The year began with the news that the repeal of the 2017 labor reform, approved during the Temer government, will be the subject of an election campaign. According to its critics, the reform would have taken away workers’ rights and would have contributed nothing to the reduction of unemployment and informality or to an increase in labor income.
In this electoral debate, the case of Spain is defended as an example to be followed. Between 2010 and 2012, as a reaction to the increase in the already high unemployment rates in the country, reforms were approved that increased flexibility in the labor market. A few weeks ago, a labor counter-reform was approved, which undid some rules established ten years ago. But contrary to what has been emphasized here, important changes that had been introduced by previous reforms were preserved, such as lower dismissal costs in permanent employment contracts.
Since the 1970s, Spaniards have had the highest unemployment rates in Europe. In 1984, when the unemployment rate was around 20%, fixed-term employment contracts were created with the aim of reducing dismissal costs, including non-monetary ones. Until then, in addition to the high compensation amounts, unilateral terminations required judicial authorization.
The introduction of fixed-term contracts generated some increase in flexibility in the Spanish labor market, but the result was less than expected, especially in its ability to reduce high unemployment rates. The main reason for this was the creation of a dual labor market. Older, skilled workers remained in indefinite jobs, while younger, lower-skilled workers temporarily filled jobs.
As the rule came to apply only to new contracts, workers who were already employed began to enjoy extra protection. Any adjustment in the number of employees, up or down, was made where it was easiest and cheapest to fire, leaving workers who had been on the job the longest untouched. This made unemployment among young people (15 to 24 years old) reach more than 50% of the workforce in 2012. In other words, introducing flexibility at the margin proved to be an ineffective measure in reducing unemployment.
The 2012 reform sought to reduce the difference between the two types of hiring, reducing dismissal costs in open-ended contracts and increasing in temporary ones. There was a drop in the unemployment rate, which had reached record levels with the 2008 world crisis and the subsequent Eurozone crisis. An important consequence of the reform was that it doubled the chance of a person leaving unemployment and entering a work contract with no deadline.
The counter-reform approved this year in Spain limits the use of temporary contracts. In theory, this measure could have positive effects by eliminating duality in the Spanish labor market, especially by keeping dismissal costs low in permanent employment contracts.
Interestingly, there is no robust evidence that the 2010 and 2012 reforms in Spain caused losses for workers on permanent contracts. Coincidentally, there is no systematic analysis, based on available data and rigorous evaluation methodologies, that allows any conclusion to be reached on the (in)effectiveness of the 2017 Brazilian reform on wages, employment and informality.
In Brazil, we also have a dual market. A formal and an informal sector with self-employed workers and those without a formal contract. But would the repeal of the 2017 reform help us eliminate this duality?
