MADRID — Spain's new conservative government approved sweeping labor market reforms Friday as part of a drive to revive a sick economy and solve Europe's worst unemployment nightmare.
With the jobless rate at nearly 23 percent, the plan is designed to encourage companies to hire more people by cutting severance packages and offering tax breaks for taking on young people.
Spain is eager to restore investor confidence, satisfy the European Union and other international institutions by seeking major structural reforms in order to cut its deficit and ward off fears that it could follow Greece, Ireland and Portugal in seeking a bailout.
Under the new package of measures, Spanish companies facing hard times will be able to pull out of collective bargaining agreements and have greater flexibility to adjust an employee's schedules, workplace tasks and wages depending on how the economy and the company are doing.
The country's severance packages — long seen as among the most generous of many countries — will also be cut from 45 days of severance pay per year worked to 33 days.
A clause will also be introduced that will cut the amount of time companies can have their workers on temporary contracts with few benefits. Nearly a third of the work force in Spain is on temporary contracts, a huge percentage that makes the country's jobless rate so volatile. As of Jan. 1 2013, workers must be moved on to permanent contracts after 24 months. Following Socialist reform of 2010 companies could run temporary contracts indefinitely.
About 1,000 protesters held an illegal, impromptu demonstration in Madrid's central Puerta del Sol plaza late Friday.
"The labor reforms approved aren't likely to achieve their proposed goals," Cristina Fernandez, a 52-year-old business consultant, said. "To reduce unemployment, you need to create jobs, not simplify firing," she said as she carried a placard reading, "Every cut mutilates my rights."
Small companies with 50 workers or fewer who hire people receiving jobless benefits will get 50 percent of that person's unemployment benefit while the employee will continue to receive 25 percent of the payments along with their wage. This way the person gets a job and the government saves on a quarter of the dole payments.
Meanwhile, self-employed people wishing to set up a business will receive tax breaks of €3,000 ($3,986) for the first person they hire if that person is under 30.
Spain's unemployment rate for people under 25 is almost a staggering 48 percent.
The government said it will also oblige unemployed people to carry out social work or take part in job training programs, a measure officials say will help cut back on Spain's huge underground economy.
The government will also make it easier for companies to lay off workers cheaply when times get rough. A new rule stipulates that a company simply has to show its revenue is down for three straight quarters in order to lay people off, with severance pay of just 20 days per year worked.
In cases of layoffs in which a company does not argue economic reasons, the maximum amount a person can receive will now go down to a maximum of 24 months of salary, from 42 under the old law.
And once the new package is passed, workers who currently have severance arrangements of 45 days per year worked will see that reduced to 33 days.
The labor reforms are the final part of a three-part push to revive an economy that is expected to slip back into recession this quarter after limping out of nearly two-year slump in 2010.
The first two reforms taken by the new government were a €15 billion ($20 billion) package of deficit-reduction measures and a plan to force banks to set aside €50 billion more in provisions to cover their exposure to a real estate market that tanked three years ago.
The conservative Popular Party took power in December after scoring a landslide win in November general elections that ended nearly eight years of Socialist rule.
The government has decide to unilaterally introduce these reforms due to the slow progress in negotiations between employers and unions, which had only reached an agreement on ending the practice of indexing workers' pay to inflation.
The measures have been introduced in the form of a decree, which means it will go before Parliament for a yes-no vote, with no possibility of amendment. Approval is guaranteed because the ruling Popular Party has an ample majority.
Deputy Prime Minister Soraya Saenz de Santamaria said Friday one of the overall goals is to make layoffs a last resort for companies. Other European countries, notably Germany, have been able to stabilize unemployment by letting companies have employees work fewer hours for less money rather than firing them.
She called the reform package "major, far-reaching and complete."
"It will mark a before and after in the labor legislation of our country," she said.
Gayle Allard, a labor market specialist at IE Business School, called the package good overall. She said the government was short on language on how its plan to stamp out tax-evasion, and that the labor market is still overcrowded with many different kinds of contracts.
"But the steps they have taken are really good and really needed," Allard said. "They are doing some stuff for the young people. That is good. They are aiming at hiring the unemployed. That is good. And to define a fair dismissal more clearly so that dismissal pay goes down for everybody, that's really good. We needed that."
But not everyone was impressed.
"I expected a more aggressive reform, as the economy minister had said it would be," said IESE Business School Economy Professor Antonio Argandona. He said he could not see how the severance pay change from 45 days to 33 days would attract employers given that temporary contracts were still available.
"Thirty-three days' severance is still very high when compared to the temporary contract," said Argandona, adding that allowing this to continue "was a big mistake."
Experts say more than 90 percent of contracts in Spain these days are temporary.
Argandona said the clause concerning layoffs for economic reasons were too vague and could be overturned by courts.
"In my opinion, they have fallen short and if the markets have the same impression as I do they won't view it very well," said Argandona.
The reform failed to bring about any major change in the yield for Spain's key 10-year bonds on the secondary market with the rate closing at 5.05 percent mid-afternoon, making for a spread of 314 basis points against the German bond, up 10 basis points from Thursday.
The benchmark Ibex 35 stock market index closed down by just over 1 percent.
Alan Clendenning contributed to this report.