The reason of high unemployment in Spain

Here we model the rate of unemployment, u_t, in Spain using its dependence on the change in labor force, l_t=dLF/LFdt. This is another country joining the set of most developed economies with the same relationships between employment and labor force. For Spain, we used data provided by the OECD. Figure 1 depicts unemployment and the change rate of labor force between 1960 and 2010. In line with the OECD description of the breaks in the labor force series: 

Series breaks: In 2005, changes in the questionnaire and the implementation of CATI system in the field work affected the estimates. The 2005 questionnaire produced an additional increase of employment (132 000) and a decrease of unemployment (78 000). From 2001, the new unemployment definition established by the European Commission in 2000 has been introduced. From 1994, persons employed in the “Guardia Civil” are not included in the armed forces. As an indication, this category represented 59 600 people in 1994. In 1976, the lower age limit for inclusion in the Labour Force Survey was raised from 14 to 16, at the same time other modifications to the survey were introduced.

 there are two spikes in the dLF/LF series near 1976 and 2001 as related to step revisions to the level. The spike around 1988 has no explanation in terms of the revisions to labor force, but is of the same amplitude. One can not exclude the opportunity that this spike is related to the processes of joining the EU in 1986.              

As expected, the same functional form of dependence is valid for Spain. The estimation method is based on trial-and-error approach and seeks for the fit between annual curves.  The final model is as follows

u_t = -7.0l_t  + 0.31; t>1986

Figure 2 depicts observed and predicted curves. Before 1986, the curves diverge and another model is likely holds.   Because of high-amplitude oscillations in the original time series for the rate of labour force change, l_t,  we have to smooth it by MA(5). For the period after 1986, R²=0.82. Thus, the change in labor force has been driving the rate of unemployment in Spain. The negative coefficient implies that unemployment is Spain goes down when labor force starts to increase.

 Figure 1. Unemployment rate, u, and the rate of labor force change, l,  in Spain according to the definition introduced by the OECD.

Figure 2. Prediction of inflation by labor force. R²=0.82 for the period between 1986 and 2009.