Can a wage increase destroy jobs or slow down hiring? And if so, why hasn’t it happened in recent years, when employment levels are at their highest despite indicators such as the minimum wage increasing by 54%? To answer these questions, a recent study published by the Bank of Spain analyzes the concept of “wage rigidity” linked to the blockage of collective bargaining. Its conclusions issue a serious warning about what may happen in the coming years if the margin for companies to adapt to the real pace of the economy is reduced.
The analysis, conducted by researchers Effrosyni Adamopoulou (researcher at the ZEW Institute and the University of Mannheim), Luis Díez-Catalán (from BBVA Research), and Ernesto Villanueva (from the Bank of Spain), compares what happened in the 1993 crisis, the Great Recession of 2009, and partially, in the pandemic of 2020 to unravel the effect of this wage rigidity directly derived from the benchmarks established in collective bargaining for all workers in the same sector or territory.
The researchers found that the agreements signed after the start of the recessions in 1993 and 2009 resulted in a nominal wage growth between 1 and 1.5 percentage points below the agreements signed prior. However, the impact of wage rigidity on employment varies. They conclude that “it can have serious consequences only if it is quite long-lasting”. For example, if agreements are blocked for years, as was the case in the initial phase of the Great Recession.
What their research also reveals is that the effects on wages and jobs affect lower-level workers in the wage tables of the agreements the most. The research directly points to the group of salaried workers whose salaries do not exceed 20% of the minimum set in the collective agreement as the most affected.
Thus, during the 2009 recession, characterized by low inflation, collective agreements had a long duration and “wage rigidity due to the lack of renegotiation” led to a “very persistent increase in the probability of unemployment.” Lower-paid workers suffered the most from workforce reductions. In contrast, during the 1993 recession, the effect of wage rigidity was limited and short-lived, as collective agreements “could be renegotiated frequently due to their short duration.”
These findings suggest that in a crisis of “low inflation” like the Great Recession, the distortions of long-term collective agreements could amplify employment fluctuations. The real wage rigidity resulting from the automatic extension of agreements and their multiperiod negotiation played a significant role in separations and job losses during the 2009 recession, while the short duration of collective agreements during the high inflation recession of 1993 made wage rigidity ephemeral and inconsequential, according to the report.
Back to the unlimited duration of collective agreements and the difficulty of renegotiation? To the unlimited validity of the agreements, which implied that if an agreement was not reached, the agreement and its conditions would not lose validity, which could delay renegotiations indefinitely. Unlike in 1993, in the 2009 crisis, a general blockage of collective bargaining occurred that aggravated the effects on employment of the recession itself. Therefore, the labor reform promoted by the Mariano Rajoy government limited these extensions to one year and strengthened the weight of company agreements over sectoral agreements.
This did not sit well with the unions, who saw their decision weakened by a unilateral decision of the government, despite having negotiated with the employers an Agreement on Collective Bargaining that committed to moderating wage increases to add flexibility without eliminating unlimited duration.
The Bank of Spain’s analysis does not delve into this economic and legal context but warns that the wage rigidity of collective agreements “may not have fully contributed to keeping workers’ incomes constant during the recession.” That is, the multi-year agreements signed under this framework (valid between 2012 and 2018) would have hindered the recovery of purchasing power from 2014 onwards, when the economy was rebounding.
Almost a decade later, the Spanish labor market has achieved a seemingly impossible feat: overcoming a pandemic that abruptly halted activity without massive job destruction, followed by a rebound in job creation that has surpassed 21 million employed, while halving the temporary employment rate. Additionally, this was achieved amid a general increase in wages, driven by runaway inflation since 2022.
All of this defied the most pessimistic forecasts, including warnings from numerous experts citing economic literature that cautioned about the risk of policy decisions endangering thousands of jobs. The government considered all its policies validated by the facts, but perhaps it is worth delving into why those predictions were incorrect.
First, the COVID 19 crisis was unprecedented and could not be compared to what happened in 1993 or 2009. Second, changes in labor market regulation in 2012 to “flexibilize” the labor market also facilitated alternatives such as ERTEs that were widely utilized by the coalition government of the PSOE and Unidas Podemos to avoid layoffs. The Bank of Spain study refers to them as an example of how contract suspensions and reduction of working hours helped mitigate the impact of wage rigidity.
Despite undoing several points of the previous legislation, especially regarding agreement rigidity, the new norm reinstated unlimited duration. Although the new formula emphasizes mediation and arbitration solutions to unlock negotiations, this does not prevent the indefinite postponement of labor and wage conditions, as seen in 2009.
Furthermore, there was a return to the priority of sectoral agreements (agreed upon by labor unions and employers) over company agreements (negotiated by works councils where there is union representation but each company negotiates independently), particularly concerning wage-related matters, which further limits adaptability for companies and workforces.
Brussels did not object to this step backward, encouraging the government’s plans to go further in repealing the provisions of the 2012 reform, with a focus on substantial changes to work conditions and deviations from agreements. The agreement signed by Sánchez and Díaz is clear: “We will review the causes so that only in situations that affect the viability of the company can these procedures be used.” The question is how far they will dare to push this idea.
According to the analysis by Adamopoulou, Díez-Catalán, and Villanueva, this does not pose a direct risk in a crisis like 2020 or in inflation peaks like those since 2022. In fact, employers and unions in 2023 unblocked a new collective bargaining agreement that established wage increases of 4% in 2023, 3% in 2024 and 2025 to contribute to the recovery of workers’ purchasing power.
The problem would arise in a crisis like that of 2009, where national problems (such as the bursting of the financial bubble) were compounded by a global financial crisis and Eurozone debt crisis (recall that in 1993 Spain was not in the Euro). A repeat of such a ‘perfect storm’ is not unlikely in today’s globalized economy.
Additionally, the redesign of ERTEs in the latest labor reform, supposedly intended to facilitate the use of this tool in a more conventional situation than a pandemic, has yielded disappointing results in terms of collective dismissals.
In this context, the report highlights that the role of wage rigidity is crucial for evaluating the future implications of labor reforms in Spain and, more generally, for understanding “how the labor market reacts to economic disruptions and the type of palliative policies that should be implemented”. It is a warning about the risk of the government designing its plans without sufficient information and analysis, potentially leading the labor market to a situation of collective bargaining paralysis similar to that of 2009, incapable of responding to a crisis like the one unleashed that year.
