Why Spain's Unemployment Nightmare Is So Much Worse Than Greece's

Spain unemployment

Photo: Pablo Blazquez Dominguez/Getty Images

Liberty Street Economics, blog of the New York Fed, released a report comparing unemployment and GDP rates in Greece and Spain, two economies that are in terrible shape.Both countries have very similar unemployment rates in excess of 25 per cent, with job losses most concentrated amongst males and younger workers. The chart below shows the two countries have similar unemployment trajectories since early 2008:

Unemployment in the Eurozone

Photo: Liberty Street Economics

However, while the spike in unemployment occurred in both nations on a similar timeframe, one country has experience a much more modest decline in GDP:

GDP Eurozone

Photo: Liberty Street Economics

 

Liberty Street has a few answers to why Spain’s job losses, when compared to Greece’s, have vastly exceeded their corresponding decrease in output:

One contributing factor is the fact that the composition of Spanish jobs made the economy vulnerable to dramatic job losses during a recession. In 2007, almost 13 per cent of jobs in Spain were in construction, compared with roughly 8 per cent in Greece and the euro area…Another contributing factor is the very high percentage of employees tied to temporary work contracts in Spain. Data from the Organisation for Economic Co-operation and Development show that 32 per cent of employees in Spain worked under temporary contracts and 68 per cent under permanent contracts in 2007. In Greece, 10 per cent were on temporary contracts; the figure for Europe as a whole was 15 per cent.

This suggests that structural imbalances are the reason behind Spain’s unusually high unemployment rate relative to GDP decline.

Examining the Spanish story, Liberty Street sees a lesson to be learned:

Spain’s employment experience relative to the rest of the euro area illustrates the cost to the economy of firms having such a high level of flexibility in how they manage workers.

It appears that the very same flexibility that enables businesses to cut costs to improve their bottom line during a downturn also exacerbates the struggles of the labour market and magnifies the economic malaise.

Read more at NewYorkFed.org.

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