Reducing the extent of employment turnover (rotation) on the labour market was a prime aim of the agreement on job security signed by the social partners in April 1997 (see inforMISEP "Policies" 58, 59 and 60). The agreement did not provide a precise definition of rotation, however. Since the conclusion of the agreement, labour market trends have been heterogeneous in this regard. Although there can be no doubt that the regulations introduced in support of the agreement were the decisive factor behind the growth of permanent employment contracts, changes in other indicators give a rather different impression. This is because the higher stability achieved has been more pronounced in some areas than in others.
Job security is a key theme of the Spanish labour market. It is therefore important to analyse changes in the main indicators in order to understand the impact of labour market reform on employment turnover and stability.
The 1997 reform implemented the following measures with the aim of expanding permanent employment at the cost of fixed-term jobs:
1. Permanent contracts were made more attractive to employers. The overall costs and the uncertainties for the employer implied by permanent contracts were to be reduced with the help of the following measures:
- clarification of the reasons justifying redundancy for economic reasons;
- reducing the compensation for illegal dismissal under a new permanent contractual form applying to specific groups of persons;
- reducing the employer's social insurance contributions during the first two years of the employment contract for persons recruited under permanent employment contracts from specific groups of persons.
2. Fixed-term contracts were made less attractive. Various forms of fixed-term contracts that could be concluded even when the work in question was not fixed-term in nature were abolished. These contracts (fixed-term contracts for employment promotion and contracts within the framework of new activities) were of relatively long duration compared to other forms of fixed-term contract.
The following trends can be observed on the Spanish labour market:
- a rapid increase in dependent employment, both permanent and fixed-term;
- a further decline in exits of permanent employees;
- a marked growth of recruitment under permanent contracts;
- a decline in the average duration of fixed-term employment (due to the abolition of longer-duration contractual forms) and an increase in the number of contracts concluded.
These trends have occurred against the background of a rate of employment growth that has been significantly higher than would be expected from the rate of economic growth. This is evidence of the positive effect of the reform.
2.3.1.1. Permanent employment contracts
When the reform was introduced, fears were expressed that the new regulations on redundancies would lead to increased rotation among employees working under the new permanent contracts. Yet the available data to March 1998 show that the opposite has been the case.
If the three possibilities for terminating an employment contract considered in the study are added together (mass redundancy proceedings with contract termination, mediation by the authorities leading to agreement on termination, and termination of the contract without appeal), the total for the last 12 months amounts to 210,000 redundancies; this is the lowest annual figure for the 1990s.
Since the reform was introduced, there has been a substantial increase in the number of permanent contracts reported to the public employment service (INEM). In the first 12 months after the reform, almost 1 million contracts were concluded. Prior to the reform the number of contracts did not exceed 370,000 in any year during the 1990s.
As a result of the increase in permanent contracts and the fall in redundancies, the level of permanent dependent employment rose. This trend is reflected in the Labour Force Survey (LFS), although not to its full extent. In the last available LFS (June 1998), the number of permanent jobs is put at 6,793,100, the highest figure reported since this indicator has been calculated. This represents an increase of 405,000 compared to the second quarter of 1997. It can be concluded from the results of the survey that this increase largely reflects the reduced number of redundancies and, among long-service employees, the conversion of fixed-term into permanent contracts.
70% of the growth in permanent contracts covered by the LFS were among employees who had worked for the employer for more than two years. It may be that the survey failed completely to cover the new contracts reached during the course of the year.
2.3.1.2. Fixed-term contracts
The labour market reform has not prevented employers from continuing to conclude fixed-term contracts. According to the LFS, between the second quarter of 1997 and June 1998 the number of employees working under fixed-term contracts rose by 135,700. In relative terms, however, the share of fixed-term contracts fell from 33.6% to 33.1%.
2.3.1.2.1. Duration of fixed-term contracts
At the same time, it emerges that the average duration of fixed-term contracts has declined. On the one hand, short-duration contracts - less than one month - increased between 1996 and the first five months of 1998 from 49% to 58% of all fixed-term contracts; on the other, the proportion of fixed-term contracts with a duration of more than six months declined from 6% to 3%.
The estimated average duration of fixed-term contracts on conclusion amounted to 90 days in 1995, 81 days in 1996 and 82 days in the first five months of 1997. In the last few months of 1997 and the first months of 1998, the duration specified at the start of the contract declined to 69 days.
This trend reflects not so much an actual decline in the initially specified duration of the forms of fixed-term employment that continued to exist, but rather the reduced importance of longer-term contracts following the abolition by the reform of fixed-term contracts to promote employment (with an initial average duration of 12 and a half months) and contracts in the context of new areas of activity (average duration: 7 months).
Due to the possibility of extensions, the actual duration of fixed-term contracts is frequently greater than the duration initially specified. Conclusive statements about the duration of fixed-term contracts can therefore only be made once they have terminated. The average duration of completed contracts signed in 1995 is estimated at 152 days, for example, 69% longer than initially stipulated. At 137 days, the figure for 1996 is also 69% longer than the average duration initially agreed. Estimates have not yet been made for 1997 and 1998, as a significant proportion of the contracts signed then are still in force.
2.3.1.2.2. Accumulation of contracts by individual workers
Given the short duration of fixed-term contracts, some workers experienced frequent changes of contract. For 1997, the average number of contracts per employee amounted to 1.99, a figure that was 1.87 in 1996 (allowing for those under contract).
