The unemployment rate in Spain has recently been fluctuating around 25%.
What has caused this?
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$\begingroup$ It's only been fluctuating "around 25%" for the last two years or so. If you use all the data that site offers it looks like the peak which is already decreasing. $\endgroup$– curiousdanniiJan 1, 2015 at 9:36
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$\begingroup$ This is a badly defined question based on a premise which has not been sufficiently demonstrated to be actually correct. $\endgroup$– curiousdanniiJan 1, 2015 at 9:38
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1$\begingroup$ other users understood it and gave proper answers $\endgroup$– GergelyJan 1, 2015 at 13:13
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$\begingroup$ so what? It's still very poorly written. $\endgroup$– curiousdanniiJan 1, 2015 at 22:47
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$\begingroup$ I am not an academic economist but somebody interested in economic questions. $\endgroup$– GergelyJan 2, 2015 at 7:42
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3 Answers
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Here's an explanation from Paul Krugman. You can read more about this in Krugman's book End This Depression Now!.
Since joining the Euro, Spain has experience large capital inflows—money flowing into Spain, mostly from Northern Europe. These inflows caused a boom in investment, coupled with an increase in prices of virtually everything (including labor) relative to other Eurozone countries.
One consequence of this is that the recession in Spain has been exacerbated by the fact that high costs of production (especially high labor costs) made the Spanish economy less competitive so that the country wasn't able to rely on exports to substitute for the reduced domestic demand.
In order to remedy this situation, Spain needs to become more competitive (i.e. for labor costs to fall relative to those in other countries). Normally, this would happen automatically: as a country exports less, demand for its currency from importers (and hence the currency's value) falls so that its products become cheaper for foreigners. However, the fact that Spain is in the Eurozone means that it can't devalue its currency—it doesn't have one of its own!
Instead, Spain must rely on 'internal devaluation', i.e. reducing the wages of its workers relative to those elsewhere in the Eurozone. This is problematic because workers are typically reluctant to accept a pay cut (so-called downward nominal rigidities). Thus, the way that the economy adjusts is to have a sufficiently large share of the workforce unemployed that people are prepared to accept jobs on significantly lower wage than they might have expected in the pre-recession years.
It should be noted that this line of reasoning is not without controversy. For one, a significant share of macroeconomists do not believe the nominal rigidities story.
answered Dec 29, 2014 at 20:51
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5$\begingroup$ This is a great Krugman passage, and I think it has a lot of truth, but there also seems to be something Spain-specific going on with unemployment. GDP in Spain has declined less than in Portugal or Italy, but unemployment has been much worse. This is a recurrence of an old phenomenon - Spain had ~25% unemployment in 1994 too - studied by Blanchard, among others, and has been blamed on Spain's labor law / unemployment benefits. $\endgroup$ Dec 29, 2014 at 21:57
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2$\begingroup$ Good answer. The only piece of the puzzle missing here is an explanation for the insufficient outflow of labour from Spain $\endgroup$– 410 goneDec 31, 2014 at 20:40
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4$\begingroup$ @EnergyNumbers Great point. Indeed, a central idea of the theory of optimal currency areas is that a prerequisite for the optimality of a common currency is high cross-border labor mobility. The language and cultural barriers to labor mobility in Europe are probably an important hinderance to the economy's ability to automatically correct for this kind of imbalance. $\endgroup$ Dec 31, 2014 at 22:48
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$\begingroup$ Why was there reduced domestic demand? He just threw that in there as if it was obvious. Why would an increase in investment lead to a decrease in domestic demand? $\endgroup$– DavidSep 21, 2022 at 18:05
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Neither the answer posited above nor the comment are off the mark. Inability to use monetary policy to adjust to a shock is certainly a cause of high unemployment in the aftermath. Idiotic fiscal policy doesn't help either. The very last thing to try to do after such a shock is to eliminate government deficits in such situations. It becomes a vicious -- not virtuous -- circle; spending is cut and government employees dismissed. This leads to decreased consumer spending and expenditures by firms serving the public sectors. Taxes revenues fall as these people's incomes do. Which leads to further cuts and a further swirl around the toilet bowl.
Spain's problems are exacerbated by many of the same problems experienced in the US sunbelt. Far, FAR, FAAAAR too many homes were built and real-estate speculation ran rampant. Like in Florida and Nevada, so many homes now sit empty that, other than custom-building, the residential real-estate industry remains in the doldrums. In the US, such activity is around 12% of GDP. With it remaining stagnant, and likely to remain so for many years to come, there are a large cadre of construction workers who are basically permanently unemployed.
A third reason is the 'undocumented' economy. Southern Europe has never been a hotbed of law-and-order. Many of those who are 'unemployed' would starve to death in Greece, Italy and Spain if they actually had no income whatsoever. They just don't have any official income at the moment. Being properly employed is far more preferable, of course, but it is not as if 25% of Spaniards actually have no income coming in the door. They just don't have a paycheque that the officials can trace coming in the door.
A final reason is the climate and cost of living. Quite frankly there are much worse places to try to continue to live without a regular paycheque than southern Europe. Like Minnesota. Try living there without a paycheque for 6 years and you'll have been pushing up daisies -- after thawing out and decomposing -- after the first winter. The pressure to fix the problem of 25% unemployment is a lot less drastic when a) it's not really 25% and b) you can live reasonably well while 'unemployed'
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$\begingroup$ +1 My understanding was that the core was a large housing bubble bursting, causing a collapse in construction and an initial spike in unemployment, which reduced demand, hurting the wider economy and driving layoffs in other industries, reducing supply and demand further - then austerity policies pushed this down even further across more sections of the economy. Then there are the many other contributing factors around this. $\endgroup$ Dec 30, 2014 at 11:09
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$\begingroup$ I agree with the undocumented factor playing a role in Spain. However, there is more to it than just "what a nice weather i dont feel like working". The existing high levels of labour cost and minimum salary regulations force Spanish employers to resort to black market to be able to employ workers competitively. $\endgroup$ Sep 3, 2017 at 17:35
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Thats a good question that I will answer perfectly.
1º When the socialists leader Felipe Gonzalez arrived to the power our industry represented the 39% of the GDP. So the industrial crisis hit a lot. However, the answer of the socialist party was reduced the industry in 2/3 and estimulated for the first time, the building companies for infraestructures and transports. These measures looked good for that moment, however, provocked a great unstability in employment rates. Those times were: " the best industrial policy is the non-industrial policy".
2º Aznar came to the power and instead of supporting, improving and driving the industry, he drived more the building companies.
3º Zapatero received the construction economy in enourmous uncontrolled growth unstoppable (a total madness). Even he tried to drive the industry and technology investment, however, he couldnt stopped the uncontrolled spending in construction that was hogging the bank credit. So in the crisis the bank stopped giving credit because they were asking a lot of money from German´s banks. That produced the collapse of the economy. His measure was get in to debt and drive a building plan to drive the employment but he failed in the diagnostic of the problem and added another problem the increasement of the debt. The construction also provocked a 30% of the young spaniards to leave the education.
4º Rajoy arrived to the power with a good plan, however, also appeared the corruption related to the massive construction operations in the regions. Furthermore, germany and ECP pressured rajoy to priorize the clean accounts first. Not drive the industry, nor technology investment, he has drived cheap underlevel jobs and cheap job contracts in order to provide jobs for the spanish companies that were financely exhausted. And rescue the banks in order to help the companies with credit, however, the construction boom, has been very painful for the banks.
Only, we have to see the difference between regions: Basque Country, industrial region, unemployment 13%. Andalusia, tourism region, unemployment 30%.
The mistakes of the past, will affect to the future.
