Spain’s Other Depression

Paul Krugman has a new post comparing Spain and Florida.  He notes (correctly in my view) that one reason Florida has recovered more rapidly is that they are part of a fiscal union.

However we should not lose sight of the fact that the supply-side also matters, even in depressions. Here’s the Spanish unemployment rate since 1987:

Note that during the depression of the early 1990s (when Spain still had its own currency) their unemployment rate rose from 16% to 24%.  I don’t recall if they devalued during that cycle, but they certainly had the ability to devalue.  And of course what’s striking about that period is not so much that Spain’s unemployment rate rose by 8 percentage points, but rather that it only fell to 16% at the peak of the previous boom!

To say Spain has structural problems with its labor market would be an understatement.

I would encourage people to avoid either/or debates in this area.  Yes, Spain has a really, really high natural rate of unemployment, due to poor labor market policies.  And yes, Spain had a really, really big increase in cyclical unemployment during this depression, due to sharply falling NGDP. Both hypotheses are true.

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