Institutional Framework and Reform

Spain’s institutional framework provides contributory social security protection covering healthcare, professional care for illnesses or accidents, and benefits for (temporary) disability, maternity, paternity, family, death, retirement, and job loss. The basic needs within these areas are also covered by non-contributory assistance benefits. Contributory benefits always have priority over non-contributory benefits and eligible individuals must claim them first (SEPE 2019). In the following, we focus on two different types of unemployment benefits. For details on the institutional background, we refer to our AppendixII.4.

2.4.1 Unemployment Benefits in Spain

Unemployment Insurance (UI) Benefits. In order to receive contributoryUIbenefits, an individual must be legally unemployed, between 16 and 65 years old, must have contributed for a minimum of 12 months within the last six years, and the reason of unemployment must be an involuntary dismissal (SEPE 2019). The monthlyUIbenefit amount is computed from the regulatory base, which is an approximation of the average labor income over the six months preceding the unemployment spell, multiplied by the replacement rate. For the first six months of theUI benefit period, a replacement rate of 70% is applied. If the individual is entitled to more than six months ofUIbenefits, another replacement rate is valid from day 181 onward. This second rate corresponded to 60% in the time period before the reform of July 2012 took place. This reform reduced the second replacement rate to 50% of the regulatory base.

According to theSEPE(2019), the monthlyUIbenefit amount is subject to a floor of 80% of the Public Income Index (IPREM)22 and a ceiling of 225% of the IPREM. It is increased by one sixth of the monthly benefit amount conditional on the number of dependent children. Details on the calculation of UIbenefits can be inferred from Table II.3in the Appendix. Moreover, the bounds ofUI(and of unemployment assistance) benefit amounts were kept constant between 2010 and 2016, when the IPREM was frozen. In other words, during the period of this chapter’s analysis, all relevant social security benefit levels were kept nominally constant in Spain.

21_{This observation is in line with the increase in earnings inequality during the recession which mostly affected the} bottom half of the distribution (Bonhomme & Hospido 2017).

22_{The IPREM serves as a reference to calculate social security benefits. By virtue of section 1 of Royal Legislative} Decree No. 3/2004 of 25 June 2004, the IPREM replaced the minimum wage which was previously used to calculate social benefit amounts. The IPREM is revised on an annual basis.

Table 2.1:Duration of Entitlement to UI Benefits

Contribution Period (in months) Benefit Period (in months)

< 12 0 12-17 4 18-23 6 24-29 8 30-35 10 36-41 12 42-47 14 48-53 16 54-59 18 60-65 20 66-71 22 ≥ 72 24

Notes:This table summarizes the Spanish system ofUI PBD. Eligibility requires a minimum contribution period of 12 months.PBDranges from 4 to 24 months, and it is a function of the individual’s months of contribution.

Source:Authors’ own illustration based on theSEPE(2019).

The duration of entitlement toUIbenefits depends on the contribution period. Table 2.1 shows that the potential benefit duration (PBD) starts from a minimum of four months given a contribution period of at least one year. It increases step-wise by two months conditional on the respective length of the contribution period (first column inTable 2.1). The maximum possibleUIbenefit duration is 24 months (SEPE 2019). For more details on the SpanishUIsystem, we refer to SectionII.4.2in AppendixII.4.

Unemployment Assistance (UA) Benefits. Registered job seekers may be eligible for non-contributoryUAbenefits under certain circumstances. In case such a job searching individual is ineligible forUIbenefits and if the monthly gross incomes correspond to at most 75% of Spain’s minimum wage, he or she can claimUAbenefits. Additional information on theUAsystem is provided in SectionII.4.3of AppendixII.4.

2.4.2 Labor Market Reform in 2012

By virtue of the Real Decree-Law 20/2012 which aimed to ensure budgetary stability and competitiveness, details on the labor market reform discussed in this chapter were only publicly announced on 13 July 2012. On this day, Spain’s vice president explained that all recipients entitled to more than six months ofUIbenefits who would start theirUIspell on 15 July 2012 or thereafter would experience a reduced replacement rate of 50% after their first six months of receivingUIbenefits. Thus, this reform decreasedUIbenefits by approximately 16.67% in comparison to the previous replacement rate of 60%. This new replacement rate is marked by the red line inFigure 2·2. For allUIrecipients who entered theUIsystem before 15 July 2012 the old rate (blue line) remained valid from day 181 of the benefit period onward. As illustrated by the black line, the replacement rate of 70% for the first six months of theUI PBDremained unchanged.

Figure 2·2:Replacement Rate Before and After the Reform 40 50 60 70 80 RR (in %) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 UI benefit month

RR for the first 6 months old RR after 6 months new RR after 6 months

Notes:This figure illustrates the drop in the replacement rate of theUIbenefits that took effect on 15 July 2012.

Source:Authors’ illustration of the reform.

Rebollo-Sanz & Rodríguez-Planas(2020) note that the public was quickly aware of the reform’s consequences regarding the UI benefit amount because the new law received medial attention and the government informed the people via several channels. Nonetheless, a displaced worker’s decision to claim his or her benefits should not have been affected by the reform because for the first six months of benefit receipt the replacement rate stayed the same. Aside from that, as the reduction kicks in six months after the beginning of the benefit spell, it is possible to investigate the responses in individuals’ job search behavior before and after the actual drop in the net replacement rate (i.e. in theUIbenefit level) takes place.

According toRebollo-Sanz & Rodríguez-Planas(2020), strategic lay-offs caused by the new law have been rather improbable because the reform was implemented already two days after its announcement. Moreover, they argue that trends of monthly inflows into theUIsystem have been similar during 2011 and 2012. As we discuss inSection 2.5.1, our analysis confirms that strategic manipulation around the reform cutoff date is not an issue, and thus the reform can be exploited as quasi-experiment. Moreover, the implementation of this reform affected a large share of the Spanish labor force, and could not be avoided in times when the economy was unlikely to improve for many months to come (Rebollo-Sanz & Rodríguez-Planas 2020). This argumentation is plausible because the unemployment rate reached its zenith of 26.1% in 2013 (OECD 2018).

Besides the reduction in the replacement rate, the new law also changed labor market rules for part-time workers and workers older than 52. For a detailed overview of all reforms, we refer to our Appendix SectionII.4.6in AppendixII.4.