Spain's Dropout Generation

In the last two decades in Mediterranean Europe, and especially in Spain, a new social group has emerged, called jovenes (youngsters). Members of this group exhibit several specific characteristics. First, jovenes are usually male, aged 25-35, although some members are in their 40s. Second, they are in a perpetual state between graduation and their first job. Third, they usually live with their parents to save money, allowing them to go out at least three times a week. Fourth, they occasionally work a part-time job – if only due to the pressure imposed by their parents. Last, and most important, they receive unemployment benefit credits and renew their membership on the “unemployment list” from time to time, so that the state subsidies don’t run out during their “temporary” hibernation.

It would be very unfair to put all the blame on them for their lack of initiative. They play a vital part in what is called the “Atlas generation.” They have the weight of the world on their shoulders, and they are going to be the ones in charge of paying for the economic sins of their parents. It is important to analyze the reasons why this social group has appeared, what the situation is like today, and what the consequences will be of this phenomenon in the future.

For the last ten years, and especially since the recent financial crisis started, Spanish unemployment has risen astronomically, reaching a record of around 20%. This, of course, does not count the thousands of illegal immigrants, who don’t appear in the official state statistics.

Aside from the vast number of unemployed, another significant group of people work in part-time jobs with “garbage contracts” or very low salaries. Members of this group are called mileuristas (those who earn only €1,000/month). This group appears above the jovenes in the social pyramid. Mileuristas normally live at home and dream of becoming economically sufficient eventually, or they live in cheap rented apartments funded by state money, which comes directly from taxpayers’ pockets.

Finally, we find a smaller group at the top of the pyramid. This group is formed by either a lucky few, or in some cases, hardworking and generally outstanding young people. This group has very decent jobs (normally around €2,000/month starting salary) and are the sons and daughters of wealthy families that normally receive a more-or-less high-quality private education. They end up employed in the family business or in some firm where their parents or family members have contacts.

Outside of this pyramid we will also find a group of people that decide to study for an “oposición” (state exam) in order to work for the government. Depending on the complexity of their education, and their success on the exam, they will end up working for the first time between the ages of 26 and 35 and will be decently, or even very well paid, for the rest of their lives.

It is also very important to give special attention to the number of years that people are called “students” in Spain. The quality of a university graduate has been devalued in recent years to the point where an employer will no longer be impressed at all by an undergraduate degree in a job interview. Consequently, at least a master’s degree or some kind of postcollege specialization accompanied by proficiency in at least three languages is demanded. This, of course, means more years spent as a student and, for the most privileged ones, a year or two living and exploring foreign languages abroad.

Not so long ago in Spain, it was an honor to have a college degree and even more prestigious to hold a graduate degree, which only a few people could achieve due to the expense and hard work that it involved. Now it is almost free to study in a Spanish public university. This is viewed as a great accomplishment that gives opportunities to people from lower classes, who will sometimes end up forming part of the group of “hard working and outstanding young people.” But, to be honest, this group is quite small. The effort to make it easier to be a student is largely a way for the government to lower the unemployment rate.

In order to explain why it is so hard for recent graduates to obtain a decent job in Spain, it is important to know that labor costs are very high for employers – a consequence of strict laws that protect workers. Four weeks’ vacation a year is the mandatory minimum. An artificially high minimum wage places a floor under the supply of workers and the demand for jobs, creating a devastating imbalance. This means there is a huge demand for jobs and little desire on the part of employers to fulfill it.

Additional reasons for the lack of job offers in Spain include the excessive finiquito, the final pay a worker is entitled to under Spanish law when fired: 45 days of salary for each year worked at the company. Furthermore, taxes on employers are very high – at least a 50 percent of each worker’s annual salary, which means that if someone is paid €20,000 a year, it costs their employer at least €30,000 a year to hire them. All this makes an employer very reluctant to hire an employee, which creates a high rate of unemployment and a huge number of “garbage contracts.” These taxes also promote black-market activity, which either sidesteps the established rules or ignores them altogether.

The taxes on employee wages are very high as well, which brings us back to the mileurista social status. These taxes create a substitution effect: firms have become desperate for new technologies to reduce labor inputs. One recent example in Spain is McDonald’s move to start substituting workers with new machines that take the order for the customer, reducing the number of workers. The goal is to leave only two sets of employees – the ones in the kitchen and ones that hand the food to you at the counter.

Spain’s misfortunes have been complicated since joining the eurozone. The ability to obtain very low interest rates to borrow money – the same interest rates as in more powerful and savings-oriented economies like Germany – worked as an incentive for companies to borrow money for infrastructure and housing construction. Around 800,000 houses have been built each year in Spain, more than France, Germany, and England combined. This meant a surge in the supply of jobs in construction industries. Unfortunately, this demand for labor was met mostly by immigrants who now find themselves unemployed with few possibilities. Huge loans to finance this housing boom, especially from the Spanish “cajas” (saving banks) now cannot be paid back and have resulted in a huge government bailout.

As a result, the Spanish government has undertaken an increasingly large debt, financed by the continual issuance of new bonds. This borrowing has strained Spain’s public finances, lowered its bond rating, and reduced the demand investors have to continue funding this deficit spending.

At the same time, the bust has caused a severe decline in tax receipts, especially in taxes like the IVA (value-added tax). Consequently the state has received less income and in response is now increasing consumption taxes to cover the shortfall (effective next month). These increased taxes will, in the end, translate to less spending and more constrained profits for all producers. They will also make Spain a very unattractive place for companies worldwide to start or continue their business.

All these effects will ultimately mean more unemployment, which takes us back to the young “Atlas generation.” Ironically, many members of this generation have complete faith in the government to take care of all these issues for them. They choose to stay at home until they are middle-aged and delay getting married and creating a family until their mid-to-late 30s. They also have an increasingly huge debt issue, which they will eventually have to take care of.

If current trends continue, within a few short years in Spain each employee will have to pay for one pensioner on social security. Only 40 years ago, ten employees took care of one pensioner through their social-security contributions. The Atlas generation, by putting off marriage and children, has worsened this worker-pensioner imbalance. The yearly rate of births per fertile woman in Spain is only 1.2, one of the lowest in the world, and it will likely decline in coming years.

The only way to solve this problem would be to lower taxes, especially employment taxes, dramatically. Doing so would encourage employers to offer more jobs and employees to have larger families. Unfortunately, this option isn’t of much interest for the politicians in Spain, who prefer to maintain the socialist status quo regardless of which political party is in power.

Jaime Levy Moreno
for The Daily Reckoning

The Daily Reckoning