Elements of Economics Assessment 1 Individual Assignment

News Abstract: As reported by BBC, Spain's unemployment rate in the last three months of 2012 rose 1% from the 3rd quarter to 26% where 5.97 million people are now jobless. Tackling youth unemployment has become a serious issue for governments and policymakers as unemployment among young people has topped 55%. Jose Luis Martinez, strategist at investment bank Citigroup, commented that "We haven't seen the bottom yet and employment will continue falling in the first quarter.

Introduction High unemployment rate is generally a shared problem in the Eurozone with Spain being typically high in this aspect. As Spains economy came to a standstill with the occurrence of the 2008 global financial crisis and the Eurozone crisis, it became almost inevitable that it will follow the pathway taken by Greece, announcing consecutive austerity measures, cutting expenditures and raising taxes to handle debts. Unfortunately, rising unemployment rate manifests itself while these movements are made. With that, the subject of unemployment shall be discussed in the rest of this paper.

Unemployment Unemployment typically takes place when people are out of work and are active in seeking work. To be deemed as employed, one must either hold a full-time job or a parttime job. On the other hand, to be regarded as unemployed, one has to be without work but is available for work and must have made specific efforts to find a job within the previous four weeks; or is waiting to be called back to a job from which he or she has been laid off; or is waiting to start a new job within 30 days. Unemployment is a serious

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personal and social economic problem for two main reasons - it results in lost income as well as dip in production. The three types of unemployment that will be discussed in the paragraphs that follow are namely Frictional, Structural and Cyclical. Frictional unemployment arises from normal labour market turnover. It is a situation where workers seek for new jobs when they become unemployed when jobs are created and destroyed. When there is an increase in the number of people entering and re-entering the labour force and that there is an increase in unemployment compensation, frictional unemployment will rise. Structural unemployment is created by changes in technology and foreign competition that changes the skills needed to perform jobs or the locations of jobs. This usually lasts longer than frictional unemployment. Frictional unemployment and structural unemployment forms the natural unemployment rate which also denotes that the unemployment rate is at full employment. So to say, full employment occurs when there is no cyclical unemployment in the labour force where cyclical unemployment is the fluctuating unemployment over the business cycle. It is when workers got laid off when the firms cut costs during times of poor economic performance.

Unemployment over the Business Cycle Potential GDP is the quantity of real GDP produced at full employment. It corresponds to the capacity of the economy to produce output on a sustained basis. Over the business cycle, actual real GDP fluctuates around potential GDP and the unemployment rate fluctuates around the natural rate of unemployment. As depicted in the tables below, it is evident that real GDP fluctuates around potential GDP in table (a), the unemployment rate in turn, fluctuates around the natural unemployment rate in table (b). During recessions, cyclical unemployment will peak and the output gap will then become negative. As business cycle peaks, the unemployment rate falls below the natural rate and the output gap becomes positive.

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(Sources of data: Bureau of Economic Analysis, Bureau of Labour. Statistics and Congressional Budget Office) It was mentioned in Wall Street Journal (January 21, 2013) that the central bank of Spain estimated that GDP fell 0.6% in the fourth quarter from the third, which translates into an annualized decline of more than 2%. From this report, we can deduce that Spain is still experiencing a recession, suggesting that unemployment rate will continue to climb.

Unemployment in Spain The unemployment situation in Spain is worrying mainly because youth makes up a big portion of the unemployed figures. According to Carrasco et al. (2012), this is particularly challenging for a society because if young people are constantly unemployed, they may never build up their work experience or that the skills that were obtained through their education may become obsolete before they are even employed. According to Kawalec et al (2013), the possible cause of the collapse of Spains economy is that the wages in Spain, alongside with some of its EU counterparts, went so high that it resulted in the loss of international competitiveness. Domestically produced goods were taken over by foreign goods not just within the country, but also externally. Henceforth, a dip in the output and employment of tradable goods is observed.

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Additionally, the inflexibility of wages due to labour legislation is another likely cause of a rise in unemployment. This is particularly observable when prices fall due to a decrease in the demand for products, which in turn, brings about a decrease of the marginal productivity of workers.

