The Spanish Economy, chapter 7, sections 1, 2, 3 and 4

2: characterization of the labour market in Spain

Features of labour market in Spain and the EU from the mid 1980s to 2011
 Increase in Labour force by increase in working age population and advance
in the activity rate. Immigration also an important factor
 Creation and destruction of employment: There were a lot of jobs in service
sector and in construction, the latter suffered the economic crisis intensely
 Youth unemployment rate is quite high due to difficulties in accessing the
employment
 After 2008 destruction of employment focused on workers with temporary
contracts, where there is more presence of young people so that’s why youth
unemployment rate has gone up again
 Higher unemployment rate in immigrants’ group

Main problem of Spanish labour market in comparison with other Eu countries is:
 High unemployment rate

Employment characteristics:
 Temporary contracts
 Low pressure or part-time workers

3. The institutional frameworks of the labour market and its reforms

There are four major stages
1. During 60s to 70s, Labour regulation was added to the political system. So, the
unions and trade were both illegal. This generated bargaining and high dismissal
costs
2. 70s to 84s. There was greater regulation. The workers statue tried to establish
regulatory framework like other Eu countries
3. 84 to 92: major reforms to facilitate the creation of employment. Fixed-term
contracts
4. After 92: attempts were made to make labour market more flexible. The measures
adopted in this stage impacted: hiring, firing, unemployment benefits, collective
bargaining, and intermediation in the labour market

The labour reform of 2012 was the most profound in Spanish Economy. It introduced
some modifications in several areas of labour regulation, mainly in collective bargaining
and dismissal costs

Labour reforms
a. Modalities of employment contracts:
1. The problem with labour regulation at the beginning of 80s
was the high dismissal costs. This was the reason why firms
were reluctant to hire new employees in expansionary phases.
2. The reform of 1984 was key. It made hiring and firing more
flexible by introducing new types of contracts, fixed-term
 contract. Due to this there were more jobs, but this created
duality in the labour market between permanent and
temporary workers
b. Dismissal regulation
1. Up to 1994 reform, in Spain and in other Southern European
countries, dismissal regulations were quite rigid, and the costs
were very high. That`s why firms resorted to temporary
contracts
2. The 2012 reform introduces major changes in employment
protection to reduce firing costs; It reduces the severance
payments for unfair dismissal (severance payment of 33 days)
and eliminates the need for administrative authorisation.
These measures bring severance payment for dismissal close
to European average and aid in the creation and destruction of
employment

c. Unemployment benefits
1. In 1992, the regulation of unemployment benefits was
reformed
2. Setting wages done through process of collective bargaining
between firms and unions. Negotiation can be centralised-
establishing an agreement for whole economy or de-
centralised- conducted with each company. Finally, it can be
negotiated on sector-wide basis-joint agreement for all the
companies of a sector
3. Dismissal costs: include both the necessary arrangements to
reduce manning levels and the severance payments
4. Unemployment benefits: allow the unemployed to efficiently
search for a job, promoting a better match between the job
accepted
5. Active labour market policies consist in advising and
supporting the unemployed. It facilitates better match

d. Structure of collective bargaining

1. 80s workers status approved an intermediate level of
collective bargaining
Topic 2: The Spanish Economy, chapter 3, sections 3, 4 and 5

Section 3: The years of Expansion and the accumulation of macroeconomic imbalances

 Strong growth in Spanish economy during the expansion phase specifically in

domestic demand which lasted from 1999 – 2007. It was due to factors such as low
interest rates, the nominal interest was lower than inflation, so Spain had negative
interest rates. Due to this there were a lot of liquidity and aggregate demand grew a
lot. This affected prices too which grew faster than Eurozone Average that’s why
euro set same exchange rate for all Eurozone, but the real exchange rate was
consistently appreciating
 This created imbalances because it was unsustainable
 Three of the most important imbalances were
1. Inflation rate that is higher than other EU countries
2. Huge government deficit, making Spain economy with highest
external debt in the world
3. Real estate bubble. When it busted affected banking stability
and the accounts of government

 When EMU (European Monetary Union) was designed, it was thought that with
common monetary policy, member countries would end up with similar inflation
rate, but this wasn’t the case and it has’ t happened since the inception of the Euro.
This same monetary policy had opposite effect on different economies of Euro

The expansion in domestic demand that drove Spanish economic growth until 2007 was
accompanied with disproportionate import of goods and services. This is because Spanish
productive system was incapable to adapt or meet the demand. This results in growing
current account deficit (trade balance). This also meant increase in external debt from 1998
to 2007 net debt (private and public) grew to 650bn€ gross external debt rose to
1.775trillion€ (165% of GDP).

