IMF: Spain’s Labour Market reforms, implemented around 2012, have arguably contributed to a faster and stronger economic recovery

IMF has just published “Distributional Implications of Labor Market Reforms: Learning from Spain’s Experience”. According to this study, Spain’s structural reforms, implemented around 2012, have arguably contributed to a faster and stronger economic recovery.

In particular, there is strong evidence that the 2012 labor market reforms increased wage flexibility, which helped the Spanish economy to regain competitiveness and create jobs. But the impact of these labor reforms on income inequality and social inclusion has not been analyzed much.

This paper (Ara Stepanyan; Jorge Salas, 13 February 2020) aims to shed light on this issue by employing an econometric decomposition procedure combined with the synthetic control method.

The results indicate that the 2012 labor reforms have helped improve employment and income equality outcomes with no substantial impact on the overall risk of poverty. Nevertheless, the reforms appear to have induced a deterioration of average hours worked, in-work poverty, and possibly also of involuntary part-time employment.

Key findings

The key findings are:

• The 2012 reforms improved employment outcomes, including for youth. Post reform growth of employment was systematically higher and youth unemployment lower compared with a possible evolution of employment growth and youth unemployment in the absence of reforms.

• However, the impact of reforms appears to be negative on the intensive margin of employment. The findings suggest that the reforms contributed to a reduction in average hours worked and an increase in involuntary part-time employment (though the results for the latter are not conclusive as they are statistically insignificant). Enhanced flexibility of part-time contracts, owing to the reforms, could possibly be one factor that drive these results.

Another factor is the structural shift in the economy from construction, that largely employs full-time workers, towards services, where about 18 percent of employees are on part-time contracts.

• The strong job creation, helped by the reforms, has improved income distribution after 2012. Our findings provide supporting evidence that the 2012 labor reforms contributed to a significant reduction in the Gini coefficient five years after the reforms. Our results are less conclusive on the impact of the reforms on the income ratio of the top 20 percent earners to the bottom 20 percent.

• We did not find any systematic impact of the 2012 labor reforms on the overall rate of population at risk of poverty. However, our analysis suggests a deterioration in the rate of in-work poverty following the reforms. This could be a consequence of the increased share of involuntary part-time employment and lower working hours as the distribution of hourly wages across income deciles did not change much over time.

The analysis in this paper does not shed light on the role of specific reforms or channels behind our findings, remarks the authors. However, the results from other studies on the impact of the 2012 labor reform suggest that probably the measures aimed at enhancing wage flexibility were mainly at play.

Finally, caution is needed when interpreting our results, says the authors. In particular, because the identified impact of the labor market reforms might still be influenced by other idiosyncratic shocks that happened simultaneously with the reforms, including other structural policies.

Click here to access the IMF report.