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ECON 1101 Macroeconomics For the World Bank Group Assignment

Describe the Impacts of the economic problems on the society and economy. 

Answer:

Introduction:

Spain is one of the largest economies in the world in terms of purchasing power parity and also in nominal terms. It is a country with flourishing trade being the twelfth largest exporter and the sixteenth largest importer in the world. It is a high income country with a GDP per capita of about USD 28520 and ranks 32 in the index of the ease of doing business in the country ("Doing Business in Spain - World Bank Group", 2017). After the financial crisis of 2007-2008, the Spanish economy went into recession. Compared to the average in the Europe and also the US the Spanish economy went into recession later but the recession continued for a longer period of time. This recession reversed the effects of the previous booms in the country leaving much of the workforce unemployed in 2012. The Spanish economy contracted almost 9% during the period from 2009 to 2013.  

The macroeconomic performance of the country started improving from 2014 as seen in fig. 3 when the country managed to overturn the trade deficit which had built up in the years of economic boom in the country with finally having a boom in 2013 after decades of trade deficit. This surplus grew in the next years. In 2015 the growth in GDP was around 3.2% which is a rate that was not seen since before the financial crisis and Spain as a country managed to gain back the momentum from previous years and recovered about 85% in the next two years (Martín, 2015). It continued its strong performance in 2016 with the growth in the country being twice as much as that of the average in the Eurozone. This exceptional performance by Spain leads to analysts to refer to it as "the showcase for structural


reform efforts” (Spence, 2015). Despite all of this and the very good performance that Spain shows across other macroeconomic sectors, unemployment in Spain remains a problem.

Summary of chosen article:

In the article chosen which appeared in the New York Times in 2016 and was written by Peter Eavis titled “The Mystery of Spain’s Perpetual Jobs Problem” the author talks about how with the improvement of economic performance the unemployment problem in Europe has been curbed after the Financial Crisis but such has not been the case of Spain which still has unemployment of over 20 percent and has had such high unemployment for five years even when the economy itself had been recovering spectacularly ("Database - Eurostat", 2017).  Now there can be a case of overstating of the unemployment in Spain as quite a few people have off the books jobs and there might be a general feeling of optimism as the unemployment was higher about two years ago. The article further explores the causes of such a phenomenon in the country.

Macroeconomic problems faced by the country:

In spite of the amazing recovery by Spain, the economy still faces some problems. One of the biggest among them has been decrease in consumption demand (Parietti, 2016). With moderation of wages in the country there has been reduced consumption growth in the country a problem to which the government is looking into and will most likely want to boost the business present in the country to offer greater variety and hence boost consumption. Another is the corruption in the society which is perceived as a top problem in the country along with unemployment ("Unemployment and corruption top the list of perceived problems in Spain", 2015).  Lending to Spain is another problem with financial institutions demanding rates above 6% for lending to the country which is close to the 7 to 8% which prompted countries like Greece to ask for a bailout and well above the 1.42% of Germany (Knight, 2012). Obviously the most important among them is unemployment which is abysmal with youth unemployment rates at 45.5 percent. This again leads to other dependant problems such as there being a large scale emigration from the country as the people specially the youths are tire of being unemployed (Saraceno, 2017). Also efforts to boost the job market such as tax breaks have only succeeded in widening the gap between the poor and the rich, with lower salaries for the middle class being promoted as a possible solution to the unemployment problem (Buck, 2016).

Causes and impact on society:

