Employment Protection Reforms: The Effect of Job Market Regulations on Unemployment Evidence from the Spanish Experience of Law 35/2010

Abstract

Spain has been plagued by incomparably high unemployment rates ever since the fall of Franco and its introduction into the European Union, recently reaching a total unemployment rate three times that of the United States and double that of the EU average, at 25 percent. These high unemployment rates represent a consistently significant divergence from the EU average, despite the recent economic boom and accentuated in the recent economic recession. Previous literature has suggested that this persistently high unemployment rate may be due, in part, to the duality of the Spanish labor market triggered by extraordinarily high severance payments formed by mid-level collective bargaining systems. In an attempt to rectify the high unemployment rate, in 2010, Spain passed law 35 which reduced the severance pay associated with hiring a permanent employee as well as provided subsidies for the hiring of youth employees. The main findings of this paper suggest that the effect of the law was to reduce the 35-45 unemployment rate relative to the 45-55 unemployment rate, or reduce the unemployment rate associated with those eligible for a contract with a lower severance payment as opposed to those for whom the law had no effect. Similarly, the data suggests that while not statistically proven, it is highly probable that the law had the effect of relatively reducing the youth unemployment rate to the adult unemployment rate.