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Patricia de Cea

Output Growth Thresholds for Job Creation and Unemployment Reduction in Spain

Viernes 5 de julio de 2013, por Carlos San Juan

As is well known, the Spanish labor market is in great distress, with the unemployment rate having increased by 18 percentage points and total employment having fallen by 17 percentage points since the beginning of the Great Recession. The issue I wish to address in this TFG is one which has drawn a lot of attention in the media, namely: Which would be the required growth rates of real GDP to create net employment and to stop unemployment growing ? Given the different adjustment (hiring and firing) costs for temporary and indefinite contracts, these growth thresholds are likely to depend on the composition of salaried employment at each period. Using a CES production function with labour and capital as inputs, I estimate a labour demand equation which allows for this composition effect, as well as for the effect of real wage growth on employment, in establishing the required thresholds. Further, since output and real wages could be taken as endogenous in determining labour demand, an instrumental variables (IV) approach will be used in estimating the relevant parameters. Annual data drawn from EPA, Encuesta de Coyuntura Laboral and Contabilidad Nacional, covering 1980-2012, will be used in the empirical analysis.

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