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Ceci n’est pas une ‘job guarantee’

Spain1The remarkable thing about the Spanish labour market before 2008 is not that wages increased – but that they increased as little as they did. Total employment grew by leaps and bounds which suggests a tight labour market and high wage increases. But wage increases were quite moderate. Why? The answer to this question is that (A) in 1992 Spanish unemployment was very high while (B) the extra-ordinary increases in employment (graph 1) were matched by extra-ordinary increases in supply. The participation rate of women spurted ahead and many millions of workers from Romania, South-America and North-Africa migrated to Spain in search for work and income. The Spanish economy was a textbook example of investor friendly (sorry: bank friendly) flexibility and dynamism, exactly the kind of thing needed (according to the textbooks) to make the Euro work. Even though total employment in Spain in 1992 was only 8% of EU 15 employment (data for the present EU are not available for this year) employment gains and losses in Spain were, in an European perspective, often about 20 to even 80% of total EU 15 employment growth and decline (graph 2)! And at this moment, job growth is, despite the worst efforts of the Troika, buoyant again (thank you, tourists). Spain was and is where the action was, and is.

Spain2

But did it really work? No. Unemployment is at present 21% and long term unemployment, which is extremely damaging for a country’s economic future as well as, of course, for the families implied, is through the roof. The huge capital inflows (which were, to an extent, possible because of the high inflow of labour, which was crucial for the huge building bubble!) and the subsequent ‘sudden stop’ led to a deep crisis – despite a shift from a sizeable government surplus to a large government deficit. Having a flexible, open, dynamic, bank friendly economy, like Spain, clearly is no guarantee for a stable and high level of employment.  And is, in a historical perspective, really that impressive? Employment is still much lower than it used to be, which means that the Spanish economy is still operating deeply below capacity. It should, however, be wary to let the banks finance the badly needed upswing.

  1. antireifier
    December 24, 2015 at 3:56 pm

    Three typos that I spotted. Countries should be country’s. Whichh obvious. But the last one weary probably should be wary? Aside from that, the analysis was quite interesting. Is the Spanish business press obsessed with inflation like the business press of North America? What about the European business press? Is it obsessed with inflation? With economies operating “deeply below capacity” even classical economists should be less concerned with inflation than deflation.

    • merijnknibbe
      December 25, 2015 at 5:13 pm

      Herb, thanks, typo’s corrected. The country is obsessed with inflation. Read this: http://www.ine.es/en/daco/daco42/igc/IGC_meto_calculo_en.pdf They try to get relative prices in Spain (compared with the EU) back to the 1999 level. All kinds of contracts are no longer indexed to domestic inflation but to EU inflation minus a part of the ‘excess’ in flation in Spain between 1999 and 2008 (as long as this variable is >0). Alas. low price levels of course do not lead to growth in any automatic way, look at Niger or, closer to home, Bulgaria. And surely not when a country has to deal with debt deflation, like Spain.

  2. Blissex
    December 26, 2015 at 3:32 pm

    «Having a flexible, open, dynamic, bank friendly economy, like Spain, clearly is no guarantee for a stable and high level of employment. And is, in a historical perspective, really that impressive?»

    If you don’t call a rise in employment from 13 million to 21 million in just over 20 years as “impressive” I wonder what would it take to impress you.

    «Employment is still much lower than it used to be,»

    As usual your graphs are far more honest than most by not starting from 2008, so we can see that employment in the 20 years from 1994 to 2014 has still risen impressively from 12 million to
    18 million, a fantastic performance for an economy that had difficulty increasing employment at all for a long time, and compared to most EU members over the same 20 years.

    «which means that the Spanish economy is still operating deeply below capacity.»

    That to me seems a rather incorrect conclusion, for at least two reasons:

    * An economy operates «below capacity» if it suffers from a *general glut*, that is all resources are unemployed. It suffers from “structural issues” if only some factors of production are unemployed. The unemployment of labor (or capital, or land, …) by itself is not enough.

