The problem with too much labor protection

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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.