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Unemployment in Spain: The failure of wage devaluation

Author

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  • Paloma Villanueva
  • Luis Cárdenas

Abstract

This article analyses from a Keynesian approach the effect of wage devaluation on the Spanish labour market during the Great Recession post-2008. It challenges the pro-flexibility literature, which attributes to labour relations reforms the prevention of larger job destruction in the recession and a larger reduction in unemployment during the subsequent expansion. Instead, we examine the role of wage devaluation in the operation of Okun’s law and gross domestic product, using an extended version of the Bhaduri–Marglin model. We find that wage devaluation has not significantly modified Okun’s law and that through its impact on income distribution, the unemployment rate rose by 1.9 percentage points. We therefore provide evidence for the negative effect of wage devaluation on gross domestic product and the positive effect on the unemployment rate. JEL Codes: C22, E11, E24

Suggested Citation

  • Paloma Villanueva & Luis Cárdenas, 2021. "Unemployment in Spain: The failure of wage devaluation," The Economic and Labour Relations Review, , vol. 32(4), pages 552-574, December.
    • Handle: RePEc:sae:ecolab:v:32:y:2021:i:4:p:552-574
    DOI: 10.1177/10353046211023807
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    More about this item

    Keywords

    Bhaduri–Marglin; labour market; Spanish economy; wage devaluation;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E11 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Marxian; Sraffian; Kaleckian
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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