IMF officials have pressed Spain to enact reforms to help firms slash wages instead of axing staff in a battle against the nation's towering unemployment rate of more than 26 percent.
In a report released Friday, International Monetary Fund executive directors praised Madrid for economic reforms, including 2012 legislation making it cheaper to lay off workers and easier to change staff hours and cut wages.
"However the economy remains in recession, with unacceptably high unemployment, and the outlook remains difficult," the directors said.
"Labour market dynamics need to improve further in order to reduce unemployment sufficiently."
In a separate report, IMF staff who held talks with Spanish government officials said the labour market dynamics "do not seem to have improved sufficiently" despite last year's reforms.
"In the end, faster wage adjustment would likely lead to fewer people losing jobs or consuming less for fear of this risk and more unemployed being hired," the staff said.
The minimum wage in Spain is 645 euros ($850) a month.
Besides enabling wage cuts, the IMF officials urged Spain to narrow the gap between workers on permanent contracts, who have the right to high payments in case of dismissal, and those on more precarious temporary contracts.
If Spanish unions and employers could agree on the reforms, such a deal would accelerate job gains, the IMF staff report said.
But Spanish government officials "did not see the present social environment as sufficiently receptive for such an agreement and feared that trying to reach one might stall crucial reforms," it added.
The outlook for Spain's economy, the fourth largest in the eurozone, is "difficult and risks are high," the IMF staff report said, predicting a 1.6-percent economic contraction this year, zero growth in 2014 and growth of just 0.3 percent in 2015.
"The weak recovery will constrain employment gains, with unemployment remaining above 25 percent in 2018," it said.
On the back of demand for workers during the tourist season, the Spanish unemployment rate in the second quarter fell to 26.26 percent from a record 27.16 percent in the previous quarter.
The IMF mission chief for Spain, James Daniel, said in a separate report that the recession-hit Spanish economy would probably show growth later this year "in the fourth or even third quarter."
"But the really important question is not whether Spain will grow but whether Spain will grow enough to create lots of new jobs to bring down unacceptably high unemployment and to increase household incomes."
Spain has never managed to achieve net job creation with economic growth of less than 1.5-2.0 percent, the IMF report said.