The unemployment rates in Greece and Spain are over 25% -yet the economic downturn in Spain is comparably mild. A NY Fed / Liberty Street Economics post believes the reason is the higher use of temporary workforce in Spain.
The post states in part:
The high unemployment rate in Greece is not surprising given the depths of its recession, but what explains Spain’s 25.8 percent unemployment rate given its much more modest downturn? One contributing factor is the fact that the composition of Spanish jobs made the economy vulnerable to dramatic job losses during a recession. In 2007, almost 13 percent of jobs in Spain were in construction, compared with roughly 8 percent in Greece and the euro area. Such a heavy weight on this sector made employment more vulnerable to a downturn given the fact that construction is the sector that typically experiences the steepest decline in a recession. Indeed, construction, as measured in the GDP accounts, fell 35 percent from 2007 to 2011, and the sector accounted for almost 60 percent of the decline in total employment over this period.
Another contributing factor is the very high percentage of employees tied to temporary work contracts in Spain. Data from the Organisation for Economic Co-operation and Development show that 32 percent of employees in Spain worked under temporary contracts and 68 percent under permanent contracts in 2007. In Greece, 10 percent were on temporary contracts; the figure for Europe as a whole was 15 percent.
This unusually high reliance of the economy on temporary contracts may well have supported job growth in Spain before the recession. Firms should be more willing to hire workers with temporary contracts during an upturn if they know that hires can be let go at a relatively low cost. In a downturn, this arrangement makes it easier for firms to shed jobs.
Spain’s labor force survey breaks down employment into the self-employed, employees with permanent contracts, and employees with temporary contracts. As expected, the employment losses since 2007 are heavily weighted to temporary workers (-36 percent), followed by the self-employed (-14 percent). At the same time, the number of employees with permanent job contracts fell by a much more modest amount (-6 percent).
Spain’s employment experience relative to the rest of the euro area illustrates the cost to the economy of firms having such a high level of flexibility in how they manage workers. Going forward, the hope is that the benefits of such a flexible labor market will also become apparent as firms are quick to hire once the economy starts to make a meaningful recovery.
Read the entire post at Liberty Street Economics.