Do Labor Reforms in Spain Have an Effect on the Equilibrium Unemployment Rate?

Abstract

In this paper, we analyze the impact of several labor reforms in Spain on its equilibrium unemployment rate. To this end, we analyzed the behavior of the observed unemployment rate in Spain during the 1976-2012 period, thereby assessing whether that rate is better characterized as a hysteresis process or, on the contrary, as a stationary process with fluctuations around an equilibrium unemployment rate (NAIRU). In order to achieve this aim, we employed unit root contrasts with structural change. Similarly, in order to calculate the equilibrium unemployment rate, we applied the methodology of multiple structural changes proposed by Bai & Perron (1998, 2003a). This method allows the estimation of breaking dates and the values of unemployment rates for each of the selected regimes. Lastly, we compare the direction in the changes of the equilibrium unemployment rate, as well as the dates of those breaking points, with the dates in which different labor reforms were enacted in Spain. This will allow us to determine whether those reforms had any effect on the Spanish labor market. The obtained results suggest that only the reforms of 1980, 1997 and 2006 had some influence on the equilibrium unemployment rate level in combination with changes in inflation and sectorial employment structure.