* Labour reforms help competitiveness, hurt consumption
* Sixth of those with jobs work part time
* Economists say lower consumption threatens growth
By Paul Day
MADRID, April 22 (Reuters) - Carmen Collado has laundered hospital linen in Madrid for 11 years. Now, almost half her colleagues have been fired and the 61-year-old grandmother is cleaning the same bed sheets, nurses' scrubs and towels as before for half the pay.
Collado is still working in a country where more than one in four out of a 22.7 million workforce have no job. But her employment does her, and Spain, few favours in the long term.
"I've had to turn the heating off this winter. I can't afford to go out with friends, and I'm ashamed to say I have turned to my own mother, who is 91, to help pay for gasoline and car insurance," says the tough, fair-haired labourer.
New laws giving companies more flexibility to cut salaries and change contract terms for employees have helped Spain pull itself back from the brink of default two years ago, restarting export growth by letting companies push down prices.
But the shift in labour rules, promoted by the European Union as part of economic changes asked of the euro area's more indebted nations, has also transformed Spanish society, with long term consequences that could undermine the recovery.
Workers on low-wage, short-term contracts have borne the brunt of the salary reductions, creating a new underclass of Spaniards who are likely to struggle for the rest of their lives to find stable employment.
According to the International Monetary Fund, wage inequality rose faster in Spain than in any other EU country from 2007 to 2012, a divide that has escalated social tensions in a country that had only recently healed the wounds of a 36-year dictatorship ended in 1975.
A recent poll indicated support for Spain's two leading parties would fall sharply at the upcoming European elections, often considered a protest vote, in favour of much smaller groups, due largely to their handling of the economic crisis.
As voter confidence in the main parties dwindles, the conservatives could lose their absolute parliamentary majority in next year's national election, making it harder to pass still vital reforms through a divided legislature.
Despite clear signs of recovery, with output expected to grow around 1 percent this year after having shrunk around 7 percent since the crisis began, Spain's path to long-term prosperity is likely to be steep, economists say.
Though exports have swelled to one-third of Spain's overall output, up from 20 percent five years ago, the country's economic health is heavily reliant on household spending, which has shrunk in the same period.
That means Spain will struggle to follow in the footsteps of Germany, whose labour market reforms of the 1990s transformed it into an economic powerhouse fueled by higher-end exports rather than domestic consumption.
Economists also question whether the cheaper, basic goods that have boosted Spain's export sector can in the long-term compete with rival products in even lower-cost countries such as Turkey or Morocco.
"The way out for Spain is going to be painful and, overall in the short run, Spain is going to be a poorer country," says Santiago Carbo Valverde, economist at Bangor University in Wales.
Household spending, a major pillar for a service-orientated economy like Spain, has shrunk by more than 11 percent since the burst of the property bubble six years ago. While the speed of the contraction is easing, much lower wages mean a return to sustainable growth could take years.
Trying to improve competitiveness by lowering wage bills was counterproductive in Spain, Klaus Armingeon, political scientist at Bern University in Switzerland, said.
"Cutting wages hurts domestic consumption, which affects growth. Lower growth will force the government to pass more austerity measures to meet fiscal targets, creating a vicious cycle."
The collapse of the real estate sector in 2007 and 2008 after a decade long property bubble sent the Iberian country into a downward spiral. Households and companies were left deeply indebted; the state was starved of lucrative real estate taxes and companies fired people en masse.
Nearly one-third of jobless people among the euro zone's 17 countries are in Spain. At one point, concerns over the public sector deficit and banks in the bloc's fourth largest economy threatened the stability of the entire single currency.
Pushed by its international partners, Spain undertook reform. Both conservative and centre-left governments approved changes aimed at creating more employment, in part by making it easier and cheaper for struggling companies to replace workers.
The number of people on low-paid, short-term contracts has soared. By the end of last year, 16.3 percent of those with jobs were working part-time, up from 11.1 percent in mid-2007.
Teresa Cavero, a researcher for international aid agency Oxfam in Spain, says the result has been an increase in the number of so-called active poor.
"These are people who are in work, but with very insecure jobs and very low wages," she said. The percentage of workers at risk of poverty jumped by almost 18 percent from 2007 to 2012, according to Spain's National Statistics Institute.
"It's good that there is work, yes, but at what cost?" Cavero said.
With around six million people without a job, Spaniards are jumping at any chance of employment.
When Swedish furniture retailer Ikea announced it was opening a new store outside Valencia and would need 400 employees, more than 20,000 applied within days of the posting, crashing its computer servers.
Marina Fuentes, a 57-year-old Spaniard who has been cleaning Madrid health clinics for 34 years, was forced to take a cut in salary last year.
Now, Fuentes' 800-euro-a-month salary is helping support Fuentes' unemployed daughter, son-in-law, granddaughter and nephew who are living in a two-bedrooom flat. When her daughter asked a social worker for advice on what to do, she was told she should move back in with her mother.
"I could get to the end of the week before; now I'm lucky if I reach Wednesday," says Fuentes, who says she's trying to buy and cook in bulk and freezing in order to save money.
Jobs that were previously shunned are now hot property.
Daniel Gismero, a 34-year-old street sweeper in Madrid, is part of a union that successfully fought to avoid a 40 percent pay cut at the private company that is contracted by the city government to clean the Spanish capital.
Their bargaining chip was weeks of strikes which left piles of trash on every corner of the city. He says the company is inundated with job seekers.
Gismero takes home 1,100 euros a month and has agreed to a pay freeze and a reduced salary for six weeks of the year until 2017 to avoid more damaging pay cuts.
"Before, nobody wanted my job," he said. "It was always seen as a shit job with shit pay. I feel like one of the privileged ones now." (Editing by Alessandra Galloni and Philippa Fletcher)