Examining Spain's twenty-plus unemployment rate

Among all the dismal macroeconomic indicators pouring out from the peripheral Eurozone economies, the biggest concern is the high unemployment rates. In an environment of fiscal austerity, high rates of unemployment rates have the potential to severely destablize the society. Nowehere is this a bigger concern than in Spain, which has the highest unemployment rate.



Though, this graphic from Zero Hedge is scary, as Ezra Klein points out, it may not be as depressing as it appears. The vast majority of kids in this age group are in school and therefore should not be considered as part of the workforce.



Historically Spain has had extrteme volatility in its labour market. Its unemployment rate surged since early 2008, mirroring its rise in the first half of the nineties. Ezra Klein writes,

Construction in Spain was a whopping 13 percent of employment during the housing bubble — far bigger than even the United States — which led to an especially big crash. Also, it’s much harder to fire workers in Spain (which in turn makes jittery employers more reluctant to hire in the first place) and much easier to use temp workers.

Temporary workers form 33% of the total employees in Spain, the highest among all major economies. A CEPR study of the labour markets in Spain and France finds that in case of the former, the cost of firing temporary labour is minimal whereas the cost of firing the permanent labour is very high. This temporary-permanent labour contract costs is an important structural imbalance in the Spanish labour market. It has echoes in India's own labour market policies.

Spain's problems can be traced to a real estate bubble and a private consumption boom. Paul Krugman captured Spain's problems succinctly,

There was a huge boom in Spain, largely driven by a housing bubble — and financed by capital outflows from Germany. This boom pulled up Spanish wages. Then the bubble burst, leaving Spanish labor overpriced relative to Germany and France, and precipitating a surge in unemployment. It also led to large Spanish budget deficits, mainly because of collapsing revenue but also due to efforts to limit the rise in unemployment.

An examination of the macroeconomic indicators highlights Spain's vulnerability. Since the mid-nineties, the Spanish debt-to-GDP ratio has declined gradually to just 36.1% in 2008. However, it has since ballooned to 60.1% in 2011. Gross capital formation has declined from 29% of GDP in 2008 to less than 23% in 2010. Tax revenues as a share of GDP has fallen from slightly below 14% in 2007 to just above 8% for 2009. Since 2007, the structural balance, or output gap, has widened from just above 1% to more than 7% in 2011. Strained by the depressed economy and the resultant fall in revenues, the fiscal balance slipped from a surplus of nearly 2% of GDP in 2008 to a deficit of 9.3% in 2011. If macroeconomic indicators are any reflection, since 2009, the Spanish economy has fallen off the cliff.

The austerity is likely to worsen the situation. However, given its high unemployment rates and the adequate fiscal space available, Spain should be following expansionary policies till recovery takes firm hold.