by Roland Lloyd Parry

MADRID, February 10, 2012 (AFP) - Spain's conservative government slashed employees' maximum severance pay in a sweeping labour reform unveiled Friday to confront a near 23-percent unemployment rate.

It was the third major reform in two weeks by a government racing to find an antidote to Spain's deepening economic malaise and the highest jobless rate in the industrialised world.

After proposing legislation to cut the annual public deficit to zero by 2020 and enacting a reform obliging banks to set aside 50 billion euros ($66 billion) against soured property assets, the government is now targeting the jobs crisis.

"The government's goal is to fight joblessness," Employment Minister Fatima Banez told reporters after Prime Minister Mariano Rajoy's cabinet adopted the new measures in a decree.

"It is a reform that can be considered historic."

Hundreds of people protested in Madrid on Friday night at the central Puerta del Sol square against the reform, in the latest of a string of demonstrations against austerity measures.

They waved banners and shouting "General strike!", in a demonstration called by the Indignants, a social movement that led a wave of protests last year.

"The reforms lower the conditions for hiring," said one demonstrator, Javier Baredes, 53, who works in telemarketing.

"There are going to be more ways of hiring, cheaper redundancies and conditions that are obviously worse for workers. Unemployment is going to rise because they are making it easier and cheaper to fire people."

About 500 protesters who were at demonstration at Sol marched to parliament, according to an AFP reporter at the scene.

Upon reaching police barriers set up near the assembly, police charged the crowd and arrested several of the participants and the protesters dispersed.

The number of jobless people in Spain shot above five million at the end of 2011, sending the unemployment rate to 22.85 percent -- double the European average.

Some analysts argue that part of the problem is high severance costs deterring employers from hiring.

Others say the real problem is a major split in the market: on one side there are permanent contracts based on collective bargaining that offer high severance pay; on the other are temporary workers who have little protection.

The latest reform, which affects small businesses and the self-employed, accounting for 85 percent of all workers, effectively cuts the maximum severance.

The previous Socialist government, ousted in November 20 elections by the Popular Party, had introduced a new labour contract with a 33-day-a-year maximum severance and just 20 days for financially-driven layoffs.

That contract, introduced in July 2010, was rarely used and 45 days a year in compensation remained the norm. Under the new rules employers have no choice but to use the new formula offering less compensation for layoffs.

"The goal is to make it easier to hire new workers in our country, especially the young and long-term unemployed," Deputy Prime Minister Soraya Saenz de Santamaria told the news conference.

The reform also:

-- Gives small businesses a 3,000-euro tax cut for the first hiring of an employee aged under 30.

-- Allows an unemployed person who finds a job to combine 25 percent of the unemployment benefit with the new salary for one year.

-- Authorises private temp agencies to operate as employment agencies for job seekers.

-- Encourages in-company training.

Unemployment has tripled since 2007, when it dropped to a low of 7.95 percent a year before a property bubble implosion that laid waste to millions of jobs in the construction sector.

"We destroyed a great number of jobs very quickly, starting from a situation of near full employment between 2007 and 2008, and very quickly getting to very high unemployment rates," said economy professor Javier Velazquez at Madrid's Complutense University.

"We will have a hard time getting the rate back below 10 percent in the next decade," he added.