High levels of unemployment can be exceedingly troublesome for a country as they can have significantly adverse effects on the country’s economy and wellbeing of its citizens. For this reason, countries take vast measures to bring down the unemployment rate when it is high and ensure that the unemployment rate stays low when it is low. However, some countries are better at promoting low unemployment than others. This paper will attempt to answer the research question: “After the burst of the real estate bubble in 2008, why has it taken Spanish unemployment so long to recover to pre-crisis levels in comparison to the rest of European Union countries, with the exception of Greece?” Although Greece is a member of the European Union, it will be excluded from the analysis in this paper as Greece has significant issues that are not relevant in examining the research question. The paper will focus in on three main interrelated arguments as to why Spain has taken longer than the rest of the EU to recover after the crisis in 2008: the housing bubble in Spain, the structural factors of the Spanish labor market, and the Spanish education system.
The burst of the real estate bubble in 2008 sent unemployment rates skyrocketing for every EU country, but Spain has taken much longer to recover than the rest of the EU countries. Spain has shown considerable improvement in its unemployment rate over the past few years as it decreased to 16.7% (see Exhibit 1 below) at the end of September 2017 from 23.7% at the end of 2014 (“Spain Unemployment Rate”). However, this is still almost double the unemployment that Spain had going into the crisis almost 10 years after the fact with an unemployment rate of 8.6% at the end of 2007 (“Spain Unemployment Rate”). Additionally, Spain’s 16.7% unemployment rate is more than double the EU-28 average of 7.4% at the end of September 2017 as shown in the chart below (“Unemployment Rates..”).
While general Spanish unemployment is still very high compared to the rest of the EU, Spanish youth unemployment is even worse. At the end of 2016, Spain had a youth unemployment rate of 44.4%, meaning almost 1 in 2 young people in Spain were without a job (“Youth unemployment figures, 2007-2016”). This is even more striking when comparing it to the European Union average of 18.7% at the end of 2016 (“Youth unemployment figures, 2007-2016”). Not only does this stifle economic growth as young people are not out on their own spending money in the economy, but it also leads many of the most talented and educated young Spaniards to leave Spain to find work in other countries.
One of the reasons it has taken Spain much longer than the rest of the EU countries to recover from the collapse of 2008 is the severity of the impact that the crisis had on Spain in relation to the rest of the EU. In the years leading up to the crisis, Spain was in the midst of a very large housing bubble. Spain had 762,214 new housing starts in 2006 alone, which was more than Germany, France, and Italy combined (Chislett). Additionally, Spain accounted for 30% of all the new homes built in the European Union between 2000 and 2009, while its GDP only contributed 10% to the EU’s total GDP from 2000-2009 (Chislett). After Spain joined the Euro in 1999 (with full implementation in 2002), EU interest rates converged, bringing down Spanish interest rates. Additionally, there was high demand for Spanish houses because property was seen as a smart investment and foreign demand was increasing as tourism was rapidly increasing, reaching almost 60 million overnight visitors in 2007 (“Annual number of international visitors to Spain from 2000 to 2016”). This combination of low interest rates and increasing demand led to the pumping up of the housing bubble in Spain. The housing bubble in Spain was exacerbated by the actions of the ECB in their efforts to help Germany out of a recession. While Spain needed interest rate increases to help curb the housing bubble, the ECB decided to cut rates because Germany was in a recession. This led to the expansion of the housing bubble as Spain had even cheaper access to capital. This highlights one of the drawbacks of Spain’s membership in the EU as they would have control over their own interest rates if they were an independent country like the United States.
When the bubble finally burst in 2008, the Spanish housing industry and its supporting sectors took massive hits and have still not recovered to pre-crisis levels. The housing and construction sectors are very labor-intensive, which meant that they significantly reduced unemployment when they were booming. However, when the bubble burst, they contributed to substantial layoffs, especially of temporary workers, that seriously pushed up unemployment. Spain saw its unemployment rate increase from 8.6% at the end of 2007 to its peak of 26.94% in Q1 of 2013 (“Spain: Unemployment Rate 2005-2017”). The structural setup of the Spanish labor market was also a significant factor that led to the large increase in Spain’s unemployment rate as well as its slow recovery.
The way that the Spanish labor market is set up has had significant implications on Spanish unemployment and the length of its recovery after the crisis. The Spanish labor market has both permanent, or indefinite contracts, and temporary contracts. As the names suggest, permanent contracts are long-term employment contracts much like a regular United States employment contract. Temporary contracts are “Agreed for carrying out a task or performing a specific service, whose execution, though limited in time, is of uncertain duration at the outset,” (“A Guide to Education in Spain”). While temporary contracts seem like a great idea for companies who need to replace a worker for a small amount of time or want to test out an employee for a few weeks or months before offering them a permanent contract, they are being abused in Spain. According to Eurostat, the share of temporary employees aged 15-64 in 2016 for Spain was 26.1%, second only to Poland at 27.5% and almost double the EU average of 14.2% (“Temporary Employment in the EU”). The issue with temporary contracts is that they offer workers little to no benefits or severance pay, and they can be terminated at any time by the employer. Due to high union activity, workers with permanent contracts are generally entitled to high levels of benefits and generous severance packages. This incentivizes companies to hire temporary workers instead of permanent ones because they are much cheaper to employ and can be laid off at any time. This leads to losses in efficiency and productivity for a few reasons. For one, companies who hire workers only for a short period of time are less likely to invest time and money into training temporary workers. Additionally, temporary workers are constantly switching jobs and rarely stay in one place for very long, which doesn’t allow them to get comfortable at their job and improve their skills. The high severance packages for permanent workers also make companies think twice before firing a permanent worker, which leads to more inefficiency as workers who are underperforming and should be fired are still working. These inefficiencies have dampened economic growth and led to slower job creation.
