How effectively has the Spanish Government reduced unemployment?

From 1985 onwards there was an increase in the female labour force participation rate rising from 27% in 1985 to 39.7% in 1998. We might assume that by having more women entering the labour force, unemployment rates will fall, however, this "modernization" of the behaviour of the female population is responsible for the reduction of the rate of the population growth. With an average growth of 0.3% from 1990-99, Spain has one of the lowest population growth rate in the world. Ofcourse there isn't much a Government can do to stimulate population growth.

Moreover, the recession that hit Spain in the early 1990's was another factor that contributed towards higher unemployment. Increased inflation means that prices went up, consumer spending reduced drastically and as a result, businesses were inclined to cut staff. I believe that the Government's intervention to adopt a strict monetary policy helped considerably to improve this situation. In my opinion, reducing interest rates led to more borrowing, thus, an increase in money supply might have allowed prices to go down and therefore, boosting economic growth. (See Appendix 3) This has been proved as from the beginning of the economic recovery of the 1990's, employment in Spain has shown a higher rate of growth than in the rest of Europe, reducing the unemployment rate by 5% from 1998 to 2000. (See Appendix 4)

Unfortunately from the second quarter of 2001 the world economy including Spain came into a recession once again. Looking forward, GDP growth slowed down further in the next quarters of 2001 due to the U.S. terrorist attacks, which reduced demand for air travel and tourism. An example to illustrate this point is a Spanish carrier, Iberia, had to cut down on 10% of its staff and reduce flights to USA & UK after the attacks. Following Sept 11th attacks, the Government had to undergo some changes its fiscal policy. It has been noted from the telephone call I made that taxes on corporations have increased ,however, income taxes have decreased. In these circumstances, people are likely to spend more ,hence, there will be a greater chance for new markets to establish and provide jobs for the unemployed.

The unemployment agency also explained that the Government is providing more temporary contracts for those who are likely to get a job during high trade seasons such as Christmas time. (See Appendix 5) In my opinion, this helps a great deal to young unemployed people.

Moreover, we must take into account the performance of the AZNAR administration.

It has further plans to reform its labour law. Firing will be cheaper, hiring less risky. But the aim is not just a more flexible labour market. Some workers will get more protection. If firing becomes cheaper, then employers are more likely to fire their workers and this may increase levels of unemployment rather than reducing them. Conversely by providing job protection, workers are more likely to feel comfortable at their workplace. Furthermore, the government hopes to widen and open the market. This may attract more FDI2. We can observe in Appendix 6 that FDI has created more jobs and allowed technology transfer to Spain. I think FDI makes workers more skilled and employable. In addition, part-time work has been encouraged as a means to increasing employment. However, I believe that part time employment is not the first choice of work for most workers and they would rather prefer to find a full time job. We can also see from the Appendix 7, that Spain's working time is much lower than the rest of the OECD countries. This supports the fact that Spain many not be as productive as the rest of the countries in the OECD and therefore, unemployment rate is still high. Another very important aspect is the percentage of Spanish population that has upper secondary education. The unemployment agency that I called said that in 1998, 42% of the Spanish population attained upper secondary education, in sharp contrast with the rest of the EU, or the US with 89%. In these circumstances I believe that Spanish people are less qualified for a job.

Overall I believe that Aznar is somewhat a supply-side policist (microeconomic policies are also important) as he believes in reducing unemployment by cutting taxes, reducing government "red tape"3 He believes that if the economy is left to the market forces, resources will move to reflect changes in consumer demand, and he has inspired enterprise. He has also cut benefits so that the unemployed are compelled to find a job. In many areas there is full male employment, and immigrants now flood in to do the jobs that Spaniards no longer want. The graph in Appendix 8 shows how supply side policies may have worked. However, I think that supply side policies may not always work as there may be opposition from trade unions.

I strongly feel that the impact of the Euro on unemployment must also be given a serious consideration. Appendix 9 explains reasons why the single currency will cause unemployment to rise. The monetary and fiscal policy for each member of the EMU is uniform and cannot be changed. As a result, the Government's reforms to reduce unemployment will be ineffective as Spain must follow the rules set by the EMU.

Consequently, I believe that much of the credit should go to the AZNAR Administration that have implemented various policies which the PP claims to be successful in reducing unemployment. (See Appendix 10) Aznar has reduced Spain's awful unemployment rate of 25 % in 1996 to the latest 12.9% in April 2002. Despite this, the real fact is that 12,9% is still terribly high compared to other EU countries. Therefore, in my view, PP has only been effective to a certain extent.

Word count: 1,248 words

Source: This has been taken from the latest edition April 9th to 15th 2002 of "The Economist"

2 Foreign Direct Investment

3 In relation to the existing level of red-tape associated with the creation of a firm, Spain, unfortunately, still remains much of the administrative bureaucracy of the old democratic interventionist regime, although there are numerous attempts to trim the amount of paperwork required to start a business.