Labour Reform as an Ethical Imperative

Versión en español y comentarios

Spain has the most restrictive labour law of all developed countries. As a result, it also has the highest unemployment.

The rules that weigh down industrial relations today stem from those laid down formulated under Franco. Why are they still alive 34 years after the death of the dictator?

Some people may think that the labour laws are wrong but well-intentioned. I do not believe this. The State, in its zeal to protect workers, is unlikely to have forgotten that a contract is only possible when all parties agree. The problem does not lie in the State’s paternalistic myopia but in the unequal way it treats its citizens.

In Spain, there are two types of worker. On the one hand, the élite which enjoys “placements” in the public sector and large corporations. On the other, temporary workers—mostly young people, women and immigrants—as well as marginal, self-employed workers.

This duality is apparent throughout the Spanish labour market, especially in access to long-term, stable jobs.

More than ever, we need stable jobs, in which workers can gain experience and accumulate knowledge. But stability is reserved for the labour élite. Today’s permanent contracts do not promote long-term relations because employers are obliged to continue paying their workers, whatever their productivity and attitude.

Obviously, employers take precautions. Firstly, they avoid long-term employment, replacing work by capital and long-term by short-term work. When they have no alternative and they have to hire long-term workers, they choose people they can trust, who will be productive even when they have a contract in which abuse is possible. So the people they hire are those able to signal that they will be cooperative in the future. And such signals, considering the calamitous state of education in Spain, are only within the reach of the well-off and the well-connected.

Entrepreneurs are being criticised for not hiring more workers. But it is no coincidence that there are few Spaniards who want to be entrepreneurs, and even fewer who want to be employers. This vocational crisis can be seen even in schools of Business Administration in regions that once proclaimed their entrepreneurial spirit. This is not just because entrepreneurs are viewed with suspicion: in a society that worships money, the fact that young people do not wish to be entrepreneurs suggests that business is not very profitable.

Temporary contracts are also a tool for inequality—not because they are temporary, but because they cannot be extended. This restriction prevents them from being used for long-term relations without the risk of opportunism. Long-term relations are thus reserved for the labour élite which is able to offer the right signals.

What’s more, there is tremendous hypocrisy regarding temporary contracts. Their fiercest critics are often the first to use them for their own employees, as has occurred with some trade unions.

And employers’ organisations are not free from blame. They say they are in favour of making contracts more flexible, but seem to be less than enthusiastic about an equally necessary measure, that of liberalising the negotiation of collective agreements. Perhaps they are afraid of undermining their raison d’être.

The crisis is exacerbating discontent, and these inequalities will end up being intolerable. The privileged half of the country cannot continue to live at the cost of the other half. If it wants to keep its standard of living, it will have to work for it. It is time for popular sovereignty to do away with privileges, and restore the forgotten values of justice and equality of opportunity. Labour reform is an essential first step to achieve the fair and open society that we all want.


Article published in the Spanish financial newspaper Cinco Días (16 July 2009, p. 15).


By: Benito Arruñada

April 1st, 2010 , 07:42

A country of unemployment and self-service

It has always surprised me that in countries richer than Spain, gas stations have staff to fill our tanks, a job that in Spain we have to do for ourselves. Now I know why. It is for the same reason that AENA, the Spanish airport and air navigation agency, which reports to the Ministry of Public Works, is going to replace air traffic controllers with machines.

The figures presented by the Ministry are only too clear. Each controller costs an average of 375,000 euro a year. It seems more than reasonable to replace them in small airports. But why not in all airports? The machines replacing them are not only cheaper, they have no need for apartments to rest in, cannot work to rule, and do not insist on AENA hiring their relatives.

But a military air traffic controller commands just 23,500 euro a year. From the social point of view, this is the most relevant cost, assuming that the competence and performance of military controllers are at least similar to those of civilian controllers. So it makes more sense for the Ministry, instead of replacing the latter with machines, to take on more controllers but replacing the civilians with military controllers.

The difference between the two wages is just the rent received by the civilian controllers for having had the skill or the good fortune to become controllers. The situation seems unfair—the civilians earn 16 times more. But it is not just a matter of distribution. Not only are resources being wasted on rent seeking but these inflated wages distort decision-making. Even a publicly-owned company such as AENA is now avoiding hiring more staff, preferring to replace them with machines.

For the same reason, converting gas stations into self-service operations was perhaps not cost-effective. In general, it is hard to know if it is cost-effective or not to use so much capital-intensive technology. I fear the signals being conveyed by Spain’s inflated wages are leading to wrong decisions.

