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Mr. Franks was an economist in the European I Department when this paper was begun. He is now in the Fiscal Affairs Department. He wishes to thank Jacques Artus, Thomas Reichmann, Richard Roy, Daniel Gleizer, and Gabrielle Lipworth for helpful comments.
This trend is even more striking if we take 1985 as the point of comparison. Between 1985 and 1991, nearly two million jobs were created, but unemployment fell by only 475,000 due to the entrance of 1.2 million women into the job market.
This appears to reflect a pattern of women moving permanently into the labor force only upon obtaining a first job, whereas men tend to enter the labor force upon completing their education regardless of whether they actually have a first job.
The share of youth (ages 16–24) in total unemployment declined from 47.5 percent in 1986 to only 35.1 percent by 1993. This decline reflects the improvement in the job market between 1986 and 1991, but also results from a decline in the participation rates (particularly in the 16–19 age group). Another factor in this decline has been the plateau in the population of young people after rapid growth in the early 1980s as the last of Spain’s late baby boomers reached working age.
The increase in newly unemployed grew much more rapidly than the growth in job placements, thus accounting for the rise in total unemployment. But the point is still valid—namely, that circulation increased contemporaneously with rising long-term unemployment.
Thus, for example, contracts with annual cost of living increases guarantee that real wages cannot decline even beyond the life of the contract.
Two simple tests were made of these predictions—looking at simple correlation coefficients, and simple regressions. The correlation between real consumption and employment is positive, and a regression of real consumption on employment and a constant displays a significant positive coefficient. A similar result was obtained for the relationship between interest rates and employment, where a significantly negative relationship was found.
The case of wages and employment is more complicated. The correlation coefficient is positive (as predicted by the equilibrium business cycles model), but this result does not necessarily imply that higher real wages cause higher employment, as the model suggests. See the error-correction model developed below, where a positive correlation between wages and unemployment is found, contradicting the positive simple correlation of employment and wages.
The calculated average replacement rate is 41 percent, compared to an average of 43 percent for 14 European OECD countries. See OECD (1991).
This is the case of moonlighting activity by people with regular employment, economic output using tax evasion tactics (such as transacting in cash) among established firms, and people working in the underground economy who report themselves as being out of the labor force.
The breakdown of the 11.4 percent is as follows: 4.0 percent classified as discouraged job seekers; 3.8 percent classified as unemployed; 2.2 percent holding multiple jobs; 0.6 percent children under age 16 working; and 0.8 other.
Muro, et al. (1988); Mancha Navarro (1987). The incidence of other forms of irregularity was much higher. The survey found 12.1 percent of workers not registered with the Social Security system, and 2.6 percent improperly registered.
El Pais. August 24, 1993, p. 31.
In all of these areas, further empirical research is warranted.
The calculation is as follows: Assume that unemployment benefits affect duration of unemployment but not entry into unemployment. Assume also 70 percent of the entrants to unemployment are currently covered by benefits. Then, the Alba-Ramirez finding that duration of unemployment is roughly 4–6 months longer for recipients of benefits than for non-recipients, implies that the duration of unemployment is one third longer for those covered. This translates into roughly one quarter more unemployment than in the absence of benefits.
This is the approach taken by Blanchard and Summers (1987) in their seminal work on hysteresis in European unemployment.
This coefficient is close enough to one that we cannot reject the hypothesis of a unit root using a Dickey-Fuller test at the 10 percent significance level. The result holds whether or not a time trend is included.
These results are similar to those obtained by Mitchell (1992) in tests for unit roots in the unemployment rates in a number of OECD countries.
Dolado, Malo de Molina, and Zabalza (1986). See also the discussion of regressions by Andrés and García in Bentolila and Blanchard (1990). The difference in the results may be explained by two factors: (1) the use of the cointegration methodology employed in these regressions, or (2) the fact that these data include quarterly data from the period 1979–1993 while the other studies use annual data from the 1960s through the mid-1980s. The wage setting dynamic has undoubtedly altered significantly from that of the Franco regime compared to today. A third possibility is that the equations are mis-specified. I did run test regressions including variables on labor taxation (which figure prominently in Dolado, Malo de Molina, and Zabalza) but they did not prove to be significant in this case.
Blanchard and Summers (1986, p. 39) point out that the insider-outsider model with monopolistic competition “implies no simple relation between employment and real wages.” The fact that an unusual sign of the unemployment coefficient may provide evidence for strong insider-outsider type behavior, where the increase in unemployment reduces the number of insiders and thus raises the equilibrium wage the insiders can achieve.
See Blanchard and Diamond (1994) for a model of the effects on unemployment of a rule whereby employers preferentially hire the most recently unemployed workers. Empirical research is needed to test both the hiring assumptions and the predictions of this class of models.
Bentolila and Blanchard (1990); Bentolila and Dolado (1990). There are two ambiguities about the evidence on mismatch which should be mentioned. First, some indicators of mismatch have declined over the period of increasing unemployment in the 1980s. Second, the existence of mismatch does not necessarily imply a market failure. It could be that mobility has declined because generous unemployment benefits allow people to remain unemployed at home rather than relocating in search of work as in the past.
On the negative side, this measure will also lengthen the coverage of generous unemployment compensation.