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Spain's government will unveil reforms to rigid labour laws on Friday that it hopes will be radical enough to get to grips with sky-high unemployment while not severing links altogether with unions ahead of key regional elections.

Investors will be watching closely as the legislation also marks the latest stage in a concerted campaign by Madrid to persuade markets it can slash its public deficit and iron out structural weaknesses in an economy that is heading back into recession.

The centre-right government, elected in a landslide in November, is prepared on Friday to go further with its reforms than a labour pact reached between unions and business leaders at the end of January - even if that risks provoking a general strike.

Workers and management agreed to give more power to companies to hire and fire, reduce the cost of layoffs, and untie wage agreements from inflation.

The government has said it also wants to give firms the ability to modify workers' hours in response to demand rather than simply laying them off, bringing an end to the rapid rise in temporary contracts that has helped push youth unemployment to just shy of 50 percent.

But it is unclear if that reform will be part of Friday's programme, and even if it is, the consensus is that a jobless rate now close to 23 percent will not come down any time soon. "I think the reform will only go half way. That's a shame, because it is necessary, even if it's hard to explain to society," Fran Gonzalez, economist at Caixa Catalunya, said.

Sources close to the government told Reuters there is a split between those who do not want the reform to be so deep that it brings about a breakdown in relations with labour
unions, and those - said to include Economy Minister Luis de Guindos - who want something more radical.

As things stand, analysts believe a desire to retain voter support ahead of upcoming local elections in heavily populated Andalucia and the northern region of Asturias mean de Guindos could lose out. "The problem is that the government faces elections in the short term... Right now it's not looking like we'll see the radical reform that Spain needs," said Jose Pin at the IESE business school.

"We've got 23 percent unemployment, so you need to reduce it fast. If the reform is radical the economy will breathe and unemployment will be reduced much faster."
No job creation yet

The previous Socialist government reformed labour rules in 2010, but the changes were widely criticised for not tackling the collective bargaining wage-setting process or delinking salaries from consumer prices.

Prime Minister Mariano Rajoy acknowledged on Wednesday that the difficult economic environment - Spain is facing its second recession in under three years - meant job creation is still a long way off. "Unfortunately the figures will not improve this year...They are going to get worse," Rajoy told Parliament.

A day earlier, Employment Minister Fatima Banez said the reform would try to end Spain's dual track employment system.

As things stand, an older generation of workers with robust benefits are very expensive to let go, and a younger generation in so-called "junk jobs" or hired on temporary contracts have no benefits or job security.

The government is expected to legislate on collective bargaining agreements in an attempt to give firms more power in setting wages according to their economic circumstances rather than across entire sectors as happens at present.

It will also likely reduce the number of days of severance pay a firm has to pay from a maximum of 45 per year worked at present, with unions hoping for it to be taken no lower than 33, and business leaders hoping for 20.

Another likely element will be incentives for firms to hire youth workers.

Strike risk seen acceptable

Rajoy has long said he expects the reform to trigger at least one general strike, and his advisers say if that doesn't happen the reform is too soft.

Fernando Lezcano, spokesman for the CCOO labour federation, said the contents of the reform would determine whether a strike takes place, criticising the government for not working with labour more closely on the reform.

"The government seems worried about satisfying the demands of financial institutions and (German Chancellor) Angela Merkel, while it refuses to enter into dialogue and share information with Spain's social partners," he said.

But it there is a strike, the high unemployment rate may well keep it from gaining mass backing. A survey by pollster Sigma Dos published in El Mundo newspaper on Tuesday showed 65 percent of people would accept a full-time contract with a 20-day severance package.

Analysts say the real proof the reform is working or not will come in October. The Spanish tourist and service sectors create jobs at a fast rate over the summer months, and analysts say that if there are fewer lay-offs in October after the season ends then it would be a sign the labour reform was working.