Spain

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RECESSION & UNEMPLOYMENT

Evaluating the impact of Recession and Government Responses

World Bank Institute.2011

María Mercedes Introini

SUMMARY

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I. Introduction.

II. Spain within EU.

III. Government recession measures

IV. Rate of Unemployment: 20,33% Why?

V. Forecast

VI. Conclusions.

INTRODUCTION

Spain slipped into recession at the end of 2008. In the first quarter of 2010, GDP has increased at 0.1% and this is the first rise for this indicator, after seven consecutive quarters of contraction.

Most of the fourth-quarter contraction is attributable to a 2.4 % fall in domestic investment and consumption, the Bank of Spain conclude that the drop in spending by households had an even bigger negative impact than the end of Spain's extended housing and construction boom.

 Basically the roots of the Spanish "problem" are undoubtedly many and complex, but there is one underlying ingredient in the present dynamic which more or less governs everything else: the dependence on external financing due to the ongoing current account deficit,

http://www.surinenglish.com/20090129/news/spain/government-confirms-that-spain-200901290941.htmlhttp://spaineconomy.blogspot.com/2008/11/spanish-crisis-in-nutshell.html

INTRODUCTION

Since the onset of the economic crisis, Spain, fourth largest economy of the euro zone, has seen its official unemployment rate double to almost 20% of the workforce, going from 1.76 million unemployed in the second quarter 2007 to 4.6 million in the first quarter of 2010.

However, Spain can be considered a successful model of labor integration, which has incorporated a large number of immigrants. In 10 years, these came to account for 10 % of the total population. Temporary jobs rapidly grew according to this demand, but the recession destroyed most of them, leaving thousands of people without a job, what led to a big increase in the number of people getting unemployment benefits, and inflating public spending dramatically.

SPAIN GDP GROWTH1998-2010

SPAIN UNEMPLOYMENT1998-2010

Spain within EU

Why has unemployment risen so much more in Spain than in most of the other European countries?

 

Juan Dolado from University Carlos III Spain answered this question in a very interesting interview: “Because of the great segmentation in the labor market. The old permanent/ temporary contracts divide; this is what I've christened as a ‘bulimic’ labor market. So it's a labor market, which creates a lot of jobs during expansions and destroys a lot of jobs during the recessions. So the volatility, for instance, of the Spanish market is about twice the US labor market, which is amazing given that two thirds of the population have been enjoying extremely rigid contracts with very difficult to dismiss and also difficulties of hiring. And still you have this one third of the population, which is just like workers in Hong Kong in the spot market, where they get hired on Mondays, fired on Tuesdays, rehired on Thursdays, and so on and so forth.

The basic difference between Spain and other countries in my view has to do with this great divide. So basically what happens is that the firing clause for permanent contracts and the timing of the legal disputes for permanent contracts is very, very expensive as opposed to temporary contracts. So the conversion typically is natural, that temporary contracts are perfect contracts for youngsters as sort of stepping-stone. But this stepping-stone never occurs because employers refuse to promote these workers in the fear of having to pay this high dismissal cost…”

Source: http://www.voxeu.org/index.php?q=node/5550

IMF analysisEuro zone

The World Economic Outlook (April 2010), identify some key points:

Large deficits.

Debt sustainability (Greece, Ireland, Portugal, Spain).

Fiscal challenge in most European countries need to be addressed.

Monetary policy remain highly accomodative in most cases.

Recovery process are still sluggish.

Inflation pressures remain subdued.

http://www.imf.org/external/pubs/ft/weo/2010/01/pdf/text.pdf7pag 53

Conclusion: Europe´s growth perspective is expected to be modestAdvanced Europe´s countries GDP is projected to grow at 1 ¾% and in real activity is expected to be 3 1/2% in 2011

GDP growth and vulnerability Spain & others EU countries

http://www.gfmag.com/gdp-data-country-reports/286-the-czech-republic-gdp-country-report.html

COUNTRIES GDP 2010 VULNERABILITY

SPAIN -0,7% HIGH

FRANCE 1,3% MEDIUM

GERMANY 1,2% MEDIUM

ITALY 0,5% MEDIUM

UK 0,4% MEDIUM

BELGIUM 1,1% MEDIUM

GREECE 2,0% MEDIUM

NETHERLANDS 1,8% MEDIUM

CZECH REPUBLIC 2,0% MEDIUM

POLAND 2,9% MEDIUM

Government recession measures

Pros

Fiscal austerity

Reductions on public spending.

Reduction of budget deficit from 11,2% GDP in 2009 to 3% in 2013.

Reforms of labor market.

Cons

Inflation and unemployment:

1.-Debt

2.-Rising mortgage interest

3.-Financial institutions have stopped doing business in the country.

4.-International credit crisis

5.-Decline construction sector.

Reduction on technology innovation and finance to SMEs

DIAGNOSIS

Spain duplicates the rates of unemployment in comparison with others countries before a similar recession.

Spanish labor market suffers seriuous institutional and structural problems.

Insider –outsider market

Wage inflexibility and dual labor market.

Current system collective bargaining

Cost gap of dismissal between indefinite workers and temporay ones.

DIAGNOSIS High dismissal costs

for workers on indefinite contract have made firms reluctant to make new permanent hires.