Generally speaking, it can be said that the shorter the average duration of a fixed-term contractual form, the greater is the probability that an individual worker will have had several contracts. For instance, 60% of interim employment contracts were concluded with workers who in eight months (between the reform in April 1997 and the LFS in June 1998) had had three or more contracts, albeit not necessarily of the same form or with the same employer. Just 20% of the contracts were concluded with workers who had had no other contract.
On the other hand, 83% of permanent full-time contracts were concluded with persons who had not had another employment contract during these eight months.
2.3.1.2.3. Increase in fixed-term contracts
The absolute increase in the number of employees working under fixed-term contracts and the shorter duration of such employment relations led to a steady increase in the number of new contracts signed. During the first five months of 1998, a monthly average of 924,000 contracts were signed, of which 90.5% were fixed-term.
The growth of permanent contracts is difficult to determine from the statistics, as it is usually compared with the sum of all contracts concluded, and there has been a sharp increase in the number of fixed-term contracts since 1993. Yet this was due not so much to greater recourse to such contracts but to the following factors:
- the proportion of all employment contracts that are covered by INEM statistics is steadily increasing. This is due both to changes in regulations and to the efforts made by the public employment service to obtain as much information as possible;
- the legalisation of private employment agencies has revealed employment relations of a very short duration that previously had not been registered;
- as mentioned above, the labour market reform restricted the utilisation of longer-duration fixed-term contracts or abolished such contractual forms, in both cases reducing average duration.
Given that the very short-term employment contracts were registered individually, in a number of areas or occupations, all the contracts reached by one and the same employee in the course of the year were recorded in the statistics.
2.3.1.3. Does a large number of fixed-term contracts imply higher labour turnover?
The standard practice of considering the number of new contracts without any allowance for their duration distorts the real importance of fixed-term contracts for employment. In order to consider the overall volume of employment, each contract must be weighted according to its expected duration. Including extensions, the average duration of fixed-term contracts currently being concluded is around three and a half months.
It is more difficult to estimate the expected duration of permanent contracts. Labour market survey data indicate that in recent years an average of 6.5% of permanent employees left the company for various reasons. This figure implies an average contract duration of around 15 years. There does not appear to have been an increase in exits due to redundancies in recent years. Another possibility of establishing the duration of permanent contracts is provided by LFS data that reveal how long an employee has been working for his/her employer under a permanent contract. In the fourth quarter of 1997, 70% had been with the enterprise for more than six years and 39% for more than 15 years. This distribution also implies an average duration of more than 15 years.
It can be concluded that in Spain permanent contracts last 52 times as long as fixed-term contracts. If this ratio between the contract duration of fixed-term and permanent employment relations is maintained, permanent contracts will create far more jobs in future than fixed-term contracts, even if the latter are far greater in quantitative terms. On average, 836,000 fixed-term and 88,000 permanent contracts are concluded per month. If contract duration is in line with the previous estimates, every month fixed-term contracts for 87.8 million days (836,000 contracts with an average duration of 105 days) are concluded, compared to 481.8 million days (88,000 contracts with an average duration of 5,475 days) under permanent contracts. Thus only 15% of total contractual working time in the coming years is covered by fixed-term contracts.
These estimates depend, however, on the new permanent contracts created under the framework of the reform exhibiting a similarly higher degree of stability as permanent contracts in the past. Little information is as yet available on this issue. In August 1998, the only month for which data are available, 837 persons applied for unemployment benefits having left permanent first-time contracts signed under the reform. A further 905 benefit applications came from workers whose permanent contracts had been converted from previously fixed-term contracts. This amounts to 0.2% of the permanent contracts reached within the framework of the reform within the space of one month. The total number of terminations is certain to have been higher, however, as not all those whose employment relations are terminated apply for unemployment benefits. Moreover, August is traditionally a quiet month in this regard. Even so, it appears that at present the new contracts are comparable to traditional permanent employment contracts.
2.3.1.4. Impact on unemployment benefits
Favourable economic trends together with the labour market reform have led to a fall in unemployment and a decline in spending on benefits by the social security system. At the same time, there was a decline in the number of entries from fixed-term employment relations into the contribution-financed social security system, so that in June 1998 one half of entitlements resulted from fixed-term and the other half from permanent contracts. This is the lowest proportion observed in the last 15 years.
This effect can also be observed when entries into the social security system are analysed with respect to the duration of entitlements and previous employment relation.
Studies of fixed-term contractual forms that can be converted into permanent contracts show that these contracts, where they are terminated without conversion, generated benefit entitlements of between eight and 12 months. In 1996, 40% of registrations were due to such contracts. This percentage was maintained with some seasonal fluctuations until May 1997; since then, however, the trend has changed. On annual averages, this group of recipients declined as a proportion of all entries by two percentage points.
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2.3.1.5. Figure 1: GDP growth and employment growth
2.3.1.6. Conclusions
The labour market reform has meant that more and more Spanish workers now have a permanent employment contract, without any evidence that such contracts are significantly less stable than previously (the number of redundancies continues to decline) or any sign of tensions emerging on the labour market, as in the 1980s (employment growth is high in relation to economic growth).
As can be seen from Figure 1, until the mid-1980s, employment growth was around 3% below that of the GDP, whereas currently, both variables are growing at the same rate.
A large number of employees are still working under fixed-term contracts, despite a slight fall in the overall number. The pace of labour turnover, i.e. the frequency with which such workers change job, has increased further for this group of workers.
In terms of future employment, fixed-term contracts are significantly less important than permanent contracts. This is due to their much shorter duration, which accounts for just 2% of that of permanent contracts.
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