Spain's struggle for labour reform

The queues start forming outside Madrid's job offices well before opening time. In some districts the unemployed snake down the street, lining-up to sign for their benefit payments, or advice on making claims.

One in five Spanish workers are now unemployed. Supporting them is costing Spain 40bn euros (£33bn, $49bn a year) - or 3.9% of gross domestic product (GDP) - according to El Pais newspaper.

It is a strong incentive for the government to undertake a reform of the labour market that many argue is long overdue.

At the start of the economic crisis in Spain, a third of all workers were on insecure short-term contracts that made them cheap and easy to fire.

By contrast, those on continuing contracts were amongst the best protected in Europe, costing an employer 45 days pay per year worked, to lay off.

So it was people like German Lopez who were first to lose their jobs in the downturn.

"Of course they preferred to get rid of people with temporary contracts," the 26-year-old shop worker explains in the flat he shares with three friends, also unemployed.

"There were other people who'd been working at the store for 20 years or more. It would have ruined the firm to sack them, so they sacked me," Mr Lopez says.

Despite sending his CV for dozens of jobs a month, he has been unable to find work for a year.

One recruitment website he uses shows 963 applicants for one post he has just applied for.

According to Labour Minister Celestino Corbacho, whilst 14 million Spanish workers are "permanent" employees, 7 million more are constantly in and out of work - on temporary contracts or unemployed. Many, like Mr Lopez, are young or immigrants.

The government intends its reform to redress the balance, and forge a more stable, productive labour market.

It restricts the use of short-term contracts and pays bonuses to firms that hire the unemployed on continuing contracts.

There are special incentives to take on the young, women or men over 45.

The severance pay on those "development" contracts is cut from 45 days per year to 33, of which eight days will be paid from a state fund.

There are also measures to enable firms to reduce workers' hours, rather than sack them, allowing greater flexibility to cope in a crisis.

The changes will cost the government - it estimates more than 700m euros until 2012. But the hope is that firms will be encouraged to start hiring again, if it is cheaper and easier for them to fire staff in a downturn.

Talks between the government, trade unions and employers' representatives lasted 2 years before collapsing. The government then opted to pass its own measures by decree.

The aim was to send a strong signal to other European governments - and the financial markets - that Spain is committed to structural reforms as well as spending cuts, to bring its finances in line as soon as possible.

It appears to have helped. Demand for a government debt auction last week was strong, and the stock market has rallied.

But the labour reform still has to be approved by parliament, and that is not guaranteed. Even then, the government has announced the decree will later change status to become a bill of law, allowing alterations by other parties before a final vote.

"This does not dilute the strength of our message," deputy prime minister Maria Teresa Fernandez de la Vega replied to criticism that the government is giving off confusing signals, and improvising on policy, yet again.

"Making this decree into a law gives us chance to improve it and make it more consensual, so it's easier to implement," she argued.

The trade unions have already voiced strong objections to the labour reform, fearing the gradual transfer of all workers to contracts giving just 33 days severance pay, instead of 45.

"Spain is already the country where the most jobs were destroyed. Now they want to make it even easier to fire a worker," argues Rafael Espartero of the UGT union. "We need policies to create jobs, not make more people unemployed."

So Spain's main unions have called a general strike for 29 September in protest.

But many see that deferred date as a sign of weakness. A public sector strike earlier this month did not attract great numbers and the unions hope pension reforms, or even additional spending cuts, this summer might add new recruits to their ranks.

There are already signs that discontent is spreading as Spain's autonomous regions begin implementing their own austerity measures.

Here in Madrid, union members warn the city Metro will be suspended for three days next week as they protest a cut in pay by the regional government. An indefinite strike by the city's rubbish collectors was just averted.

National spending cuts scraped through parliament last month by just one vote, leaving the government looking weak and isolated.

Its actions have reassured the financial markets to a degree - including introducing the labour reform. A vote of support for that reform from parliament, might go some way towards repairing the government's battered standing here at home.