I was at the international airport in Madrid this past weekend, catching a flight to London, and made the mistake of buying a chicken sandwich on rye. I found myself in a line of about 15 people. What was the hold up? Not the sandwiches. They were already made and wrapped. But the café had only one, extremely harried employee on duty, who not only manned the cash register, but got people coffee, answered questions, and so on. Fortunately, I had a few spare minutes before my flight departed and had the luxury of waiting 15 minutes simply to pay for an off-the-shelf lunch. But that wasn't really how I wanted to spend my final moments in Spain.
Why, you ask, am I sharing this minor travel-related annoyance? Because it gets to the heart of Spain's jobs problem. And it shows why labor markets with very high levels of protection for workers simply don't work.
The airport café was typical of my entire journey in Spain. Only one person often staffed hotel front desks. I spent two days at a small hotel in Seville and never saw anyone at reception. Unable to check out, I had to leave without paying. (Thus that hotel comes highly recommended.) I learned to ask for a check at a restaurant at least 20 minutes ahead of when I needed to depart. With one waiter often responsible for 15 or more tables, getting his attention felt like winning the lottery. And at rush hour on a busy Friday evening in Madrid, the high-speed rail line had a mere handful of ticket windows open, creating endless lines and more delays. So much for the benefits of high speed.
Everywhere I went in Spain, I seemed to be wasting 10 minutes here and 20 minutes there due entirely to understaffing. That may not sound like much, but add that up over the course of a week and I lost tons of time that I would rather have applied elsewhere, to writing my articles, or enjoying my time in Spain, or spending more money. The dearth of staff also lowered the quality of the services provided throughout the country, something I found surprising for an economy so dependent on tourism. People in Spain don't seem to mind the delays and bottlenecks. They consider them just an inevitable part of daily life. But there is an economic cost to all of this inefficiency. If I didn't have to wait to pay for my chicken sandwich at the airport, maybe I would have gone off to buy a magazine or something else. But no time for that.
It's not that there aren't enough available workers in Spain. With an unemployment rate at a staggering 20%, there's no shortage of people who hotels, restaurants and other companies could hire. But they don't. And that isn't just a factor of the current economic downturn. Unemployment in Spain is traditionally higher than in the U.S. Even during the so-called boom years of the mid-2000s, the unemployment rate never sank below 8%.
The reason is that employers don't want to create jobs. It's simply too costly. Blame the country's overly strict labor laws. Mandated severance payments "“ of as much as 45 days per year of service "“ make laying off employees prohibitively expensive, and that makes firms reluctant to hire them in the first place. Managers do have the option of taking on temporary staff on fixed-term contracts. If those workers get dismissed, they don't receive the same giant severance payments as permanent employees, allowing companies to downsize at reduced cost. But that choice has its own downside. With workers around for only a short time, they have little commitment to their jobs, and employers have even less reason to train them properly. That affects company performance and competitiveness.
The labor laws in Spain have created a distorted economy, where those workers in permanent positions almost have jobs-for-life, while the remainder can't find stable employment, or jobs period. That may be good for the protected workers, but nobody else. Not companies, not young people (who, as new entrants to the workforce, have the hardest time finding regular jobs), and not the overall economy. If Spain can't put people to work, it's going to have a rough time rebounding from the Great Recession and its own disastrous housing bust. The government has to make labor laws more flexible.
And the problem isn't limited to Spain. Many other countries in Europe, including Greece, have similar counterproductive labor markets and suffer from similar labor woes. If they don't reform, Europe won't be able to create jobs, boost growth or compete with the U.S. and Asia.
Of course, you're probably thinking that workers deserve protection. As a salaried employee myself, I completely agree. But for the overall good there has to be balance. In the U.S., where labor laws are more flexible than in a country like Spain, workers can get fired more easily, and that has its own serious costs. I think corporations in the U.S. are too quick to layoff workers when hard times begin to bite. They abuse looser labor laws to appease the short-term financial interests of shareholders or management itself. That's not good for the long-term competitiveness of a company, and it's not fair to ordinary workers, who bear an unfair share of the pain of an economic downturn. But at the same time, companies in the U.S. have more incentive than those in Spain to hire workers once the economic outlook improves. American companies don't have to worry as much about the costs of hiring. That's why unemployment in the U.S. is traditionally lower than in Spain.
Spain's Prime Minister Jose Luis Rodriguez Zapatero is promising a major reform of the country's labor market, which would alter the severance pay system to encourage companies to hire more workers, among other changes. The unions are likely to squawk about the proposals and I'd expect them to call for strikes in protest. But for Spain's economic future, I hope the government has the will to push through reform. Otherwise that high unemployment will persist. Spain's workers need and deserve jobs. Hopefully next time I'm in Madrid's airport I won't have to wait so long to buy a sandwich.
But at the same time, companies in the U.S. have more incentive than those in Spain to hire workers once the economic outlook improves. American companies don't have to worry as much about the costs of hiring. . So why aren't they hiring? (except for the Census Bureau) Not much real difference between Spain and US (pun intended), is there? Both places still have people out of work. . "¦and btw, if this sounds bitter it isn't, but please remember that labor laws / worker protection can be seen a LOT differently by an unemployed person than a comfy salaried one. Thanks for this post, Michael; hopefully you'll get many replies here.
"once the economic outlook improves"...Hmm, key words. Stocks may be up but they are not an accurate indicator of the economy. Does the economy look "up" to you?
In American, we charge employers 7.5% tax for the privilege of hiring an employee, and just to make sure we punish everyone, we also charge the employee another 7.5% tax. It's called FICA, and if ever there were a counter-productive tax, this is it. . FICA can and should be eliminated, and if you'd like to know why, I can give you 10 reasons. See: Ten Reasons To Eliminate FICA
Rodger Malcolm Mitchell
Is it only 7.5%? Sure feels like more than that. Then again, 401(k) accounts were supposed to be the Great White Hope to guard against the impending collapse of social security, and guess what? Boom, crash, splash, flush, right down the crapper.
