By John Stonestreet
MADRID (Reuters) - Spain's new government will push ahead within weeks on labor reform aimed at tackling the European Union's highest unemployment rate after unions and employers failed to meet a deadline for agreeing how to modernize a rigid system that harms them both.
It is difficult to see how the reforms can help Spain's immediate battle with a chronically-weak economy and a jobless rate that has soared to 23.5 percent in recent months, leaving some 5.4 million out of work.
But Prime Minister Mariano Rajoy drove home the need for action by releasing the latest unemployment figures two weeks early this week and says he will do what is needed to loosen up the system and enable freer job creation.
To do so the government will have to take aggressive measures to worsen wages and conditions for employees that unions warn could prompt a national strike. From what signs the government has given on the shape of the reform, on the other hand, economists say it may also fail to please employers and risks not doing enough to generate meaningful improvement.
In a speech in Malaga on Saturday, Rajoy called the headline unemployment number - equivalent to almost one in four of the economically active population - "astronomical" and said his government would "wage war" on unemployment lines.
"This is in keeping with the change of government," Santiago Sanchez, chief economist at Juan Carlos III university in Madrid, said.
"The previous government looked for positive statistics to highlight its management (of the economy) .. and this one is rooting out the worst ones to justify its tough austerity measures."
Elected in a landslide in November, Rajoy gave worker and employer representatives until last Friday to agree on a broad sweep of reforms as he tried to draw a line under some 18 months of largely fruitless talks. They missed the deadline.
The government also faces credit agency pressure, with Standard & Poor's warning it could cut Spain further this year or next following Friday's two-notch downgrade if reforms were delayed or "insufficient to reduce the high unemployment rate."
Job creation in Spain has been crippled by a stagnant economy, a tough austerity program and exceptionally generous redundancy deals. Critics say the labor market is shackled by complex and rigid agreements on collective bargaining, statutory redundancy payments and temporary contracts.
"The (labor) reform has to be thought of as a golden opportunity to change the structure of the way the Spanish labor market operates and to be a major force for higher productivity and to reduce structural unemployment," Antonio Garcia Pascual, chief southern European economist at Barclays in London, said.
Unemployment rates were likely to rise further given Spain's economy was set to shrink this year, he said, but reforms making it easier and cheaper for companies to hire and fire as well as giving more workers better protection would promote jobs growth once the upturn comes.
Terms and conditions for Spanish workers tend to be agreed at regional level and sometimes across industries, giving unions strong negotiating powers that they will battle to protect.
But generous permanent contracts mean firms are more inclined to hire workers on temporary ones that offer little protection.
"Collective bargaining .., is something we are particularly sensitive about," said a spokesman for the country's biggest union, the blue-collar CCOO, warning that major changes could provoke a general strike.
Garcia Pascual said the government could "probably" live with that. "I suspect that with 23 percent unemployment the response (to a strike call) may not be so enthusiastic."
Gilles Moec, analyst at Deutsche Bank in London, said he expected the new laws to give firms greater freedom to opt out of collective contracts. "My understanding is that the government is ready to go there," he said.
The government will also scale back redundancy payments for permanent staff that are among the highest in the world, favoring contracts offering a statutory minimum of 33 days' pay for each year worked, Treasury Minister Cristobal Montoro said.
Unions are demanding 45 days' pay and employers 20, but even the lower figure dwarfs payoffs in other countries.
In Germany, at least half a month's pay is usual and in France a fifth, while in the United States there is no statutory requirement to award severance pay.
The heavy extra potential burden on employers in Spain means many are prepared to offer only temporary contracts that give workers little if any protection against dismissal.
A SINGLE CONTRACT
According to the national statistics institute, 26 percent of all Spanish employment contracts were temporary as of last September, and the proportion has almost certainly risen since.
For Barclays' Garcia Pascual, the labor market will not revive until that trend is reversed.
"I think they should be bold and think about a single contract where the firing cost increases with seniority. (But) that is not easy to sell to unions or employers."
"The best way forward would be to reduce the level of protection on permanent contracts and improve (it) ...on temporary ones," added Deutsche Bank's Moec.
The labor reform draft is expected to be ready by early February and Treasury Minister Cristobal Montoro said it would be pushed through without a broader consensus if necessary.
The government would however "keep lines of communication open" with unions and employers in the run-up to the new legislation, a labor ministry spokeswoman said.
While angering unions, more flexibility would please domestic employers and would-be foreign investors.
"What most people want is more flexibility and collective bargaining agreements" tailored to individual companies and sectors, said U.S. ambassador Alan Solomont.
He cited the U.S. practice of linking work hours to productivity cycles, for instance in auto plants. General Motors Co operates a large assembly line in Zaragoza.
The strategy also worked well during the 2008/9 economic crisis for Germany, where unemployment fell in December to its lowest level since the country's reunification two decades ago.
(Additional reporting by Feliciano Tisera and Fiona Ortiz, Stephen Brown in Berlin, Vicky Buffery in Paris and Timothy Ahmann in Washington; editing by Patrick Graham)