Abstract
The evolution of Spanish unemployment has been quite idiosyncratic. The full-employment levels of the early 1970s were followed by unemployment rates that were the highest within the OECD countries in the aftermath of the oil price shocks. While unemployment was extremely persistent during most of the 1980s and 1990s, it experienced its sharpest decline in recent years. We investigate the determinants of this unemployment trajectory using the analytical framework of the chain reaction theory (CRT). We show that unemployment may not gravitate towards its natural rate due to frictional growth, a phenomenon that arises from the interplay of lagged adjustment processes and growing exogenous variables in a dynamic system with spillovers. The empirical analysis distinguishes four periods: (i) 1978–85, (ii) 1986–90, (iii) 1991–94, (iv) 1995–2005, and finds that capital accumulation is a crucial driving force of unemployment. Thus, our theoretical and empirical results question the key role of the natural rate in policy-making.
Acknowledgments: We are grateful to the editors Philip Arestis and Malcolm Sawyer, and other participants in the 5th International Conference on Developments in Economic Theory and Policy (Bilbao, July 2008), for their insightful comments. Hector Sala is grateful to the Spanish Ministry of Education and Science fo financial support through grant SEJ2006–14849/ECON.
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© 2009 Marika Karanassou and Hector Sala
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Karanassou, M., Sala, H. (2009). The Rise and Fall of Spanish Unemployment: A Chain Reaction Theory Perspective. In: Arestis, P., Sawyer, M. (eds) Path Dependency and Macroeconomics. International Papers in Political Economy Series. Palgrave Macmillan, London. https://doi.org/10.1057/9780230251090_6
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DOI: https://doi.org/10.1057/9780230251090_6
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