Unemployment. Something else than labour market rigidities.

Spain is usually accused for its heavily regulated labour market. According to World Bank, redundancy cost in Spain averages 56 weeks of wages, more than twice the OECD level. During recessions, the decline in labour demand usually increases the unemployment rate and, therefore, hiring and firing restrictions do not exert the major influence on firm’s decisions to employ additional units of labour. However, the persistence of strong labour market regulation imposes significant economic costs.

Nevertheless, economists are not unanimously in agreement with recent reform introduced by the Zapatero government removing the restrictions for dismissals on a fair basis and deregulated dismissal procedures on indefinite labour contracts. Some argue that the labour market deregulation and fewer firing restrictions will further increase the unemployment rate since the major cause of it is the lack of labour demand. On the other hand, a handful of economists claim that Spain’s persistent labour market rigidities are the major cause of country’s high unemployment rate.

I am not going to argue for or against the labour market reform. In fact, I do believe that it must not be the only reason for suffering the highest unemployment rate in the Euroarea (EUA). Paraphrasing some well known sentences we can ask ourselves: is there live beyond labour market regulations? Yes, it is!

Some time ago there was a lot of discussion about the “economic model”. It was denounced that the economy were based on “bricks” instead of “bites”. In other words, while Spain had to improve investments addressed to underpin knowledge based economy, it flirted with housing bubble. But, in my opinion there were a higher and hidden danger, a structural deficiency in our level of education. Eurostat uses the percentage of the adult population (25-64 years old) that has completed upper secondary education as a measure of the share of the population that is likely to have the minimum necessary qualifications to actively participate in social and economic life. In 2007 in Spain this percentage was 50.4% (52.6 in 2010) while the average of Euroarea (EUA) was 65.9% and of Europe-27 (EU-27) 70.7%. Looking at figure-1, I wonder how we could get full employment in competence with European economies, but it would be another blog.

But, still, we can consider that this structural weakness, due to the level of education, can predict somehow the evolution of unemployment rates. When the housing bubble blew up and in a scenario of recession where to find new sources of  employment? Figure-2 shows the level of secondary education of countries or areas in 2007 (HK-2007), just before the crisis, and the level of unemployment in 2011. As expected, the higher the level of education the lower the level of unemployment. We cannot immediately conclude a causal effect but, at least, a new way of thinking apart from labour market rigidities.

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