High unemployment in Spain is not uncommon and the high unemployment visible now might be due to labour forces which have existed for decades in the economy as can be seen in fig.5. An unemployment rate of over 20 percent is not unusual at all for Spain and the country has been at that level for three periods of time since it has been converted to a democracy in the 1970s. In the last peak it took the country about 14 years to level out to the general level of unemployment in Europe at large (Thompson, 2011). A large portion of the workers in Spain emerged from the years of dictatorship with ironclad job security. These securities remained and much of the new hiring was done on a temporary basis. Just some time before the Financial Crisis hit, about a third of the employees in Spain worked on a temporary basis which was way higher than the European average at that time. It must also be noted that the bubble in Spain was horrible and way worse than what had happened in the US. With the onset of the crisis, it was easier to lay off the temporary workers. At the peak of the crisis, construction was responsible for 12% of GDP and 13% of employment in Spain. The boom in construction can be tied directly to the boom in debt. Household borrowing was about three times in 1996 and 2004, and the price of a square meter of housing was also tripled in the same amount of time. Then the crisis hit and old homes remained unsold while new homes were not built and construction which had served as a steady income for the youths of the country dried up. However it must also be noted that it is very much likely that the ability to hire people on a temporary basis and not have to commit to a full time contract was one of the most likely driving forces behind the recovery of the country 2014 onwards. But the coexistence of the protective labour contracts along with the temporary labour contracts which offer almost no protection have created friction within the Spanish companies and have created a dampening of the possible growth of the country. Another problem is that much of the working age population in Spain do not have any education beyond high school and have remained unemployed for many years beyond the 2008 Financial crisis. It might be noted that with the changing face of the job markets and the technology boom it might be difficult for a person who has been out of the job market for so long to be assimilated within the company and be able to be productive. Thus this creates a problem for the employers as well who might be willing to train such people but due to the absence of higher education cannot work in fields that require tertiary education. Such worker are losing touch with the industry they worked in due to being absent from the labour market for so long and thus find it increasingly difficult for the above mentioned reasons to find employment again. Also, due to the burst in the housing bubble, the construction industry is unlikely to provide jobs as it did in the previous years especially to unskilled workers who might have trouble finding employment somewhere else. There is perhaps no easy solution to this and would require a complete overhaul of the entire job market especially in terms of how contracts are formed in the market and the retaining programs. That would require the Spanish government to be able to afford this costly procedure which it most likely cannot as it has one of the highest budget deficits in Europe.

The biggest impact of the unemployment is obviously the lost livelihoods of the people who are directly affected by this. It also leads to some indirect effects such as an increase in consumer demand in the country as a whole and also to emigrations as most people who get the chance would want to leave the country as they face a high risk of unemployment within the country (Chislett, 2014). Due to this, and the fact that most of the people who leave are usually trained to at least college level it creates a self perpetuating cycle where the only high school educated remain and thus there is dearth of high skilled workers and thus the companies might not want to pay more as a whole and the wages decrease so again college students leave to escape these low wages and unemployment threats.

As evident from the AD-AS model if there has been a lowering of the minimum wage or an effect in the employment market such that it is always possible for the firm to hire more people at cheaper rates, the production will increase and the long run aggregate supply curve will shift outwards. However that cannot be a solution as the market with low wages and temporary contracts cannot offer development and content for the workers in the long term.

Policies:

According to the government agencies the labour reforms introduced in 2012 have been the basis for the change of the Spanish job market. Being based on the “flexicurity” model, the reform has transformed collective bargaining in order to bring it closer to ground, had employment protection legislation and tried to bet on internal flexibility to avoid dismissals. To help with the unemployment the government introduced many new reforms. Some among them are that the government dramatically reduced the amount of compensation that must be paid to an employee for firing them and also created a new type of open ended temporary contract which is that the worker must be working on a one year trial period. The government argues that such reforms have helped bring down the unemployment in the country with the flexibility thus introduced having dramatic impact on the auto industry of the country ("Spain struggles to reduce unemployment, debt despite growth - The Economic Times", 2016).

A sharing programme for best practice has been developed to help with the unemployment situation, along with some new activation tools, such as a national website which lists the vacancies in the private and public domain in a single portal. Furthermore, more opportunities are being given to young people through the European Youth Guarantee and the National Strategy for Entrepreneurship and Youth Employment, in which there is included over 100 measures. Training is also given so as to give real opportunities to the unemployed and tackle mismatch of skills within the unemployed and what the employer is looking for (Báñez, 2014).

Conclusion:

Spain has to look beyond the short term solutions it has been offering and look into large scale educational and structural reform of the labour market (Rodríguez-Pose, 2013). Being able to hire temporary workers at such low rates hardly offers any security to such workers and is merely a way to reduce the statistic to make it seem favourable (Tadeo, 2016). It is unemployment high waiting to happen as most of the jobs are short contract and low wage. The most important reform to look into would be educational such that people can attain higher skills and be able to work jobs that are high paying and require longer contracts. Also availability of such jobs would very well help to reduce emigration and thus brain drain from the economy. Spain is about to grow at a rate which is higher than what it was growing before the Economic Crisis. In isolation this seem like a positive achievement but it should be kept in mind that in unemployment remains unchecked Spain will have to grow at a much more rapid pace to maintain its macroeconomic variables. 