In the current crisis, temporary jobs are the first to be eliminated, leaving in particular young workers, women and immigrants with much higher unemployment rates.http://economy.blogs.ie.edu/

archives/2008/12/imf_calls_for_l.php

Public sector debt

High deficit

Negative GDP growth

Cause of this vicious circle, Standard & Poor´s lower its rating on Spain´s sovereign debt from “stable” to “negative”.

Property bubble

Since 1997, almost 1/5 of Spanish GDP growth have been generated by the construction sector.

70% of the two million jobs which were lost in Spain since the start of the economic downturn were directly or indirectly related to the construction sector.

In 2010 have reached a “historical fall” of -16%.

Forecast for 2011: -13,6%http://www.dawn.com/2011/02/21/world-economies-13.htmlhttp://www.interempresas.net/Construccion/Articulos/46165-recesion-seguira-golpeando-a-construccion-en-2011-con-13-6-por-ciento-de-caida-en.html

Spain and USA Added value of construction within the

total GDP

http://www.eleconomista.es/economia/noticias/218869/05/07/La-vivienda-amenaza-la-economia-espanola-puede-traer-una-recesion-transitoria.html

20,33% Why?

1) Special measures of unemployment.:

SPEE . Public service registration employment service. Measures uemployment taking into accounts the number of people registering as unemployed in their offices.

LFSurvey (elaborated by the Statistics national Institute) that consists of a survey used evenly throughout the EU, measures the labor force, the empoloyed and unemployed, through telephone interviews.

There are visible contradictions between the two systems: P.e in the second quarter of 2010:

SPEE registered: 3,9 million people unemployed

LFS registered :4,64 million people unemployed

20,33% Why?

2) Wage inflexibility

The unemloyment is the result of the falls of the economic activity in the recessive phases of the cycle. When a country duplicates the rates of unemployment of others before a similar recession, since it has happened frequently in Spain, it shows that his labor market suffer serious institutional and structural problems.

3) Dual labor market.

The cost gap dismissal between indefinite workers and temporay ones is enormous, since they are very low for the second ones, which are young women of more recent incorporation to the labor market, with high qualification, which one dismisses easily. There exists a labor dual market when a recession comes they dismiss independently of knowledge, qualification, effort or performance.

The rotation of the temporary contracts is really high and increase and promote inequality

20,33%WHY?

4) Permanent and temporary contracts:

According to the results of a study made by Prof. Dolado (University Carlos III Madrid, Spain) here are the main reasons of the high rate of unemployment .

With the recession, temporary workers declined by 20% (7% for total employment).As a consequence they give rise to a dual and segmented labor market

“…a much more lax regulation on the use to temporary contracts and the rigidity of indefinite contracts discourages the investment of the companies in sectors of high added value and, on the contrary, they promote the specialization in sectors of low added value, like the residential construction that has been one of the most affected in the crisis…”

http://www.uc3m.es/portal/page/portal/actualidad_cientifica/noticias/contratos_paro

20,33%WHY?

The authors of the work plead for the elimination of the majority of temporary contracts and the implementation of a unique labor contract with an indemnization for dismissal as a way to reduce volatileness and high rate of unemployment.

5) Unreliable data of people that claim benefits and work unoficially.

6) Rigidity market labour.:

Lack of part time jobs (12% of total workers.) with an estimated loss of 1,5 millons of potential workers

The strict current regulation dissuades the permanent contracting of the companies and the mobility of the workers of a contract to other one since they would lose his rights of dismissal on having changed company.

Rigidity labor marketSpain & OECD standards

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Spain

OECD Sstandards

http://books.google.es/books?id=b6mGfGT70FAC&pg=PA98&dq=OECD+standards+labor+spain&hl=es&ei=vclwTZPxM8Kt8AOCiKmvCA&sa=X&oi=book_result&ct=result&resnum=3&ved=0CDYQ6AEwAg#v=onepage&q&f=false

Rigidity labor marketSpain & countries.

Spanish labor markets are among the most rigid systems in the world,despite a series of small reforms since the 1980s.

9 of 10 of new unemployed workers in Europe are spanish.

Ecuador and Venezuela are the most rigid.

USA is the more flexible.http://www.libertaddigital.com/economia/espana-supera-en-rigidez-laboral-a-paises-tercermundistas-como-malawi-o-ghana-1276349945/

USA

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Labor reformThe reform aims to :

1.- reduce the duality of the labor market.

2.- increase the internal flexibility of the companies

3.- facilitate the adjustments of permanent workers

4.- help to reduce the excessive resource of use of temporary contracts.

5.-lower dismissal costs

6.-boost hiring of younger and better educated workers,

7.- more flexible collective bargaining agreements to prevent bankruptcies and preserve jobs.

8.-use of agencies deprived of placement and labor intermediation, in collaboration with public services of employment.

http://www.oecd.org/dataoecd/14/4/45603740.pdf

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=156451

FORECAST Spain Government & IMF

http://imarketnews.com/node/17312http://gestion.pe/noticia/486535/espana-revisa-baja-crecimiento-economicohttp://www.ambito.com/noticia.asp?id=544777http://www.imf.org/external/pubs/ft/weo/2010/01/index.htm

Gover

nmen

t 201

1

IMF

2011

Gover

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t 201

2

Gover

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IMF

2010-5.00%

0.00%5.00%

10.00%15.00%20.00%

GDP growthUnemployment

FORECAST

Axis Title

POVERTY AND UNEMPLOYMENT