Sunday, March 10, 2013

The Spanish unemployment mystery (part 2)

Now at the other end of the cycle with respect to our last entry, the chart shows the decline in GDP for every job lost since 2008.

Readers will note that we only included years in which GDP has declined relative to 2008.... and both Germany and Austria are missing. The figure for the former is over 1.4 million euros - a reflection of the fact that their unemployment insurance is in fact an employment subsidy. In the case of Austria, it is 530-odd thousand euros - too big for the graph to scale and possibly attributable to something similar. In the case of the Netherlands, employment increased in 2009, despite a decline in the general economy. We'll just pass on it and start with 2010. Countries disappear from the graph as GDP rises above 2008 levels.

Catching our eye again are Spain and Portugal. Just as it took little GDP growth to produce a job in the 1995 to 2008 period, it required a very small drop in a recession economy to remove one. By the end of 2011, a mere 11,000 euro decrease in GDP corresponded to a lost position in Spain. In the case of the latter country - the amount is a supremely silly 2,600 euros.

Neither number is particularly credible unless one makes the assumption that unemployment insurance benefits and other subsidies are very high relative to wages. Better to think of both as signifying a massive return to an underground economy.

A start in the correct direction might be to compare Spain with that other real estate bust economy - Ireland. Calculating backwards, had Spain reduced employment at the 79,000 euro GDP rate job losses would have amounted to 310,000 instead of the official  2,155,000. It's very far from a perfect calculation, but it should point one to the right analytical path



Enrigsa said...

I see that you construct the indicator with the GDP. But I would be careful about the GDP because GDP just measure final production, and the Spanish economy had a boom in sectors which are not measured by the GDP: specifically Intermediate Inputs (however industrial production surveys do). Intermediate Inputs were much more volatile than GDP in the boom as well in the recession. And Intermediate Inputs represent almost 2/3 of the economic activity, and a important part of the employment is there. So this fact could explain why GDP doesn't change very much while unemployment is getting more volatile. I have an article in Spanish about this phenomenon (with the corresponding data) I recognise that I have many doubts about the topic, so you are invited to make feedback.

Anonymous said...

Other possibility to explain this is the overworking of those maintaining employement and the bigger amount of money for the owners of companies. These option is supported by the changes in working laws and that rich people gained more and more money since 2008.

Charles Butler said...

Enrigsa - you might have a good point, but I don't entirely buy it. You're almost saying that the expenditure method of GDP calculation should produce very different results from the income method.

I'd be more convinced if you were to draw up a comparison across the OECD, for example.

Charles Butler said...

Anon - yes, there are a lot of moving parts working here. As to your specific points, the increase in corporate profits relative to wages is a phenomenon that is taking place everywhere. What needs to be seen if this is much, much worse in Spain than elsewhere. And re more hours worked by the employed - yes, that too (as probably in Ireland).

It wasn't my intention to over-simplify the matter. Just wanted to point out the glaring difference.

santcugat said...

When the alternative to getting 400 euros a month in benefits is a 600 euro a month job, being unemployed sounds like a rational decision to me (especially once you add social security, transportation, and child care).

Enrigsa said...

Not really, expenditure method calculation should be equal to the income method. As I explain in the article, GDP measures the final production, and the income of the society is the final production. But when a worker is fired, he starts to get the unemployment benefits, and for the national accounting, the income of this worker hasn't changed (only the difference between the salary and the subsidy). And this person continues buying and consuming (maybe less), of course, expenditure and income are equal. But we have an unemployed person more. In this way, GDP and national accounting don't reflect what is going on in the economy (maybe later). GDP and income from salaries are very stable. All of this is my critics for using the GDP like a proxy.

In the suggestion of looking other countries I have alredy searched in the case of USA and Germany. I saw differences, intermediate inputs were less volatile during the cycle, but I have to draw the pictures (when I have time)

Thanks for your opinion, I don't want bother you very much.

Anonymous said...

comparison with 1994 interest rates were lot higher and had high unemployment compare now record low interest rates and certainly record unemployment in under 25 yrs age, EU cannot raise interest rates, well it can but will be suicide, and cannot devalue . This is a very dangerous situation.

Charles Butler said...


Presumably inflation was also higher.

1994 average 15-24 yrs - 1,249,000 unemployed.

2012 average 945,000

UR higher now, but both near 50%

In what sense is 2012 dangerous and 1994 not?