Fighting Unemployment: The Limits of Free Market Orthodoxy

By David R. Howell | Go to book overview

7
Employment Performance and Labor
Market Institutions: The Case of Spain

RAFAEL MUÑOZ DE BUSTILLO LLORENTE


7.1 INTRODUCTION

Since the early 1980s, Spain's unemployment rate has been much higher than that of any other member country of the Organization for Economic Cooperation and Development (OECD). For the OECD-IMF orthodoxy, which finds the source of high European unemployment in the rigidities imposed by labor market institutions, this would seem to be a puzzling result, since Spain has followed a policy of deregulation and reduction of real labor costs since the mid-1980s. It should be noted that Spain's labor costs were already among the lowest in the European Union and that the construction and consolidation of the welfare state in Spain started much later than in the rest of Western Europe and has not yet reached the same level of development as that of other European countries.1 So Spain does not have, at least at first glance, many of the institutional features that predict persistent high unemployment according to the orthodox view. Furthermore, from the beginning of the economic recovery of the mid-1990s, employment in Spain has shown a higher rate of growth than in the rest of Europe, with an extraordinary 9 percentage point reduction in the unemployment rate from 1996 to 2001 (OECD 2002, Statistical Annex Table A).

The orthodox interpretation of the causes of unemployment in Europe focuses on the inadequacy of its labor market institutions when confronted with the exogenous shocks of the 1970s (IMF 1999). According to the OECD, this is precisely the problem for Spain: “An unfortunate combination of rigid corporatist structures, an increasingly generous welfare system, and a wage bargaining system that takes insufficient account of local labor market conditions … has made for a particularly inflexible labor market”

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