In my research on the Great Depression I became convinced that sticky nominal hourly wages and government attempts to prop up wages were both factors that contributed to high unemployment.
Unemployment in Spain has now reached levels comparable to America during the Great Depression; 23% of the workforce is idle, and the rate is heading still higher. This made me wonder what was wrong with the Spanish labor market. Why weren’t wages adjusting to restore equilibrium?
Here’s The Economist:
Germany may have pursued wage restraint, but that is no easy route to prosperity. Indeed, dual labour markets are more likely to have the opposite effect. Permanent workers fearlessly seek higher wages, confident that job losses will fall first on temporary workers. Soaring Spanish unemployment has produced little wage moderation. During 2009 the pay of permanent workers rose by 4% in real terms.
And attractive as the German model is now, across decades American jobless rates are tough to match. The Anglo-Saxon preference for little or no employment protection may be the most effective at herding workers from declining industries to growing ones, driving job creation and innovation. Dyspeptic bond markets are now pushing Spain and others towards reforms that make it easier and cheaper to lay off workers again. Not before time.
So what should we blame; the ECB or Spanish labor laws? The correct answer is both.
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