Spain passed some labor market reforms in 2012 that have helped to decrease the unemployment rate, but they still do not address most of the structural issues in the labor market. The main changes were aimed at making the Spanish labor market more flexible by easing up on regulations in the labor contracts. The reform also “redefined the economic grounds for dismissal, establishing objective circumstances that could justify the termination of a contract,” (Spain: A first assessment of the 2012 labour market reform”) and reduced some of the severance packages for permanent workers. These reforms have helped to improve the Spanish labor market over the last 5 year, but more is needed in order to fix the structure of the Spanish labor market.
The education system in Spain is another significant factor in why Spain has lagged behind the rest of the EU, excluding Greece, in their recovery after the financial crisis in 2008. According to a report done by the OECD in 2014, “45% of the country’s 25-64 year-olds had below upper secondary education (below a college or university education) as their highest level of attainment,” (“Education at a Glance 2014 – Spain”). This means that almost 1 in 2 working-age adults in the Spanish economy do not have a college or university degree. This makes it much harder for these people to find work again as they do not have the skills or credentials to access many of the jobs in the workplace without going back to school or going through additional training. Additionally, Spain is part of the EU, which means that its workers can move to work in any other country in the EU. However, having a very low level of education will make a Spanish worker much less competitive in the EU labor market, making it much harder for him or her to find a job in another country in the EU. Even the Spanish workers who do have high levels of education are at a disadvantage because in 2014, “No Spanish University is among the world’s top 200 in the main academic rankings,” (Chislett).
The education problem in Spain is also contributing to the high amount of Spanish youth unemployment. As seen in Exhibit 2 above, the rates of early leavers from Spanish education have been improving steadily since 2009, but is still very high at 19% at the end of 2016. Additionally, Spain is still has one of the highest rates of young people deciding to leave their education early in the European Union. According to the European Commission, the EU average for early leavers from education and training was 10.7% at the end of 2016 (Europe 2020 Targets: Statistics and Indicators for Spain”), with an EU goal to have all countries have a dropout rate of less than 10% by 2020. One of the reasons that the dropout rate has been so high in Spain is that young people in school see that there is little chance for them to get a full-time “permanent” contract after they graduate and see no incentive to continue schooling. This is extremely problematic for Spain as lower levels of education for their young people make them less competitive in the labor market, furthering the problem of youth unemployment. Spain has been able to steadily reduce the dropout rate over the last 5-7 years, but needs to continue its efforts to reduce it further to avoid a negative feedback loop, where the high levels of youth unemployment contribute to higher dropout rates, which in turn contribute to higher levels of youth unemployment.
In order for Spain to make significant strides in improving their labor market and long-term unemployment rate, Spain needs to implement a series of reforms to stimulate growth, fix structural problems in the labor market, and improve the education system. Spain needs to implement additional labor market reforms that will de-incentivize companies from hiring temporary workers over permanent workers. One way this can be done is to increase the benefits and severance pay for temporary workers while simultaneously decreasing the severance pay and requirements for dismissal of permanent workers. Additionally, Spain needs to implement reforms in the education system to improve the quality of the education their students receive as well as make it applicable to the needs of tomorrow’s economy. One this could be done are to enhance the professional training of teachers as well as retrain some of the current teachers. Another way would be implement reforms in the curriculum being taught so that students coming out of schooling have the skills and knowledge that companies in the marketplace are looking for. Additionally, Spain needs to update their vocational courses to make them more attractive to young people and make sure they relate to local business and labor markets. Lastly, Spain needs to make changes in order to foster entrepreneurship and innovation, which will help retain top talent and entrepreneurs.
In conclusion, Spain has been lagging behind the rest of the EU in its recovery from the housing crisis in 2008 due to the severity to which the crisis affected Spain, structural problems in the labor market, and issues with the level of education of Spanish people and education system in general. These issues in the labor market and education system have been reducing efficiency in the labor market and dampening economic growth and job creation, leading to a slow recovery for Spain. In order to fix the structural issues that are contributing to Spain’s unemployment problem, Spain needs to implement a series of reforms aimed at improving the education system and incentivizing companies to hire permanent workers. The transformation of the Spanish economy will not be an easy road, but a necessary one if Spain wants to achieve low levels of unemployment over the long-term.
Exhibit 1: Unemployment Rates for the end of September 2017
Exhibit 2: Youth Unemployment Rates for Spain
Source: Gobierno de Espana: Ministerio de Educacion, Cultura, Y Deporte