Costs of flexibility

Posted: 29 November 2012 in Uncategorized
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As we all know, both Spain and Greece are currently suffering from very high unemployment rates.

But, according to Thomas Klitgaard and Ayşegül Şahin, there are two major differences between the countries. First, they got their via different paths.

Job losses started earlier in Spain, with the collapse of a housing bubble, while Greece managed to keep employment levels stable, in line with the euro area as a whole, before its sovereign debt crisis caused very steep declines in employment beginning in 2010. In both countries, employment in 2012 is down roughly 15 percent from 2007 levels.

Second, and more important, the employment decline in Spain, in contrast to Greece, is way out of proportion to the decline in GDP.

What explains the difference?

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.

It is exactly that “flexibility” employers have in dealing with workers that explains the high and persistent joblessness in the U.S. economy after the crisis of 2007-08.

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