The “curse” of the Spanish labor market goes beyond an unemployment rate at a crazy level of 11.3%, the highest in the EU and more than double the average of the Twenty-Seven, 5.9%. despite the improvement in recent years. The paradox is that, according to macroeconomic theory, this rate could not fall much lower without becoming a sign of serious difficulties. The key lies in the concept of “structural unemployment”, an indicator which indicates that the improvement in employment does not respond to real GDP growth, but would symptom of an economic bubble who can click at any time. A trend that we already saw during the great crisis of 2008.
Sometimes the relationship between macroeconomics and employment seems to defy common sense and the structural unemployment rate is one of the most striking examples. Because,how reducing unemployment can be negative? To understand this contradiction, we must delve deeper into the meaning of this often confusing indicator. with a level of “minimum unemployment” that cannot be reduced without structural reforms. In reality, what he points out is a very different result.
What economists say is that when the unemployment rate falls below the structural level, the economy risks overheatingcausing an increase in prices, an increase in unit labor costs and, consequently, a loss of relative competitiveness on international marketss. All this, in turn, usually leads to a current account deficit or a reduction in the surplus if it existed before.
Structural unemployment is estimated by two very similar rates: NAIRU (by the acronym of unemployment rate without inflation) and the NWRU (from the non-accelerated unemployment rate). In other words, one estimates the level of unemployment at which a decrease in unemployment increases inflation and the other increases wages. In practice, they are synonyms, although the European Commission and the European Central Bank pay more attention to the NAWRU, since the relationship between wages and jobs is more direct. These types of rates are not static, but are continually updated based on a methodology that includes various business cycle variables, although they are much less volatile than the unemployment rate. But that’s why they also collectmedium and medium impact long term of variables such as structural reforms, which explains the confusion surrounding it.
As Fedea explains in a document dedicated to NAIRU (but applicable to NAWRU), andThis level of unemployment is compatible with stable inflation (close to the ECB’s 2% target) and a balanced current account. Although the structural unemployment rate is often linked to inflation, the truth is that its impact on the balance of payments (the current account which roughly represents the difference between exports and imports) is just as important, if not more important , when external shocks occur that cause an IAbrupt interruption of global capital flows.
This is particularly problematic in the country which has the highest real unemployment rate but which also leads the structural unemployment rate. According to AMECO, the European Commission database, over the last 50 years, i.e. since the last years of Franco’s rule, the correlation between “real” and “structural” unemployment rates is became more intense in Spain: to periods when unemployment is below the NAWRU They are followed by the outbreak of crises which also result in sharp increases in unemployment.
But what exactly does a “wage-accelerating unemployment rate” imply? This would be the level from which a drop in unemployment translates into a rebound in the wage bill which ends up being reflected in prices. And why is this a problem? Because the simple creation of jobs, without improving the intrinsic quality of job productivity, does not justify an increase in wages. When this happens and also affects inflation, it means that the economy has entered into a risk of imbalance. Or rather a bubble.
This is precisely what happened in Spain during the 1999-2007 cycle, when low interest rates generated a credit bubble that fueled the economy and reduced the unemployment rate to a minimum. Cheap credit, driven by low rates from the European Central Bank, stimulated the growth of the Spanish economy, fueling sectors like construction, which were not very productive and non-tradable (they could not be exported). The growth of construction, a very labor-intensive sector, has generated hundreds of thousands of low-skilled jobs, even pushing the unemployment rate below 8%, well below the NAIRU or NAWRU.
All these new construction workers, as well as other equally dynamic sectors, took advantage of their good working time to consume (buy cars, televisions, etc.). This galloping consumption was not compensated by domestic supply (the Spanish economy produced a lot of housing, but few durable goods), so that a good part of this consumption began to generate one of the largest current account deficits in the world (largest in the world). . world in terms of GDP). In other words, with such a low unemployment rate, Spain went into debt abroad to build housing and buy goods produced in Germany and China. and other countries that have historically been net creditors.
This large current account deficit, a product of the bubble and an artificially low unemployment rate (several percentage points below the NAIRU), triggered Spain’s net foreign debt. When the global financial crisis broke out and capital flows stopped, our country stopped receiving the funds that fueled its bubble and its consumption (Spain lived beyond its means). The economy had to make a sudden and painful adjustment, with massive job destruction and an internal devaluation which helped to balance the current account.
And now what?
The current situation in Spain is different from then, with a decline in unemployment that seems to be in line with that of the NAWRU. This implies that the reduction in unemployment is more solid than at other times, although we must take into account the effect of the economic reforms developed by Spain in the last decade (starting with the reforms of the work of 2012 and 2021) but also the impact of policies to respond to the impact of the pandemic since 2020. And of course the increase in rates by the ECB to contain inflation.
Thus, the increase in GDP and the moderation of inflation are data that seem to lighten the shadows, but with the precedent of the years before the financial crisis, where the real and structural unemployment rates are so close always worrying. We can say that the light is not yet red, but it starts flashing orange.
Indeed, unemployment figures are already starting to fall below the NAWRU in 2023: 12.35 compared to 12.2% in 2023. A gap of one tenth which, according to Brussels estimates, will widen in 2024 to three tenths (11.9% against 11.6%) and half a point in 2025 (11.6% structural unemployment against 11.1% unemployment). Although it must be emphasized here that structural unemployment is an estimate in which Brussels and the The Spanish government does not agree.
In the latest update of the 2023-2026 Stability Program, the Executive estimates that the NAIWU will increase from 10.8% of the active population (two points below the AMECO estimate) to 9% in 2026 , in line with the expected evolution of the unemployment rate. But even if this prediction comes true, the underlying problem will still not be resolved: The correlation between the two rates is too close to take Spain out of the “edge of the knife”: either a double-digit unemployment rate persists (very far from the 8% before the Great Recession), or the economy runs the risk of becoming unbalanced again.
How to get out of this dilemma? An economy with an unemployment rate of 11.2% and which aspires to continue reducing it must reduce its structural unemployment rate much faster, which means more ambitious reforms. Both in the economic field and in the productive model and in the field of work itself.
Over the last year, various voices, from Caixabank Research to the Bank of Spain, have focused on this issue, with proposals for moving forward that range from improving worker training, to the reform of active employment policies or the modification of the conditions of unemployment compensation to encourage the “reactivation” of the unemployed. The latter idea is one that the government has adopted as part of its recent and controversial subsidy reform.
Other proposals, such as eliminating “rigidities” in the labor market by clarifying the causality of layoffs (which implies facilitating 20-day layoffs, as proposed in the PP labor reform) seem out of place. the government’s agenda.
