Is it only going to get worse before it gets better?
Societe Generale think so: as the chart says, they’re expecting it to reach 30 per cent in 2015 (from an already-awful and record-breaking 27.2 per cent, at last count). The country’s unemployment rate has historically tended to be high — only falling below 8 per cent right at the peak of the boom. Michala Marcussen says Spain’s particular problem is its gap in conditions for permanent and contract staff:
In our opinion, much of this is attributable to the dualism that results from the very large dismissal cost gap between permanent and temporary job contracts. Successive reforms have sought to reduce this gap, but even after the latest reform it remains too high.
The further drawback of extended use of temporary contracts is the lack of investment in on-the-job education and training. With extensive use of temporary contracts, the result is under-developed human capital. The fact that workers with less schooling are also those most likely to be offered temporary contracts further exacerbates this issue. The result is weak structurally productivity outcomes.
Plus, there are other labour market problems specific to Spain — not surprisingly, the construction industry’s contraction is one, but other aspects of its economy also feature:
In the context of the current crisis, Spain saw significant job destruction and notably in the construction sector. Combined with the observation that labour mobility across regions tends to be low, and notably when it comes to temporary contracts. A further impediment to labour mobility is an under-developed rental market. Looking at the Beveridge curve for Spain, it is noticeable that the number of unemployed per vacancy has increased sharply.
The government estimates that labour market reforms introduced last year, which mandated greater flexibility, lower dismissal costs and incentivised permanent contracts, will boost employment by 3.7 per cent and potential GDP by 4.5 per cent in the long run, but Marcussen reckons OECD analysis suggests the latter number might be more like 0.65 per cent. She also says the reforms aren’t enough to overcome the next few years of contraction:
Looking ahead, our concern is that the Spanish economy continues to face significant headwinds from deleveraging and austerity (as discussed in our Global Economic Outlook). Furthermore, the more flexible wage bargaining system introduced in the 2012 reform, while a medium-term positive is a short-term negative as weaker wage developments further weigh on household incomes. This is the J-curve effect often associated with labour market reform. We expect Spain to post GDP growth at -1.4% in 2013, -0.8% in 2014 and 0.3% in 2015. These growth levels are consistent with a further climb higher in unemployment.
The 30 per cent unemployment is a real possibility unless two things happen. One is more reforms — specifically, SocGen thinks Spain needs to change the legislative regime for the services sector, particularly retail; reduce labour taxes; reform the financial sector (umm..); incentivise R&D investment and pursue better education outcomes.
The other thing that could help mitigate a rising unemployment rate is… fiscal transfers:
In this context, we will closely monitor proposals from Germany and France due on 28 May to boost youth employment and any initiatives adopted at the 27-28 June Council.
SocGen is not holding out much hope, though.
Related links:
Marginalised in Spain - FT Alphaville
Job destruction vs unemployment duration by country, 2007 vs 2011 - FT Alphaville
Unemployment: It’s not all back to the 1970s, but a serious chunk of it might be – FT Alphaville
Spain: Stuck on the sidelines – FT