    * After writing «many millions of workers from Romania, South-America and North-Africa migrated to Spain» your conclusion should have been that “the spanish, romanian, southamerican, northafrican economy is still operating deeply below capacity”, if you use «below capacity» to mean that there is labor glut. Because in effect given colossal migratory patterns you cannot look at the Spanish economy in isolation, because it is not isolated, it has a job market largely merged with that of those countries.

    Then there is the third reason, which you allude to, but let’s make explicit: the great surge in employment that drove those millions to Spain was created by a huge surge in asset sales that produced a colossal inflow of hard-currency money to Spain.

    But that is the universal cure-all of any political economy: vast inflows of hard-currency can lift any country’s GDP and employment or standards of living quickly and directly, as in very different ways the norwegian and greek case demonstrate so clearly.

    What countries like Spain and Greece need to go back to the employment and living standards levels of the boom years of 2004-2008 is therefore very simple: either the discovery of large amounts of oil that can then be sold for large inflows of hard-currency, or indefinite fiscal transfers from hard-currency nations of at least 10-20% of GDP.

    Indeed for example indefinite fiscal transfers of hard-currency for 300% of GDP to Romania and Bulgaria would lift their wages to the level of Spain or Greece, and thus reduce the incentive for their citizens to emigrate to Spain or Greece, also thus greatly reducing unemployment in them.

    Thus the problem of development policy and countercyclical policy can always be solved simply: large inflows of hard-currency. It is guaranteed to work.

    :-)

  3. Blissex
    December 26, 2015 at 4:12 pm

    «the extra-ordinary increases in employment (graph 1) were matched by extra-ordinary increases in supply. [ … ] The Spanish economy was a textbook example of investor friendly (sorry: bank friendly) flexibility and dynamism,»

    There is a much wider point here, that I often mention in my discussions with “the Sandwichman”: that the experiences of Spain and similar nations with large immigration flows (e.g. Greece, the UK) into “informal economy” work demonstrate: that the “lump of labor fallacy” is indeed a fallacy, in the sense that it is usually possible to create a large number of very-low-pay, no-benefits, highly-insecure (and unsafe) jobs, especially if there are large hard-currency inflows.

    What is difficult is not to increase employment, but to increase the total amount of wages. Massively increasing employment without proportionally increasing wages is much easier.

    It is often forgotten that not so many decades ago something like 40% of the workforce were personal servants. A Christie, a famous author who was middle class in that time, once wrote that when she was young she never expected to be so rich that she could afford a car or so poor that she could not afford a servant.

    A lot of the spanish (and greek and british) “jobs miracle” is a massive increase in what we could call low-end underemployment (for immigrants, plus high-end underemployment in bullshit finance jobs for native insiders).

  4. Blissex
    December 26, 2015 at 4:28 pm

    Also, as to the title «Ceci n’est pas une ‘job guarantee’», given the «extra-ordinary increases in supply …. millions of workers from Romania, South-America and North-Africa migrated to Spain» how could Spain provide a job-guarantee to any numbers of immigrants from «Romania, South-America and North-Africa»? That’s a bit a of an issue :-).

    BTW I have been reading recently, and finding them entirely contemporary, some books and articles about what the “job guarantee” was called in the postwar social-democratic phase, and it was called “full employment policy”. Some random links:

    William Beveridge, “Full Employment in a Free Society”, 1945.
    books.google.co.uk/books?id=oDicBQAAQBAJ

    Henry Wallace, “Sixty Million Jobs”, 1945.
    books.google.co.uk/books?id=WBaGnQEACAAJ

    Ben Chifley, speech of 1949-11-14.
    electionspeeches.moadoph.gov.au/speeches/1949-ben-chifley

    Warren Creel, “The Myth of Full Employment Under Capitalism”, Fourth International, July 1946.
    marxists.org/history/etol/newspape/fi/vol07/no07/creel.htm

    (Joan Robinson), “The Times”, 1943-01-22 and 1943-01-22.
    blogs.roosevelt.edu/glanger/jrtimes-1/
    blogs.roosevelt.edu/glanger/jrtimes-2/

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