Long-Term Unemployment Parkin (2012) explains that long-term unemployment which results from job loss is the most costly of all unemployment. Looking at the situation in Spain, unemployed Spaniards are covered by two successive benefits - a contributory unemployment insurance benefit for 4-to-24 months depending on contributions, then an assistance benefit for 6-to-30 months (Carrasco et al., 2012). With that benefit in place and the still escalating unemployment rates, it is likely that the government will utilise most of its resources for benefit pay-outs. This would in turn put more pressure on the governments budget plans. With that, it is true that long-term unemployment is indeed costly and is bound to create more negative impact on the unemployment rates.

Catalonia Standing as one of the most prosperous part of Spain, Catalonia makes the largest extra contribution to Spains budget for distribution around the poorer parts of the country (Glenny 2012). The Christian Science Monitor (January 23, 2013) reported recently that Catalonia's parliament has approved a declaration of sovereignty signalling a referendum to separate the north-eastern region from Spain. In the report, it was mentioned that many Catalans are certain that Catalonia will be better off if it leaves Spain as they claim that their taxes have been utilised in helping poorer regions. Consequently, should Catalonia be successful in gaining independence, it is likely that the economy of Spain will be presented with yet another major challenge as it loses one of its wealthiest autonomous communities. With the economy plunging deeper into the recession, it is likely that the unemployment rate will continue to hike.

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Measures taken by the Government Besides implementing austerity measures such as reducing expenditures and raising taxes, Spain is also struggling to convince investors, as well as Spaniards, that they are in control of their economies. On the other hand, a dip is observed in the demand for goods and services when measures such as reducing wages and pensions are implemented. The Spain government has also taken steps to reform labour practices to make the labour market more flexible and hopeful for the young workers. In the aspect of education, the government is working on boosting skills but as this is being done, it is vital that the government ensures that education institutes are teaching the skills which investors are looking for. While such measures will ultimately promote jobs, it will take time in producing desirable outcome. In the meantime, steps were taken to encourage firms to hire from the youth workforce.

Conclusion As much as ample measures have been laid out on the table, things are still looking bleak in Spain. Rubiales mentions that although measures such as reducing hiring and dismissal costs, limiting union power, and encouraging training increases the flexibility of the labour market, it may also decrease the persistence of unemployment in the long-run. Therefore, additional active labour market policies must be pursued so as to reduce the current high levels of unemployment.

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References: Blackstone, Brian. 2013. "German Strength Shows Europe's Economic Split." Wall Street Journal, sec. Europe News, January 24. http://online.wsj.com/article/SB1000142412788732353980457826137391763664 6.html (accessed January 28, 2013). Cala, Andrs . "Catalonia declares intent to hold independence referendum." The Christian Science Monitor, sec. World, January 23, 2013. http://www.csmonitor.com/World/Europe/2013/0123/Catalonia-declares-intent-tohold-independence-referendum (accessed January 28, 2013). Carrasco, Raquel, and J. Ignacio Garca Prez, 2012. "Employment Dynamics for Immigrants and Natives: Estimates from a Multi-Spell Duration Model." https://editorialexpress.com/cgibin/conference/download.cgi?db_name=SAEe2012&paper_id=72 (accessed January 28, 2013). Garcia-Rubiales, Victoria. "Unemployment in Spain: An Analysis of Labour Mobility and German Strength Shows Europe's Economic Split Young Adult Unemployment." Stanford University. Glenny, Misha. 2012. "Eurozone crisis: Catalonia's place in Spain." BBC News, sec. Europe News, December 10. http://www.bbc.co.uk/news/world-europe-20644877 (accessed January 29, 2013). Kawalec, Stefan, and Ernest Pytlarczyk. 2013. "Controlled Dismantlement of the Eurozone: A Strategy to Save the European Union and the Single European Market." German Economic Review. 14. no. 1. http://0onlinelibrary.wiley.com.prospero.murdoch.edu.au/doi/10.1111/geer.12003 /pdf (accessed January 28, 2013). Parkin, Michael. 2012. Economics - 10th Edition. Boston: Pearson Education, Inc. The Associated Press. 2012. "Eurozone unemployment hits another record high." USA Today, November 30. http://www.usatoday.com/story/money/business/2012/11/30/eurozoneunemployment-record-high/1737337/ (accessed January 29, 2013).

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