For example, the employers’ organizations and the trade unions have just agreed on a one per cent wage rise for 2010 in a context that is almost deflationary and for which all sorts of experts were recommending wage drops. For decades, they have been agreeing on such high wages that it is now in employers’ interests to replace workers with machines. This means they are excluding the less skilled workers from the labor market. The results are self-service at gas stations, ATMs in banks, drivers having to pay by card at motorway tolls and cinemas with no ushers to take us to our seats. And, inevitably, factories are disappearing and those that remain are increasingly using automatic processes. It also seems inevitable that work will be concentrated in sectors in which labor regulation is less strict, such as construction, self-employed work, and in the underground economy. The fact that all these activities use labor-intensive technologies speaks for itself.

Moreover, it is not true that replacing work with physical capital heralds a new economic model because Spain has 20% unemployment and an overabundance of unskilled workers. The INEM, Spain’s employment institute, forecasts that four out of every ten unemployed workers have little possibility of finding a job. Fortunately, this forecast is incomplete—it only applies to workers whose wages are greater than the value of what they produce.

The gap between their productivity and the natural aspiration to higher wages can be filled by increasing productivity or reducing wages. But we have spent decades trying to increase the productivity of the unemployed by offering them training. Instead, all we have achieved has been a parallel education structure in the hands of the employers’ organizations and the trade unions, one which is even less efficient than the general education system. We also subsidize hiring, but it comes at a huge administrative cost with very meager benefits.

We need to look the facts in the face. Our labor institutions cannot continue expelling the least productive workers from the official labor market, condemning them to degrading unemployment benefit, trumped-up training courses that only serve the interests of their organizers, and subsidies that are hugely expensive considering they serve only as a cover-up.

These millions of workers have the right and the obligation to work and, if they produce to a level below the wages agreed on by our selfish “social” agents, then the representatives of popular sovereignty should rescue this sovereignty and seek justice. We may give them direct compensation for their low wages, but we should not tolerate their being excluded from productive activity. We cannot continue to allow these consensuses that are being reached behind the backs of the poorest and to their detriment.

Published in Cinco Días, April 1, 2010, p. 14.

By: Benito Arruñada

February 22nd, 2010 , 08:40

Retiring before We Work

The Spanish public has recently received two items of news: we shall live longer, but retire later. The two announcements are connected because we shall have to work longer to finance, amongst other things, the health care expenditure that will help us live longer.

Because of this connection, we should note that decisions in both areas are also related. But we usually separate them. We hope to retire early and live longer, a dual demand that is impossible to meet for everyone. But many citizens and a good number of politicians seem not to understand this.

Although this is not a real possibility in Spain, there is a lot to learn from how the two decisions would be taken in the market. Citizens would have to choose when to retire and how much they want to spend on their health insurance. This would be similar to saving money in a pension fund. In order to save, they would have to spend less on other things, including their health insurance. For example, people could choose a cheaper health insurance, one that does not cover costly technology that may or may not work, or one that includes excess and co-payments to prevent their abusing it in the future.

Obviously, it would be difficult for potential purchasers of pension funds and insurance policies to decide on the right product, and collateral damage that is difficult to resolve may well occur. But we can learn from such market solutions, adapting them to improve our situation.

The key lies in linking cost and benefit decisions, sharing them out in a fairer way. A viable and less unfair welfare state needs citizens to consider both costs and benefits. They need to be aware of their choices between quality of life and current and future consumption, and they need to remember that it is they themselves, and not other people, who have to pay for what they consume.

Otherwise, we will be voting and taking decisions on benefits as if we did not have to pay for them. When we go to the doctor, we ask for the most expensive medicines even if a much cheaper generic one would serve us equally well. In hospital, we expect top-class service and the latest technology, and we are delighted to hear that Spain is a world leader in transplants. But we hate paying tax and, when retirement age comes along, we expect to retire even if we are still in good health and working at full capacity.

Such shortsightedness about costs is not sustainable. We need to learn at least several lessons from the market:

1. Whatever the total amount we decide to spend on pensions, we have to be better at linking the amount of each pension to the contributions made during working life. Setting the amount of individual pensions on the basis of the last few years worked is unfair and will eventually turn against the system. It is damaging for those whose incomes grow less over time, that is, the less skilled workers.

2. We should also be allowed to receive a pension while continuing to work. People would have us believe this destroys work, but there is nothing further from the truth—all work generates demand and, in consequence, new jobs.

3. In order to help citizens realize that it is they who pay taxes, prices should be given without VAT, and income tax withholdings should be set lower so that most people have to pay when filing their income tax returns instead of receiving a rebate, as is the case now.

