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Explaining the Common Stochastic Trend in Spanish Regional Unemployment: Granger-Causality Analysis

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Book cover Spanish Regional Unemployment

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Abstract

This chapter delves deeper into the likely sources of Spanish unemployment by making use of a broad collection of institutional and macroeconomic variables which, the economic literature suggests, can exert an influence on unemployment. Specifically, we focus on studying whether each variable individually considered Granger-causes the common factor of the unemployment rate and find that there is a wide range of macroeconomic and institutional variables that might be useful for anticipating a change in the unemployment rate. By determining the factors responsible for the common hysteretic patterns in Spanish unemployment, we will be in a position to suggest policies that can help tackle this problem.

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Notes

  1. 1.

    Note that we focus exclusively on the direction of causality going from the different macroeconomic and institutional variables to the common factor.

  2. 2.

    When the degree of integration differs according to the different test, we compute the Granger-causality analysis under the different scenarios and the results remain fairly unaltered.

  3. 3.

    See exact data sources for each of the explanatory variables in Table A1 in the Appendix.

  4. 4.

    In Table A5 in the Appendix, we provide the Granger-causality analysis results for all the variables investigated, including all those variables that do not significantly Granger-cause the common factor driving Spanish regional unemployment rates.

  5. 5.

    However, in Blanchard and Wolfers (2000) shocks to TFP growth are treated as having permanent effects on unemployment. These authors present econometric evidence that a 1 % drop in the underlying TFP growth rate prompts a 0.73 % increase in unemployment. Nickell's (1997) approach to the effects of TFP growth on unemployment, on the other hand, differs from Blanchard and Wolfers' (2000) in that they are taken to be only temporary. According to his findings, a 1 % reduction in TFP growth gives rise to a 0.86 % increase in unemployment. By contrast, no effects are found by Bertola et al. (2001).

  6. 6.

    International Monetary Fund (IMF) economists have devoted considerable effort to analysing this burning issue. For example, Blanchard and Leigh (2013) contend that the short-run fiscal multipliers should be neither the only nor the most important aspect within the fiscal adjustment strategy. A good decision would involve pondering over the benefits derived from and the pain inflicted on the economy by cutting government outlays today and would compare them to the positive and negative effects of the alternative “wait today and do later” on output and employment. The strength of the private sector would drive the optimal fiscal strategy in each economy.

  7. 7.

    This lack of adjustment associated with the role of long-term unemployment is likely to have been compensated for by the effect of the flexibility reforms undertaken in recent times.

  8. 8.

    For an analysis of Spanish vacancies and unemployed workers in terms of matching, see Álvarez de Toledo et al. (2008, 2011, 2013).

  9. 9.

    We will again touch upon the relationship between the construction sector and unemployment in the group of price variables by looking at housing prices and their significance in Granger-causing the latter variable.

  10. 10.

    Many other authors (Nordhaus 2007; Kilian 2008; Blinder and Rudd 2012) second this view of the weakening association between oil price increases and declines in economic activity over the last two decades and add some other reasons that could account for this finding. An exception is Hamilton (2009), who argues that an oil price hike seems to have decisively contributed to transforming an economic slowdown into the Great Recession.

  11. 11.

    As stated below, more time is needed in order to compute the effect of the recent Spanish reforms regarding EPL over the entire business cycle.

  12. 12.

    A new strand of the literature takes a step further and links the EPL to the Central Bank’s monetary policy stance (Faia et al. 2013). These authors claim that firing costs matter for the efficiency of monetary policy and make a case for it to be targeted at lowering the productivity-reducing externalities triggered by high firing costs. When applied to the European Monetary Union, the policy implications are for the heterogeneous firing costs across countries to be harmonised so that the efficiency of the single monetary policy is enhanced. Besides, even though our main interest lies in explaining the relationship between EPL and aggregate unemployment (or employment), it should be noted that EPL is likely to have important effects on the unemployment rate of different groups of workers. Recent empirical evidence suggests that less skilled workers are hurt the most by strict EPLs (MacLeod and Nakavachara 2007).

  13. 13.

    By the same token, Baker et al. (2005) display results that are in line with Nickell (1997) and Fitoussi et al. (2000): UC leads to higher unemployment, although it is worth emphasising that this result is only significant at 10 %. They also obtain the same outcome as the previous aforesaid articles concerning the effects of bargaining coordination on the unemployment rate. On the other hand, in Nunziata (2003) it is reported that UC has a significant detrimental impact on employment growth only during economic expansions. Other studies have also tackled this empirical relationship between UC and unemployment without much success. An example of these is Jimeno and Rodríguez-Palenzuela (2003), where the coefficient associated with aggregate unemployment is not statistically significant, although when gender differences are introduced, female unemployment is observed to be affected by UC.

  14. 14.

    Low layoff costs in exchange for a generous unemployment benefit system and intense ALMPs.

  15. 15.

    In reviewing what empirical evidence says about the relationship between ALMPs and unemployment, we are also confronted with opposite results. On the one hand, Layard et al. s' (1991) regressions imply the existence of a negative relationship between these variables. Nickell (1997) shows that a 10 % increase in ALMPs spending leads the unemployment rate to drop by 2.4 %. Likewise, Elmeskov et al. (1998) find that an increase of 10 % in ALMPs spending causes a 1.47 % reduction in the unemployment rate. On the other hand, Blanchard and Wolfers (2000), Bertola et al. (2001) and Jimeno and Rodríguez-Palenzuela (2003) fail to find a clear link between ALMPs and aggregate unemployment.

  16. 16.

    Actually, in 2012, the Spanish Government reduced the replacement rate from 60 % of the net reference pay to 50 %, applicable from the 7th month following the first day on which the unemployed starts receiving the subsidy.

  17. 17.

    Álvarez de Toledo et al. (2008, 2011) test, with macroeconomic and individual data from the Spanish public employment agencies respectively, the plausibility of the stock-flow model (Coles and Smith 1998) for the Spanish economy. In essence, they conclude that there exists clear evidence of this type of labour market segmentation. More specifically, the results point to an extreme case of that scheme: a queue of workers. In this scenario, the search intensity is almost fruitless without labour mobility.

  18. 18.

    Baker et al. (2005)’s outcome contradicts those reported above. They make the point that if the government raises the replacement rate, unemployment will decline, as long as the benefit duration is not extended too much.

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Authors and Affiliations

  1. Pablo de Olavide University, Seville, Spain

    Alejandro García-Cintado, Diego Romero-Ávila & Carlos Usabiaga

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  1. Alejandro García-Cintado
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  2. Diego Romero-Ávila
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  3. Carlos Usabiaga
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Correspondence to Alejandro García-Cintado .

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García-Cintado, A., Romero-Ávila, D., Usabiaga, C. (2014). Explaining the Common Stochastic Trend in Spanish Regional Unemployment: Granger-Causality Analysis. In: Spanish Regional Unemployment. SpringerBriefs in Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-03686-1_3

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