We have the same problem here, but not so severe. I used to use a 50-55ish contractor to do all the work at my house because he was very good, though not cheap. He is always very busy and hard to get and the first time I hired him I was surprised that he showed up in his pick up truck full of lumber to do a week of work at my house BY HIMSELF. I helped him unload the lumber and asked why he didn't have a kid to help him with the grunt work. (Surely, I was thinking, paying some dumb but strong kid to carry 2x4's would be a lot cheaper than paying this guy.) He started grumbling "cuz then I gotta worry about worker's compensation and FICA and this and that and before you know it I'm spending $50 an hour for some kid."
And so I have Exhibit A: One job gone and a bunch of people who can't get work done on their house by the contractor of their choice because he won't hire anybody to help him.
I personally don't advocate abandoning labor protection laws. In all but the tightest labor markets employers have natural advantages in negotiating with their employees and employees should be protected from exploitation, but anybody who opens their eyes can see how giving that advantage over to the employee (which is what happens when they unionize) backfires. I guess it's hard to find the "sweet spot".
There is an answer. First you have to remember that employees are customers/clients! We need a "Quality Customer Minimum Wage" even if we have to raise prices a small percentage. This creates a quality economy. Second, employers need flexibility in hiring, firing and using it's employees as long as reasonable rights are protected. Removing the FICA tax and integrating it into a progressive income tax is a reasonable suggestion for the U.S. I happened to be in Madrid airport last week end also. I had to go through passport control and security just to change planes. This is inefficient usage of labor and security forces!
Mark S. Pash, CFP progressive-economics.com
From a fried (Spanish heritage, and frequent visitor to Spain) of mine: Elisa Castellon
It appears that his point is that Spain's labor laws should be more flexible. He should have started with that and ended with his personal experience and some personal ranting. Spain does have to amend its labor laws, but this may await the next Prime Minister, who will probably be from the right. The current one is from the left, and such reforms are not easy coming from the left. They need to raise the retirement age (as we need to do), shorten the period of unemployment and permit more flexibility for employers to hire and lay off.
The labor unions are extremely powerful, which makes change difficult, and that has to change.
Much of the unemployment comes from the construction sector and everything connected to it from banks to manufacturers of materials to the purchasing power of those affected by construction who have lost their jobs, many of whom are immigrants. I am glad that new construction is at a standstill because the coastlines and the interiors were overbuilding.
The temporary worker program (which he should have investigated before suggesting that it would be a panacea) does not work for bars. The program is very limited and cannot be used in bars and cafes.
One thing he failed to mention is that almost all cafe workers in Spain have degrees connected to their jobs. They are efficient and know their jobs with complete confidence. That cannot be said in the US. I can go on and on about this topic.
Remember that Spain was under a military dictatorship for 40 years which prohibited laws benefiting workers and all labor unions. There has been the normal reaction to that, but it is changing in the minds of the people and change will be put into effect. My guess is that this guy speaks no Spanish and jumped to these conclusions off the top of his head without any discussion with any Spaniard, and they are always happy to discuss the economy. Just raise the issue.
Elisa (Note. Why don't you send my comment to the editor?)
As I am one more apt to be serving some pompous jet set traveler and scribbler, I tend to favor the security of the average working man than a minute's inconvenience of some bourgeois foreigner.
My real problem is with "...Spain. With an unemployment rate at a staggering 20%..." This is comparing applies to oranges. The US May U-3 unemployment rate is 9.7. But the "unemployment rate" is just that U-3 rate - the US U-1 rate is lower, and the U-6 rate is higher. There's a very easy way to cut US unemployment if the number is all that matters - stop all unemployment payments, that would lower the number immediately, even though the consensus of business is that it would be more harmful than positive. When we compare our U-3 rate to their equivalent U-6 rate, of course ours will look better.
For good or ill, the US powers-that-be believe in welfare-to-work, and that welfare receivers should pick up trash along the highways. This lowers our unemployment rate, and maybe makes the sides of highways a little cleaner, but does not fundamentally make our economy any better and stronger than Spain.
I drove across the rust belt recently and things do not look good. I understand Michigan is actually losing population year by year. Of course American hubris dictates we instruct the Spanish how to run their economy, while ours languishes and as BP oil wells destroy our coasts because America doesn't believe in "over-regulating" business.
A couple of comments on the comments above.
@bocatowordpress: I don't subscribe to the mentality of the Contractor who felt that he'd be paying $50/hr to a temporary helper. It shows ignorance and a lack of organization.
As a small business owner, I take the time to screen employees and employ them at a competitive wage. I pay FICA, Medicare and state and Federal taxes for this person. There is a 10% to 15% premium for these taxes. This means, the person making $20/hour net will cost me $25/hr - no more. For a full time employee with benefits, this may rise to $30 hour if I add 401K and Medical (but there is a LOT of variation here).
If this employee allows me to increase my revenue by 20% by increasing my capacity, it is money well spent.
@getaw2job: I believe that the welfare workers who clean highways add value. The issue we can debate is whether the govt should run that program, or whether it should be handed off to contract staff to deliver.
The underlying issue to me with this debate is the fact the European states tend to mandate processes that maximize employment rather than efficient use of resources. This drives inefficiencies. The US approach is different (not sure if it is better - it just allows us to shoot ourselves in the foot more efficiently).
I'm firmly in agreement with Mr. Schuman. This is just a "needed to be said" statement similar to an earlier post on the Wrong Lessons From China." I highlighted this story on my business journalism blog today here: http://bit.ly/arjcPT.
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