Ceci n’est pas une ‘job guarantee’
The 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.
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.