Employment protection legislation and labour market outcomes in Spain

Spanish experience of labour market deregulation since the early 1980s, particularly in the form of reform of fixed-term contract legislation, illustrates the potential pitfalls of such policies. The changing nature of employment protection legislation in Spain is outlined in this paper along with theory and international evidence of the impact of such legislation on labour market outcomes to set the context. Evidence from the 1980s and 1990s suggests that the new permissive policy on fixed-term contracts has if anything exacerbated the segmented labour market via lower wage responsiveness to unemployment, greater precariousness of employment for a third of employees and, recently, the highest level of unemployment ever recorded. However, these problems are almost certainly not the fault of the reforms. Rather it is other aspects of the Spanish labour market and industrial relations system which have contributed to the apparent "failure of deregulation" to improve performance. The combination of a worker representation system, which encourages insiderism, and the labour ordinances, which hinder internal flexibility, has stymied the reforms of employment protection. These two features will need to be altered if the less stringent employment protection is to have its desired effect.