SPAIN'S EXPERIMENT

A look across Europe's employment map yields some interesting observations.

Clearly, the rate is high everywhere: an average of around 10 percent, compared with under 5 percent in the United States. But there are some countries in Europe (Spain, Britain, the Netherlands, Ireland) where joblessness is low or dropping dramatically, while in others (France and Germany) it refuses to yield even as growth reignites.Why the difference?

Spain is a country that gives a particularly interesting answer to the question. It is a European leader in two areas: as the country with the highest unemployment rate (about 19 percent, according to the latest official figures, and as the one with the fastest job growth.

Spain created more than 370,000 net jobs last year, a 3 percent increase, equivalent to about half of the new jobs created in all of Europe. This year, job creation is racing ahead at a 3.3 percent pace.

What caused this impressive employment growth in a country long known for having one of Europe's most rigid labor markets? The most obvious reason was fast growth, well above the European average last year.

This is also a key reason for fast job creation in Ireland, Britain, Finland and Portugal.

But there are two other factors that were decisive in chipping away at an intolerably high unemployment rate.

First, a new government elected in 1996 pledged to reverse two consecutive decades of very fast expansion of the public sector.

Spain's government swelled rapidly in the 1980s and early 1990s as the country returned to democracy while attempting to bring its welfare state up to northern European standards.

The dizzying growth was accompanied by the fastest rise in taxes seen anywhere in Europe during that period and by a soaring public-sector debt whose interest payments ate up larger and larger chunks of tax revenues.

It should come as no surprise that the result was a severe ''shock'' to businesses as they staggered under a new fiscal burden. One of the effects was sharply reduced job creation and an unemployment rate that ratcheted up at frightening speed.

The conservative government that took office in 1996 vowed to reverse that shock for businesses. Even the modest initial steps it has taken in that direction - freezing taxes, with a plan to cut them next year, and cutting government spending in 1997 - have been a breath of fresh air for the economy.

At the same time, fiscal austerity has made it possible to cut interest rates drastically, easing the onerous financial burden on business of tight monetary policy.

Steps toward deregulating the economy have also helped.

The other factor that fueled job growth in Spain was the timid labor reform implemented last year.

Although it was partial and left much to be desired, the reform at least enabled Spanish businesses to create new permanent contracts without facing severance payments as high as previously. (The maximum layoff payment was cut from 45 days' salary per year worked to 25 days.)

This law came on the heels of a 1994 labor-market reform that broadened the acceptable reasons for firing a worker and gave employers some flexibility in arranging part-time and overtime work as well as vacation periods.

What is important to note is that Spain still has a rigid job market and Europe's highest required dismissal costs. Much remains to be done to give the country a truly flexible job market.

Spain also has a big government compared with the United States, and higher tax rates. Yet the lesson it teaches is that even a little ''lightening up'' can work miracles.

Europe would do well to take this lesson seriously. The same phenomenon is being repeated in some other European countries where authorities have made a determined effort to halt the incessant growth of the public sector or start to roll back some regulations. The Netherlands, Sweden, Britain and Ireland are examples.

In contrast, in core countries like Germany and France, where economic growth is beginning to accelerate, job growth has been pitifully weak or nil.

Perhaps the reason is that without some liberalization (some of those desperately needed supply-side measures to ease the regulatory and fiscal burden on business), economic growth will have only a limited trickle-down effect on the job market.

Perhaps Europe's response to the unemployment problem does not need to be a radical slashing of the regulations and welfare programs that its citizens and politicians seem so determined to preserve at all costs.

If core countries like Germany and France could muster up the political courage for at least selective reform, which would lighten the burden of the system on businesses, the results might be surprisingly positive.

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