Reference list:

Báñez, F. (2014). Jobs, unemployment and government action - OECD Observer. Oecdobserver.org. Retrieved 27 March 2017, from https://oecdobserver.org/news/fullstory.php/aid/4505/Jobs,_unemployment_and_government_action.html

Buck, T. (2016). Spanish unemployment rate below 20% for first time in 6 years. Ft.com. Retrieved 27 March 2017, from https://www.ft.com/content/ecff6e4c-9c1f-11e6-a6e4-8b8e77dd083a

Chislett, W. (2014). Five reasons why Spain has a stubbornly high unemployment rate of 26%. OUPblog. Retrieved 27 March 2017, from https://Five reasons why Spain has a stubbornly high unemployment rate of 26%

Database - Eurostat. (2017). Ec.europa.eu. Retrieved 27 March 2017, from https://ec.europa.eu/eurostat/web/lfs/data/database

Doing Business in Spain - World Bank Group. (2017). Doingbusiness.org. Retrieved 27 March 2017, from https://www.doingbusiness.org/data/exploreeconomies/spain

Eavis, P. (2016). The Mystery of Spain’s Perpetual Jobs Problem. Nytimes.com. Retrieved 27 March 2017, from https://www.nytimes.com/2016/05/03/upshot/spains-jobless-numbers-almost-look-like-misprints.html

Knight, L. (2012). Spanish economy: What is to blame for its problems? - BBC News. BBC News. Retrieved 27 March 2017, from https://www.bbc.com/news/business-17753891

Martín, J. (2015). España recupera en sólo dos años el 85% del PIB perdido durante la crisis. www.larazon.es. Retrieved 27 March 2017, from https://www.larazon.es/economia/espana-recupera-en-solo-dos-anos-el-85-del-pib-perdido-durante-la-crisis-EA10988729#.Ttt1ubIu49EsOLK

Parietti, M. (2016). 5 Economic Challenges Spain Faces in 2016. Investopedia. Retrieved 27 March 2017, from https://www.investopedia.com/articles/investing/012416/5-economic-challenges-spain-faces-2016.asp

Rodríguez-Pose, A. (2013). How Spain can escape the unemployment trap. World Economic Forum. Retrieved 27 March 2017, from https://www.weforum.org/agenda/2013/05/how-spain-can-escape-the-unemployment-trap/

Saraceno, F. (2017). The main challenges the Spanish economy faces in 2017. The Corner. Retrieved 27 March 2017, from https://thecorner.eu/spain-economy/the-main-challenges-the-spanish-economy-faces-in-2017/60289/

Spain struggles to reduce unemployment, debt despite growth - The Economic Times. (2016). The Economic Times. Retrieved 27 March 2017, from https://economictimes.indiatimes.com/news/international/business/spain-struggles-to-reduce-unemployment-debt-despite-growth/articleshow/52911330.cms

Spence, P. (2015). How Spain became the West's superstar economy. Telegraph.co.uk. Retrieved 27 March 2017, from https://www.telegraph.co.uk/finance/economics/11574536/How-Spain-became-the-Wests-superstar-economy.html

Tadeo, M. (2016). Spain’s Unemployment Rate Falls to More Than Six-Year Low. Bloomberg.com. Retrieved 27 March 2017, from https://www.bloomberg.com/news/articles/2016-10-27/spain-s-jobless-falls-to-more-than-six-year-low-boosting-rajoy

Thompson, D. (2011). Why Is Unemployment in Spain So Unbelievably High?. The Atlantic. Retrieved 27 March 2017, from https://www.theatlantic.com/business/archive/2011/12/why-is-unemployment-in-spain-so-unbelievably-high/249300/

Unemployment and corruption top the list of perceived problems in Spain. (2015). Spanishnewstoday.com. Retrieved 27 March 2017, from https://spanishnewstoday.com/unemployment-and-corruption-top-the-list-of-perceived-problems-in-spain_21159-a.html

 

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