participation in the Eurozone is a blessing, as this will eventually force the country to go through real reform and make tough decisions.

There is potential and talent within the country, and there is potential to attract people from abroad. But in order to reduce unemployment rates, true and deep reforms will be needed, both in education and training systems and in labour markets.

Author: Andrés Rodríguez-Pose is a professor at the London School of Economics and Political Science and a Member of the World Economic Forum’s Global Agenda Council on Employment.

Image: People wait for an employment office to open near Barcelona.The stickers on the wall read “unemployment”. REUTERS/Albert Gea