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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. Karanassou, Marika & Sala, Hector & Snower, Dennis J., 2002. "Unemployment in the European Union: A Dynamic Reappraisal," IZA Discussion Papers 531, Institute for the Study of Labor (IZA).
  2. Edmund Phelps & Gylfi Zoega, 2001. "Structural booms," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 16(32), pages 83-126, 04.
  3. Dolado, Juan J. & Jimeno, Juan F., 1997. "The causes of Spanish unemployment: A structural VAR approach," European Economic Review, Elsevier, vol. 41(7), pages 1281-1307, July.
  4. Xavier Raurich & Hector Sala Lorda & Valeri Sorolla, 2004. "Unemployment, growth and fiscal policy: new insights on the hysteresis hypothesis," Working Papers wpdea0404, Department of Applied Economics at Universitat Autonoma of Barcelona.
  5. 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.
  6. Marika Karanassou & Hector Sala & Pablo F. Salvador, 2008. "Capital accumulation and unemployment: new insights on the Nordic experience," Cambridge Journal of Economics, Oxford University Press, Oxford University Press, vol. 32(6), pages 977-1001, November.
  7. Marika Karanassou & Dennis J. Snower, 2004. "Unemployment Invariance," German Economic Review, Verein für Socialpolitik, Verein für Socialpolitik, vol. 5(3), pages 297-317, 08.
  8. Dolado, Juan J. & Garcia-Serrano, Carlos & Jimeno, Juan Francisco, 2001. "Drawing Lessons From the Boom of Temporary Jobs in Spain," CEPR Discussion Papers 2884, C.E.P.R. Discussion Papers.
  9. Güell, Maia & Petrongolo, Barbara, 2003. "How Binding are Legal Limits? Transitions from Temporary to Permanent Work in Spain," CEPR Discussion Papers 3931, C.E.P.R. Discussion Papers.
  10. 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, London School of Economics and Political Science, vol. 53(210(S)), pages S313-34, Supplemen.
  11. Eichengreen, Barry, 2001. "The EMS Crisis in Retrospect," CEPR Discussion Papers 2704, C.E.P.R. Discussion Papers.
  12. Polo, C. & sancho, F., 1990. "An Analysis of Spain's Integration in the EEC," UFAE and IAE Working Papers, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) 140.90, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  13. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780199279173, October.
  14. Olivier Blanchard & Justin Wolfers, 1999. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," NBER Working Papers 7282, National Bureau of Economic Research, Inc.
  15. Roberto Bande & Marika Karanassou, 2009. "Labour market flexibility and regional unemployment rate dynamics: Spain 1980-1995," Papers in Regional Science, Wiley Blackwell, vol. 88(1), pages 181-207, 03.
  16. 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., John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
  17. Rowthorn, Robert, 1999. "Unemployment, Wage Bargaining and Capital-Labour Substitution," Cambridge Journal of Economics, Oxford University Press, Oxford University Press, vol. 23(4), pages 413-25, July.
  18. 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.
  19. Sosvilla-Rivero, Simón & Herce, José A., 2008. "European cohesion policy and the Spanish economy: A policy discussion case," Journal of Policy Modeling, Elsevier, Elsevier, vol. 30(3), pages 559-570.
  20. 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.
  21. Marika Karanassou & Hector Sala & Pablo F. Salvador, 2008. "The (Ir)Relevance Of The Nru For Policy Making: The Case Of Denmark," Scottish Journal of Political Economy, Scottish Economic Society, vol. 55(3), pages 369-392, 07.
  22. 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.
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Citations

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Cited by:
  1. Marika Karanassou & Hector Sala, 2010. "Labour Market Dynamics in Australia: What Drives Unemployment?," The Economic Record, The Economic Society of Australia, vol. 86(273), pages 185-209, 06.
  2. 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.
  3. 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).

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