Spain: Unemployment demand deficient, Global financial crisis responses (Essay Sample)

UNEMPLOYMENT IN SPAIN
Student’s Name:
Course:
Date:
UNEMPLOYMENT IN SPAIN
Stable and low unemployment is one of the four major objectives in macroeconomics. However during periods of recessions, where there is negative growth, it is always quite impossible for governments to attain these goals. The economy of Spain has always experienced the worst unemployment rates compared to its economic partners. The crashing of the housing market as a result of poor banking controls, higher public spending and high unemployment rates provided the conditions for the collapse of the economy. The recession of the country has resulted into decreased spending and the aggregate demand of the economy. This probably means that less products will have to be produced and demand decrease for labor will lead into unemployment. In rescue of the global financial crisis, the IMF came in to offer Spain with the relevant policy frameworks that could help it survive the crisis and hence focus on sustainable economic growth. The IMF provided Spain with appropriate guidelines that could help it revive its economy. Some of the guidelines includes; restructuring of the labor market, reduce public spending and regulate the banking system. Unemployment still remains a major issue in Spain and the country must continue in advancing the policies that will help it address the specifics of the Spanish Labor market.
Background
Spain has been rated as the fifth largest economy in the European Union and it is also one of the countries that suffered greatly as a result of global financial crisis. Spain joined the European Union in 1994 and its unemployment rate was at 24%. Since 1980, the unemployment rate in Spain has always stood at 16%. Even in the years 2005, 2006 and 2007, when the country experienced economic growth, the unemployment rate has always been above 8 percent.[Joan Edelman, Spero and Hart Jeffrey. The politics of international economic relations. (Cengage Learning, 2009).]
Spain was affected by the global economic crisis because its economy depended greatly on heavy investment in construction and housing. The dependence on toxic assets oversees and on the global economy also resulted into the global financial crisis. In the year 2007 there were about 700,000 units of housing that were going on in Spain. There are various factors that facilitated the housing market business. Some of these factors include increase in population from the incoming immigrants, home purchases by northern Europeans, the growth of middleclass, homeownership subsidies and a poor control of the banking institutions.[Ibid., 13]
The global financial crisis effects began having an impact on the Spanish Economy in the first quarter of the year 2008. During this period, the real growth of GDP slowed down by about 0.9%, the domestic demand contributed about 0.1 percent in the GDP while the export growth slowed down by about 0.7 percent compared to the previous year. In the year 2009, there was a decrease in domestic demand, foreign trade and private consumption, thus leading to a decline the economic activity by about 3.6%.[Ion, Dobre, and A Alexandru. "The impact of unemployment rate on the dimension of shadow economy in Spain: A Structural Equation Approach." European Research Studies Journal 13, no. 4 (2009), 179-197.]
The effect on the economy increased the rates of unemployment by about 12 points from the year 2007 to the year 2009. In the year 2008 construction sector unemployment increased from 315, 108 at the onset of the year to 607, 905 at the end of the same year. In 2009 December, there were about 4.45 million unemployed Spaniards. During the first quarter of 2011, there was a rise in unemployment from 21.3 million people to 4.9 million people.[Barbara, Petrongolo and Pissarides A. Christopher. "The ins and outs of European unemployment." (2008).]
As the effects of the global economic crisis began creating devastating effects in Europe, the financial market placed Spain as part of the PIGs, an acronym commonly used to refer to a heavily-indebted country in the European Union. However as stated earlier, Spain is considered the fifth largest economy in the European Union. Portugal is rated at fifteenth, Ireland thirteenth, and Greece eleventh. Nevertheless, in the year 2009, the output of Spain was relatively higher and it was close to that of France and Italy and below 10 percent to that of UK or Germany. Unlike Ireland or Greece, there are very low chances that Spain will receive aid from the European Union or for any state in the EU to manage its bad debt. According to Dominique Strauss-Khan, the IMF CEO, Spain does not require any kind of financial support.[Ibid., 18.]
Unemployment demand deficient
If the labor market functioned appropriately, the recession would only cause average wage rate to decrease, demand for labor to decrease and quantity for demand for labor to also decrease. However, the wages are considered "downwards sticky”, since it is unlikely for wages to decrease as a result of worker discontent and union strength, thus leaving the average wage at a much higher rate, making the quantity of demand for labor to decrease. In Spain’s situation, due to the demand for labor, there was a massive decrease, thus resulting into an average decrease because the unions had to protect the jobs of their workers causing the quantity of the demand for labor to increase. Consequently resulting into unemployment gap. This kind of scenario resulted into 25% unemployment in Spain The effects has been so devastating especially on the youths who lack the required experience, thus making them more likely to get fired hence resulting into a 50 percent unemployment in the youth.[Ibid., 22.]
The high unemployment had a serious effect on those directly affected by it. The effect is high on individuals who are 30 years and are educated. This is because Spain economy depends on this category to purchase housing or begin families. If these groups remains unemployed, there will be expected unemployment since there will be no jobs for individuals leaving university. Unemployment has also resulted into strained relationships since most families would break up as a result of no jobs after wedding. Because the standards of living may decrease in the future, most families are prolonging to have children. In addition, more individuals have opted to live with their parents for a longer duration in order to gain financial security. Some families have even tried to depend on the pensions of their grandparents in order to survive. However as argued by most critics, it is better for most families to rely on other families than to rely on unemployment benefits in order to survive.
Global financial crisis responses
The large deficits of the government, rising unemployment and other related challenges resulted into investor panic. The low confidence in investor had a great effect on borrowing and thus destabilized the global currency markets. According Mutual Assessment Process (MAP) Spain is facing a global financial crisis. Spain has been classified as an advanced deficit economy. In order to achieve a balanced and sustainable growth, most economies are expected to create a fiscal consolidation that is reliable, rebuild confidence in the market and bring back fiscal soundness. Additionally, it is advised that countries should establish and implement policies that address high unemployment as part of fiscal consolidation. The labor reforms should be designed in a way that its main purpose is to lower the hiring costs, reduce employment in the long-term, encourage search for jobs, mobility and matching. Fiscal consolidation along with reforms in comprehensive labor market and collaborative policy actions suggest a sustainable and balanced global growth.
An emergency austerity bill was approved by the Spanish Parliament in 2010. The government allocated 15 billion euros for the austerity bill with the aim of restoring confidence and reassuring debt markets in the economy of Europe. The bill reduced the civil servant wages by about 5 percent, the budget deficit was also cut by 9.3 percent in GDP by 2010. After 2 months, Spain passed a labor market reform. The reform was aimed at making the wages to be more responsive towards the labor market. This would later firm-particular conditions, and ease employment protection legislation for permanent workers. The steps that were taken to reduce the cost of dismissing and employing workers. In addition, the labor reform alleviated the conditions for different firms to opt out from collective higher level bargaining agreements.[José Emilio Boscá, , A. Díaz, Rafael Domenech, Javier Ferri, E. Pérez, and L. Puch. "A rational expectations model for simulation and policy evaluation of the Spanish economy." SERIEs 1, no. 1-2 (2010), 135-169.]
If the economy continues to experience low aggregate demand, the unemployed will lose morale and their expertise and skills will become deteriorated and outdated. As time moves on, the workers may not be able to fit the jobs applications that are available when the economy revives. This may cause the aggregate supply for labor to decrease, thus increasing the space between the total labor force and the supply of labor. The space between the total labor force and supply for labor represents economy’s unemployment and since the aggregate supply in Spain is moving inwards, the rate of unemployment is probably increasing. This is a situation referred to as structural unemployment that may cripple an economy and ...