22 October 2015

New jobs data provides a boost for Rajoy…

Spanish national statistics institute INE this morning released the most awaited and politically significant batch of quarterly jobs data of the past four years – the last one before the 20 December general election.

I bet Prime Minister Mariano Rajoy is satisfied. The headline figures are nothing short of a boon for the upcoming election campaign. The number of unemployed people fell by 298,200 in the third quarter of the year compared to the previous quarter, and by 576,900 compared to the third quarter of 2014 – the sharpest drop on records.

This is crucial for two reasons. Firstly, it allows Rajoy to claim that he has kept his flagship electoral promise: there are fewer Spaniards out of work now than when he took over power four years ago. Secondly, it brings the number of unemployed people below the ‘psychological threshold’ of five millions.

…but it’s still too early to claim the Spanish labour market has turned the corner

However, I think it is still premature to say that the Spanish labour market has turned the corner. The table below compares today’s data with the situation Rajoy ‘inherited’ when he entered office.

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A few points are worth making:

  • The decrease in the number of unemployed people over the past four years has been helped by a drop of almost 200,000 in the so-called ‘active population’ – people in work or looking for a job. This means that a lot of people who were previously counted as unemployed have not returned to the workforce but dropped out of the labour market entirely – since they have stopped seeking employment. It is hard to claim this as a success.
  • Compared to the last quarter of 2011, there are fewer employees on permanent contracts and over 200,000 more on temporary contracts. The data released today, for instance, shows that the fall in unemployment in the third quarter of 2015 was exclusively driven by a rise in temporary jobs. This links back to a longstanding problem – the duality in the Spanish labour market. There are two important fall-outs from this. Firstly, workers on temporary contracts may feel less secure and therefore less inclined to spend or invest – ultimately harming the economic recovery. Secondly, it tends to be older workers who have permanent jobs and younger ones on temporary contracts. This creates generational divides in the workforce (and society more widely), while also hampering the prospects and development of young workers over the longer term. Remember: albeit decreasing, the youth unemployment rate in Spain was still 46.6% at the end of the third quarter of 2015.
  • Similarly, there are fewer full-time workers and nearly 300,000 more part-time workers now than in the last quarter of 2011. This can be seen as both a blessing and a curse. On the one hand, it highlights progress in making the Spanish labour market more flexible and responsive. However, it also adds to concerns that the Spanish recovery is cyclical – not structural. If the recovery fades, then it is possible that these jobs could evaporate again – and quickly.
  • While the number of long-term unemployed – people who have been out of work for one year or more – has recently been decreasing, it is still slightly higher than it was when Rajoy entered office. Furthermore, if you add those who have become economically inactive, there is a significant chunk of the Spanish population that has been out of work for a long time.

In other words, this is no time to rest on laurels. More needs to be done to address the duality of the Spanish labour market and, perhaps even more importantly, help long-term unemployed return to work via better and more targeted re-training programmes.

I have no doubt the economy, and unemployment in particular, will dominate the Spanish election campaign. Rajoy has a strong card to play. The numbers are on his side, but – as I argued in the past – there is a difference between macroeconomic indicators getting better and real people feeling a real recovery. The challenge for the Spanish Prime Minister will be to convince more voters that his is the only viable recipe to put the country’s economy back on track.