4. We should also eliminate the deceptive distinction, which exists for accounting purposes only, between the payments that are made to the Social Security “by the employer” and “by the employee”. This leads people to believe that social services are much less costly than they really are.

5. Finally, we need to start discouraging superfluous expenditure and consumption. We all know that our medicine cabinets at home are full of expensive but unused drugs. And the problem goes beyond the health sector. University classrooms all over the country are half empty because students consider they have the “right” to not go to class.

If the welfare state is to have a future, such asymmetry and ignorance must be avoided. Otherwise, we will continue to dissociate costs and benefits, running the risk of retiring late and dying young.

Published in Expansión, February 22, 2010, p. 46.

By: Benito Arruñada

February 12th, 2010 , 10:18

Morality of Layoffs

In Spain, you can be forgiven for just about everything, except for heresy. A few days ago, the media inquisitors did their utmost to burn Adolfo Dominguez at the stake of disrepute. He had said something that many people think in private but are reluctant to state in public: that Spain should change its laws to allow what is wrongly known as “free dismissal”, that is, the negotiation of dismissal by the parties to the employment contract.

The term is wrong because in countries where such freedom to negotiate exists, parties may, or may not, include in the contract wording to the effect that dismissal requires the company to pay compensation to the worker or that a worker terminating a contract must pay compensation to the company.

A wide variety of employment formulae exists. Contracts can be drawn up based on collective agreements or without any trade union participation in the form of individual contracts, and they may include either explicit compensation (which can therefore be enforced in the courts) or implicit compensation (based on the company’s need to preserve its reputation in order to continue hiring employees).

The formula is chosen depending on the conditions in each case. There will be greater restrictions if guarantees are needed when investing in physical or human capital because the value of such investments depends on continuation of the relationship in the long term. (Such capital has been known as “specific” assets since the studies by Oliver Williamson, the 2009 Nobel prizewinner for Economics). Companies are only too willing to offer permanent jobs when they need a stable workforce in the long term. The permanent jobs of Japan are the paradigm, but in fact there is no need to look outside Spain. The Spanish Corte Inglés department store gives its employees better conditions than those required by law.

Free employment contracts are less restrictive for activities in which it is in the interests of both sides—employers and employees—to maintain a possibility of termination at will. This may be in the interests of workers because they wish to protect themselves against selection errors and the presence of shirkers.

This is the opposite of what happens in Spain, where it is not unusual for a team of workers to include some incompetent members or skilled skivers. Many workers tolerate such opportunism, perhaps believing it is the employer rather than they themselves who pays the cost of such idlers. Fishermen are a noteworthy exception. When a sailor shirks his duty, his colleagues report him to the employer, insisting he be replaced the next time the boat sails. It is no coincidence that they are customarily paid a share of the catch.

It is true that free dismissal may entail difficulties, especially if there is no competition, or when bargaining power is unbalanced. But such difficulties are not always present, which is what our laws assume. And, anyway, there are many ways of resolving them, with solutions through trade unions (agreements), laws (on compensation to be paid for dismissal) and the courts (regulation by judges of employment contracts, similar to that for adhesion contracts). These solutions can be flexible as the problems involved are relatively manageable and do not cause the high degree of opportunism that is caused by today’s stringent rules.

Such extreme laws only protect the elite of workers who have little need for protection, that is, civil servants and the employees of large corporations. Much in the news today is the blackmail being exercised by air traffic controllers. But this is not essentially very different from the pressure being applied by workers in the automobile sector, who are making the survival of the auxiliary sector dependent on state subsidies to manufacturers to ensure that the latter remain in Spain and continue paying them their inflated wages.

Given the penury of the other half of Spain, the half that does not work for the public sector or a large corporation of this type, it is especially important to denounce the unconscious hypocrisy of those who oppose freer negotiation of working conditions. It is unconscious because they believe in their moral superiority. And it is hypocrisy because the elite workers reap dual benefits from the current situation—they end up without competitors, and their competitors are at their service.

For all these reasons, I feel Adolfo Dominguez should be doubly congratulated. He is one of the few entrepreneurs who dares to say what he thinks in public, and his diagnosis is right. Only sensibly regulated contractual freedom can achieve prosperity and justice in an open society.

For centuries, bad theology prohibited money-lending against interest. But this did not prevent part of the Church from benefiting from the purchase of perpetuities, a sort of indefinite loan. The new orthodoxies sometimes behave in a similar way. When Spanish trade unions act as employers, they too avoid permanent contracts.

Published at Cinco Días, February 12, 2010, p. 140.