After more than 13 years of discussions and refusals to discuss, Spain finally has a new labor reform proposal on the table.  Prime Minister José Luis Rodriguez Zapatero announced yesterday that he would propose reducing the cost of unfair dismissals to 33 days (previously 45), only 25 of which would be paid by companies.  The proposal is somewhat timid and is certain to meet with union opposition, but it is a step in the right direction and could give confidence to markets.

Currently, the costs of unfair dismissal in Spain are the highest in the developed world.  The reduction proposed by the government would extend to all permanent workers the terms of a new contract introduced in 1997 with lower severance pay.  The effect of the 1997 reform on permanent job creation was slight:  companies continued to grant about 90% temporary contracts, even in the years of fast growth.  To have a major impact on job creation, the reform should be accompanied by 1) clearer legal definition of objective dismissal, 2) a reform of the unemployment benefit system, 3) a change in the collective bargaining system and 4) a crackdown on companies who violate the law and abuse workers.  To make the market truly functional will require little short of an overhaul of existing institutions.

Even if it makes it past union opposition, Zapatero´s new contract will not immediately reduce unemployment.  Spain´s economy first needs to show enough growth to begin creating jobs.  What the proposal would do is set better foundations for the creation of stable jobs once the economy moves out of the crisis.  In addition, it sends a message to markets and consumers that the government is ready to take action to address one of the world´s highest unemployment rates.  This effect could be the most important one; and though it will be small, it is welcome.