Does deregulation decrease unemployment? An empirical analysis of the Spanish labour market

Publication Date01 Sep 2020
Copyright © The authors 2020
Journal compilation © International Labour Organization 2020
*Complutense Institute for International Studies (ICEI), Madrid, emails: (cor-
responding author);; Daniel Herrero and Julián López Gallego
would like to thank the Complutense University of Madrid and Santander Bank for their funding of
pre-doctoral contracts for trainee research sta (CT17/17-CT18/17 and CT27/16-CT28/16, respectively).
Responsibility for opinions expressed in signed articles rests solely with their authors, and
publication does not constitute an endorsement by the ILO.
International Labour Review, Vol. 159 (2020), No. 3
Does deregulation decrease
unemployment? An empirical
analysis of the Spanish labour
Abstract. Spain underwent two major labour reforms in 2010 and 2012 under the
assumption that deregulating the labour market and decentralizing collective bar-
gaining would automatically reduce unemployment (deregulation hypothesis). This
article highlights the impact of demand and the sectoral structure of the economy
to explain the behaviour of this variable (structural hypothesis). Analysing subna-
tional panel data, the authors assess the capacity of these two hypotheses to ex-
plain unemployment trends. Their results cast doubt on the deregulation hypothesis
and indicate the importance of cyclical and structural factors.
Keywords: economic policy, unemployment rate, labour reform, labour
exibility, panel data, Spain.
1. Introduction
Unemployment in Spain has historically been high and sensitive to economic
cycles. Although the 13 per cent average rate over the 1994 –2007 growth period
exceeded European levels, unemployment steadily decreased over these years
to reach its lowest level in decades (8 per cent). However, the economic crisis in
2008 made it clear that the apparent convergence achieved with other advanced
economies was nothing but an illusion (Royo, 2009; Tridico, 2 013). By 2013, the
national unemployment rate had shot back up to 25 per cent, and in the auton-
omous communities of Andalusia, the Canary Islands and Extremadura it stood
at 35 per cent (gure 1).
Various authors have attributed this behaviour in the unemployment rate to
inadequate institutions, which distorted the competitiveness of the labour mar-
ket (Bentolila, Dolado and Jimeno, 2008 and 2 012; Dolado, 2012). It was on this
International Labour Review
basis that the 2010 and 2012 labour reforms were launched, aiming to change
the institutional design of the labour market in two ways: rst, by decreasing
employment protection and making working conditions more exible; and, sec-
ond, by decentralizing collective bargaining. These legislative changes were sup-
posed to allow wage restraint and greater exibility in order to contain rising
unemployment during the crisis and bring it back down faster during the re-
covery (MEYSS, 2013; García Pérez and Jansen, 2015; Cuerpo, Geli and Herrero,
2018; Doménech, García and Ulloa, 2018).
In our opinion, excessive emphasis has been placed on institutional labour
market reform, distracting attention from the underlying reasons for recent
unemployment trends in Spain. In particular, we consider that the outcomes
of such deregulation are ambiguous (Avdagic and Salardi, 2013) and that both
the trends in demand and the sectoral composition of the economy need to be
taken into consideration (Fina and Toharia, 1987; Fina, 1987; Rowthorn, 1995).
As regards the rst factor, it is worth stressing that reducing unemployment in
Spain requires higher growth rates than in other economies (Cuerpo, Geli and
Herrero, 2018). Regarding the second factor, the recent trends in unemploy-
ment are clearly related to the rapid expansion of the construction industry
during the period of growth and its equally rapid collapse during the recession
(Buendía, 2018).
We will refer to the rst approach as the deregulation hypothesis, since it con-
siders that certain reforms of labour market institutions have a direct impact on
unemployment trends. The second approach is our structural hypothesis, which,
in line with Fina and Toharia (1987), links recent trends in unemployment with
the behaviour of aggregate demand and that of specic industries within the
economy. The aim of our study is to compare these two approaches, as applied
to the case of Spain over the 2008 –16 period.
Source: Labour force survey (EPA).
Figure 1. Unemployment rate
Balearic Islands
Canary Islands
Castile-La Mancha
Castile and Leon
Valencian Community
Basque Country
La Rioja
3530252010 15

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