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The Rise and Fall of Spanish Unemployment: A Chain Reaction Theory Perspective

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  • Karanassou, Marika

    ()
    (Queen Mary, University of London)

  • Sala, Hector

    ()
    (Universitat Autònoma de Barcelona)

Abstract

The evolution of Spanish unemployment has been quite idiosyncratic. The full employment levels of the early seventies were followed by unemployment rates that were the highest within the OECD countries in the aftermath of the oil price shocks. While unemployment was extremely persistent in most of the eighties and nineties, it experienced its sharpest decline in recent years. We investigate the determinants of this unemployment trajectory using the analytical framework of the chain reaction theory (CRT). We show that unemployment may not gravitate towards its natural rate due to frictional growth, a phenomenon that arises from the interplay of lagged adjustment processes and growing exogenous variables in a dynamic system with spillovers. The empirical analysis distinguishes four periods: (i) 1978–1985, (ii) 1986–1990, (iii) 1991–1994, (iv) 1995–2005, and finds that capital accumulation is a crucial driving force of unemployment. Thus, our theoretical and empirical results question the key role of the natural rate in policy making.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3712.

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Length: 42 pages
Date of creation: Sep 2008
Date of revision:
Publication status: published in: Philip Arestis and Malcolm Sawyer (eds.), International Papers in Political Economy, Palgrave-Macmillan, 2009
Handle: RePEc:iza:izadps:dp3712

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Keywords: impulse response function; labour market dynamics; frictional growth; chain reaction theory; capital accumulation;

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References

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  1. Roberto Bande & Marika Karanassou, 2006. "Labour Market Flexibility and Regional Unemployment Rate Dynamics: Spain 1980-1995," Working Papers, Queen Mary, University of London, School of Economics and Finance 574, Queen Mary, University of London, School of Economics and Finance.
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  4. Marika Karanassou & Hector Sala & Pablo F. Salvador, 2006. "The (Ir)relevance of the NRU for Policy Making: The Case of Denmark," Working Papers, Queen Mary, University of London, School of Economics and Finance 580, Queen Mary, University of London, School of Economics and Finance.
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Cited by:
  1. Bande, Roberto & Karanassou, Marika, 2010. "Spanish Regional Unemployment Revisited: The Role of Capital Accumulation," IZA Discussion Papers 5012, Institute for the Study of Labor (IZA).
  2. Marika Karanassou & Hector Sala, 2008. "Labour Market Dynamics in Australia: What Drives Unemployment?," Discussion Papers, School of Economics, The University of New South Wales 2008-26, School of Economics, The University of New South Wales.
  3. Martin Leites & Sylvina Porras, 2013. "El enfoque de la Reacción en Cadena: una aplicación para explicar la dinámica del desempleo en Uruguay," Documentos de Trabajo (working papers), Instituto de Economía - IECON 13-11, Instituto de Economía - IECON.

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