Spanish Unemployment

Abstract

Spanish unemployment Samuel Bentolila and Olivier J. Blanchard Spain has experienced very high inflation in the 1970s and extremely high unemployment in the 1980s; the latter still stands at 16.6% today, with inflation rising again. In this paper we argue that Spain has suffered from the same problems as most European countries, but in a stronger form. The specificity comes from the Franco legacy, which left Spain in the mid-1970s with both an archaic system of labour relations and an inadequate production structure. We find the cause of the inflation explosion in a wage push, itself originated in a breakdown of labour relations; and trace the initial rise in unemployment to the non-accommodating stance of monetary policy. Turning to the large magnitude of the increase in unemployment and its steadily decreasing effects on inflation, we argue that three mechanisms were at work: a decrease in capital accumulation caused by the wage explosion and monetary contraction; labour shedding on a large scale; and ‘hysteresis’ effects, whereby high unemployment led to changes in the labour market, resulting in higher equilibrium unemployment. We infer that there is an important bootstraps component to Spanish unemployment. Thus, much lower unemployment is feasible, and achievable at steady speed with little inflation cost; policies aimed at undoing some of the endogenous changes in the labour market would make it easier and faster.

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