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

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  • Marika Karanassou

    ()
    (Queen Mary, University of London and IZA)

  • Hector Sala

    ()
    (Universitat Aut�noma de Barcelona and IZA)

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 Queen Mary, University of London, School of Economics and Finance in its series Working Papers with number 633.

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Date of creation: Oct 2008
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Handle: RePEc:qmw:qmwecw:wp633

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Keywords: Labour market dynamics; Frictional growth; Chain reaction theory; Capital accumulation; Impulse response function;

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  1. Roberto Bande & Marika Karanassou, 2006. "Labour Market Flexibility and Regional Unemployment Rate Dynamics: Spain 1980-1995," Working Papers 574, Queen Mary, University of London, School of Economics and Finance.
  2. Marika Karanassou & Hector Sala & Pablo F. Salvador, 2007. "Capital Accumulation and Unemployment: New Insights on the Nordic Experience," Working Papers 611, Queen Mary, University of London, School of Economics and Finance.
  3. Juan J Dolado & Carlos Garcia--Serrano & Juan F. Jimeno, 2002. "Drawing Lessons From The Boom Of Temporary Jobs In Spain," Economic Journal, Royal Economic Society, vol. 112(721), pages F270-F295, June.
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  5. Karanassou, Marika & Sala, Hector & Salvador, Pablo F., 2006. "The (Ir)relevance of the NRU for Policy Making: The Case of Denmark," IZA Discussion Papers 2397, Institute for the Study of Labor (IZA).
  6. Rod Cross & Julia Darby & Jonathan Ireland & Laura Piscitelli, 1999. "Hysteresis and Unemployment: a Preliminary Investigation," Computing in Economics and Finance 1999 721, Society for Computational Economics.
  7. Garrido, Luis & Toharia, Luis, 2004. "What does it take to be (counted as) unemployed? The case of Spain," Labour Economics, Elsevier, vol. 11(4), pages 507-523, August.
  8. Marika Karanassou & Hector Sala & Dennis J. Snower, 2010. "Phillips Curves And Unemployment Dynamics: A Critique And A Holistic Perspective," Journal of Economic Surveys, Wiley Blackwell, vol. 24(1), pages 1-51, 02.
  9. Edmund Phelps & Gylfi Zoega, 2001. "Structural booms," Economic Policy, CEPR;CES;MSH, vol. 16(32), pages 83-126, 04.
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  11. Rowthorn, Robert, 1999. "Unemployment, Wage Bargaining and Capital-Labour Substitution," Cambridge Journal of Economics, Oxford University Press, vol. 23(4), pages 413-25, July.
  12. Polo, Clemente & Sancho, Ferran, 1993. "An analysis of Spain's integration in the EEC," Journal of Policy Modeling, Elsevier, vol. 15(2), pages 157-178, April.
  13. Karanassou, Marika & Snower, Dennis J., 2002. "Unemployment Invariance," IZA Discussion Papers 530, Institute for the Study of Labor (IZA).
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  16. Guell, Maia & Petrongolo, Barbara, 2007. "How binding are legal limits? Transitions from temporary to permanent work in Spain," Labour Economics, Elsevier, vol. 14(2), pages 153-183, April.
  17. Dolado, J J & Malo de Molina, J L & Zabalza, A, 1986. "Spanish Industrial Unemployment: Some Explanatory Factors," Economica, London School of Economics and Political Science, vol. 53(210(S)), pages S313-34, Supplemen.
  18. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780198284345, October.
  19. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
  20. Barry Eichengreen, 2000. "The EMS Crisis in Retrospect," NBER Working Papers 8035, National Bureau of Economic Research, Inc.
  21. Philip Arestis & Michelle Baddeley & Malcolm Sawyer, 2007. "The Relationship Between Capital Stock, Unemployment And Wages In Nine Emu Countries," Bulletin of Economic Research, Wiley Blackwell, vol. 59(2), pages 125-148, 04.
  22. Arestis, Philip & Mariscal, Iris Biefang-Frisancho, 2000. "Capital Stock, Unemployment and Wages in the UK and Germany," Scottish Journal of Political Economy, Scottish Economic Society, vol. 47(5), pages 487-503, November.
  23. Sosvilla-Rivero, Simón & Herce, José A., 2008. "European cohesion policy and the Spanish economy: A policy discussion case," Journal of Policy Modeling, Elsevier, vol. 30(3), pages 559-570.
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Cited by:
  1. Roberto Bande & Marika Karanassou, 2010. "Spanish Regional Unemployment Revisited: The Role of Capital Accumulation," Working Papers 666, Queen Mary, University of London, School of Economics and Finance.
  2. Marika Karanassou & Hector Sala, 2009. "Labour Market Dynamics in Australia: What Drives Unemployment?," Working Papers 636, Queen Mary, University of London, School of Economics and Finance.
  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) 13-11, Instituto de Economía - IECON.

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