'Actual' versus 'Virtual' Employment in Europe: Is Spain Different?

We study the evolution of sectoral employment and labour cost in 11 European countries over the last two decades. Our statistical approach consists of decompositions for country, industry and temporal effects. Virtual economies are constructed by filtering country effects. We find that sectoral effects account for more than 80% of the long-run differentials across countries and industries in employment growth, whereas country-specific effects are more important in the analysis of labour-cost dynamics. The initial distribution of labour across sectors plays a crucial role in explaining cross-country differences in employment. We pay special attention to Spain, a country that has experienced a high persistent unemployment rate, and show that this may be the result of a severe sectoral reallocation problem, originating from the very heavy weight of agricultural employment in 1975. Our study of the virtual economies also provides new evidence about the relative performance of some industries and countries, e.g. the poor performance of Belgium, the relatively good performance of Italy, in particular its textile sector, etc.