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Output Growth Thresholds for Job Creation and Unemployment Reduction in Spain

Autora: Patricia de Cea, 2013

Lunes 15 de julio de 2013, por Carlos San Juan

The Spanish labor market is in great distress. The unemployment rate has increased by 18 percentage points and total employment has fallen by 17 percentage points since the onset of the Great Recession. The issue we wish to address in this paper is one which has drawn a lot of attention in the media, namely: What would be the required growth rate 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 GDP growth thresholds are likely to depend on the growth of real wages and the composition of salaried employment at each period. Using a CES production function with labour and capital as inputs, we estimate a labour demand equation using annual data over the period 1980-2012 which allows for these considerations in establishing the required thresholds. Our main finding is that, if moderation in real labour costs and plausible shares of temporary work were to remain in the future, GDP growth thresholds would be smaller than those quoted in available reports on this issue.

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