Spain, which boasts the eurozone's fourth largest economy, last year enacted "courageous" reforms to the labour market, the Organisation for Economic Cooperation and Development (OECD) said in a report.
Prime Minister Mariano Rajoy's conservative government passed reforms in 2012 that lowered the cost of laying off staff while making it easier to change workers' hours and conditions.
"Despite the still difficult economic environment, more firms have been hiring workers on permanent contracts since the law was passed," the OECD said.
"Recent reforms have helped create jobs and should further boost competitiveness and employment in the years to come," it added.
The OECD said Spanish labour costs had dropped by 3.2 percent between the end of 2011 and the second quarter of 2013.
"While this wage moderation is affecting workers' living standards, there is already evidence that it has started yielding its dividends in terms of employment performance and has contributed to save jobs," it said.
Spanish workers are feeling the pain of the salary squeeze, however, said Paloma Lopez, employment secretary of the major CCOO union, estimating that 60 percent of workers earned less than €1,000 ($1,375) a month.
"They face major difficulties because they still have to pay the mortgage," she told news agency AFP.
The OECD said more needed to be done, however.
"Further efforts to better support job seekers and to provide firms with greater options to adjust in difficult times are still needed," said OECD employment chief Stefano Scarpetta.
Spain remains one of the OECD countries with the most generous severance pay requirements, the report said.
"The OECD suggests reducing over time the severance costs for large employers to align them closer with OECD and European averages," it said.