The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
This paper argues that the sharp increase in unemployment in a number of advanced countries during
the Great Recession was not just cyclical (the result of a lack of aggregate demand); the degree of
adjustment of real wages and the impact this had on labor productivity also played a role. In many
countries, post-2007 employment losses were modest, as real wages adjusted when the economy
slowed down. But in some countries real wage growth stayed too high for too long. The result was
large-scale labor shedding, which boosted labor productivity but also contributed to a sharp rise in
unemployment. In this context, the paper discusses the different experiences of the UK (where
employment increased) and Spain (where it fell sharply), and finds that almost two thirds of the
employment losses in Spain resulted from the failure of real wages to adjust adequately.