Real Estate bubble

With price of real estate assets growing, together with lower interest rates up until 2006,
led to real estate bubble. House prices grew 200%. This imbalance would end up triggering
economic and financial crisis:
 Firstly, because the help lent by the rest of the world to finance growth were mainly
used to produce good and housing that couldn’t be exported to return the loans
 Secondly housing requires long term finance while the resources provided by
overseas were much shorter in duration
Section 4: Financial crisis and economic crisis

 In sept 2008, financial market became aware that periphery countries (GIPSY)
Greece, Ireland, Portugal, Spain and Italy, less developed countries have
accumulated a lot of debt. So, they imposed harder financial terms on them
 Serious repercussion on employment and unemployment
 Banking system of Spain was hardest hit by crisis. They were suffering with
liquidity and solvency problem. Spain was in vicious circle in which feasibility of
Spanish finances (public and private) depended on the ECB (European Central
bank) willingness to inject the liquidity. ECB showed reluctance to finance
Spanish imbalances, so Spain asked EFSF (European Financial stability facility) for
a line of credit in 2012 to recapitalise the banks.
 Public sector: Despite the austerity programmes, economic policy that aim to
reduce government budget deficit. This sector was also suffering from crisis. In
the first half of 2012 public debt has doubled since 2007, so International
financial markets stopped helping Spain.

Conclusion
The difficulties that Spanish banks and public administration faced during these crises are
not only due to external debt, but also the lack of confidence in Spanish Economy. Spain is
unable to generate resources to pay back its debt. Most Spanish companies produce
expensive and uncompetitive goods and services, which hinders their exports and their
share in the domestic market.

Section 5: Recovering from the crisis and the future of EMU

Two main structural reforms which started in 2012 were

1: labour reform: Intended to make labour market more flexible
2: Reorganise the banking system: since mid 2009, the government has nationalised banks
with liquidity and solvency

There are also plans to create new (ESM) European stability mechanism to provide aid for
countries who have difficulties re-establishing their fiscal and financial stability and
competitiveness
Some formulas to remember

 GDP: Y = C + I + G + ( X-M)
 Domestic demand: Y = C + I + G
 Net external demand = (X-M)
 Investment rate: I/Y * 100
 G&S Exchange balance = (Exports – Imports)
 Trade openness ratio = Exports + Imports/GDP * 100
 How to calculate CAGR? Example:

o Calculate the Compound Annual Growth Rate (CAGR) of GDP and its
components between 1986 and 1990.


Let Yo = 1986 and Yn = 1990 and n (recovered in time units) = 4

R = ((Yn/Yo)1/n – 1)*100

From chapter 3

 Potentially active pop = active + inactive

 Active = Employed + Unemployed
 Activity rate = Active / potentially active * 100
 Employment rate = Employed / Potentially active * 100
 Unemployment rate = Unemployed / active * 100
 Unemployment = Active - Employed
 Employee rate = Employees / Employed * 100
 Temporality rate = Temporary / Employee * 100
 % Long Term unemployment = LTU / Unemployed * 100
 Employees = Temporary workers / Temporary rate
 Employed = Employees / Employee rate
 Potentially active = Employed / Employment rate
 Active = potentially active / activity rate
Example

What is unemployment rate? And LTU rate?

1. Temporary workers / Temporary employment rate = Employees
2. Employees / Employee rate = Employed
3. Employed / Employment rate = potentially active
4. potentially active / activity rate = active
5. Active – employed = unemployed