SPAIN´S UNEMPLOYMENT PROBLEM

Source Eurostat

The Spanish unemployment rate hit 17.9% at the end of the Q2 2009, according to Spain’s National Statistics Institute (INE), the highest level in the eurozone and well above the 8.9% average of the 27 EU member states. In fact, Spain makes up over half of the past year’s increase in eurozone unemployment, with over 30% of the eurozone’s jobless living in Spain. The Organization of Economic Cooperation and Development (OECD) predicts that Spain’s jobless will reach 20% of the workforce during 2010, gradually edging closer to the historic high of 24% recorded in 1994.

Every country across Europe has suffered from the economic contraction. Yet Spain’s catastrophic housing collapse and towering unemployment figures make its plight stand out. The downturn has been aggravated by Spain’s rigid and antiquated labor regulations. As Luis Garicano of the London School of Economics argues, “that the crisis has hit Spanish employment disproportionately is due to the catastrophic way the labor market works.” Unless action is taken to remedy the underlying causes of Spain’s unemployment crisis, the country faces a prolonged and dire recession.

In short, quick-fix programs cannot alleviate Spain’s unemployment sickness. Only widespread and effective reforms to reduce wage indexation, equalize dismissal costs of temporary and permanent employees, and reduce the power of collective‐wage bargaining can solve this entrenched problem. These reforms are essential under the conditions of a single currency to allow Spain to compete and avoid asymmetric shocks.