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

• Author: Daniel HERRERO,Julián LÓPEZ GALLEGO,Luis CÁRDENAS
• Published date: 01 September 2020
• Date: 01 September 2020
• DOI: http://doi.org/10.1111/ilr.12179

Copyright © The authors 2020

Journal compilation © International Labour Organization 2020

* Complutense Institute for International Studies (ICEI), Madrid, emails: d.herrero@ucm.es (cor-

responding author); luiscard@ucm.es; jlgallego@ucm.es. 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

market

Daniel HERRERO,* Luis CÁRDENAS* and Julián LÓPEZ GALLEGO*

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

368

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

2016

Andalusia

Aragon

Asturias

Balearic Islands

Canary Islands

Cantabria

Castile-La Mancha

Castile and Leon

Catalonia

Valencian Community

Extremadura

Galicia

2014

2012

2010

2008

Madrid

Murcia

Navarre

Basque Country

La Rioja

Percentages

3530252010 15