One often cited economic figure when talking about Spain is the unemployment rate. It is ludicrously high. So why is this? What causes high unemployment in Spain? And why, despite improving economic conditions across Europe. does Spain appear stuck?
Let’s begin with the numbers. Spain suffers from nearly the highest unemployment in the developed world, 18.5% compared to 4.7% in the United States. Youth unemployment is even higher, at an unheard of 42%. Undoubtedly this is not a good thing, but it is not so unusual for
Spain, considering that at the peak of their economic boom in 2007, 8% unemployment still persisted.
There are three main factors that suppress the labor market in Spain: Labor regulation, lasting effects from the 2008 financial crisis, and anemic economic growth.
To begin, Spain has some of the most stringent labor regulations in all of Europe. Many of these laws were put in place to protect workers. However, the same regulation that protects workers from being fired effectively disincentivizes companies from hiring them in the first place. For example, up until 2012, if a company wanted to let go of a permanent worker, law required that they continue pay them for 45 days for every year they had been employed. This required that firms think long and hard before they hired any new workers. Many Spanish industries are unionized as well, making it difficult for companies to downsize during economic downturns. The strict regulations, while arguably just and fair to employees, discourage firms from expanding and hiring new workers.
Firms have circumvented some of these requirements by hiring temporary workers. These short contract workers currently make up a staggering 25% of the Spanish workforce, compared to roughly 12% in most other European countries. Because the workers are not are not full time, many regulatory protections do not apply to them and thus it is much cheaper for firms to hire them. These workers may be one reason for Spain’s elevated rate unemployment as the label “temporary” means that many of these workers are not counted in official employment figures.
Another reason reason for Spain’s current high unemployment is the bursting of the housing bubble in 2008. During the leadup to the financial crisis, the construction and housing industry accounted for 13% of total employment and 12% of GDP. Between 2000 and 2009, a remarkable 30% of the homes built in Europe were built in Spain. So when the housing bubble burst, it really burst in Spain. Millions of construction workers were left without work and the homes they had bought were now underwater. Since that time, construction has not rebounded to anywhere near pre-crisis levels.
These two issues combined lead to the compounded problem of slow economic growth. Following 2008, Spain experienced negative GDP growth until 2013. Since then, growth has been positive but remains weak. Economic growth affords a host of benefits to a country. For Spain, these come in the form of reduced borrowing costs lower unemployment. The fact that economic growth in Spain is stagnant means that the latter benefit will remain depressed for the foreseeable future.