Unemployment : Spain Unemployment

By : Bianca Siregar

Grade: 11

Title of Article : Spain Jobless Rate Hits Record After Rajoy’s First Year

Source of Article : http://www.bloomberg.com/news/2013-01-24/spanish-jobless-rate-hits-record-after-rajoy-s-first-year.html

Date of Access : March 8th, 2013Date of Article Published : January 24th, 2013Date Commentary was written: March 9th, 2013

Word Count: 750 WordsSection of Syllabus Related: Macroeconomic Objectives 1

Spanish Jobless Rate Hits Record After Rajoy’s First YearBy Angeline Benoit - Jan 24, 2013 11:24 PM GMT+0700

Spanish unemployment rose to a record in the final quarter of 2012 as Prime Minister

Mariano Rajoy’s government imposed the deepest budget cuts in the country’s

democratic history.

The number of jobless approached 6 million people, or 26.02 percent, from 25.01

percent in the previous three months, the National Statistics Institute in Madrid said

today. That matched the median forecast of 10 economists surveyed by Bloomberg.

Spain is now home to a third of the euro region’s unemployed.

The jobless number rose as Rajoy marked his first anniversary in office. It is now the

highest since at least 1976, the year after dictator Francisco Franco’s death heralded

Spain’s transition to democracy. Some officials predict the slump that hit the euro area’s

fourth-largest economy in 2008 will extend into this year.

“The government expects unemployment to come down in 2013 but it seems too

optimistic given not only the weak economic activity we expect but also the usual lag

between activity and unemployment,” said Ricardo Santos, a euro-area economist at

BNP Paribas SA in London. “This will continue going forward given that the bulk of the

cuts in the public sector is yet to be made.”

INE data released today show that 259,000 unemployed people in the last quarter had

lost a position in the public sector up from 176,000 at the end of 2009.

IMF Forecast

Job destruction will probably continue until the end of the year, Spanish Deputy

Economy Minister Fernando Jimenez Latorre told reporters in Madrid today. The

worsening economic contraction and higher unemployment in the last quarter of 2012

are the result of “the concentration of a large part of the budget cuts approved to boost

income and cut spending, as tax on sales was raised and public sector employees’

year-end bonus scrapped.”

While budget cuts have a negative impact on output in the short term, they are

necessary to regain investors’ confidence, Latorre said. The improvement of Spain’s

funding conditions will eventually translate into better credit conditions for the private

sector, leading to an economic recovery along with an increase in exports, in the second

half, he said.

Economy Contracts

The International Monetary Fund yesterday cut its forecast for economic growth in

Spain this year, forecasting that gross domestic product will contract 1.5 percent after

previously predicting a drop of 1.4 percent.

The Bank of Spain said separately that the recession worsened in the fourth quarter due

to budget cuts. The central government and the regions started implementing Rajoy’s

fifth package of austerity measures in a year, including higher sales tax and cuts in

unemployment benefits, public-sector jobs and wages.

Meeting the European Union deficit target for 2013 will require “a very ambitious

additional fiscal effort,” the Bank of Spain said. The European Commission said this

week that Spain will probably miss its 2012 goal of 6.3 percent of GDP, and in 2013 it

sees the shortfall at 6 percent.

“The government’s forecast of a 0.5 percent contraction this year is already looking way

too optimistic,” Jonathan Loynes, chief European economist at Capital Economics Ltd.

in London, said by telephone. “We predict a 2.5 percent drop as the negative forces in

recent quarters, including a dreadful labor market, persist.”

Seat Jobs

Carmaker Seat may cut as many as 740 jobs affecting 400 temporary workers and 340

office employees, La Vanguardia reported this week. Other measures being considered

are reducing working hours and cutting wages to boost productivity amid adverse

conditions for sales, the newspaper said.

Rajoy has still won time among investors as a rally in securities of so-called peripheral

countries enables him to avoid seeking a full international bailout. Spain sold 7 billion

euros ($9.3 billion) of 10-year bonds via banks on Jan. 22.

“It is necessary to distinguish between the markets and the real economy, which

continues to be worrying,” Sara Balina, chief economist for Spain at Madrid-based

consultancy Analistas Financieros Internacionales, said in a telephone interview. AFI

forecasts an average unemployment rate of 27.3 percent this year. “More fiscal

consolidation efforts will have to be made and exports won’t make up for a deteriorating

domestic demand.”

Rajoy has requested the Spanish regions divide their combined deficit by five in the two

years through the end of 2013, even as education and health care represent over half of

their spending and the recession undermines tax receipts.

While Economy Minister Luis de Guindos this week ruled out additional budget cuts, the

government is working on an overhaul of public administrations that could further fuel

unemployment this year. Expansion newspaper said yesterday a draft law pares more

than 60 percent of local government jobs across Spain.

Commentary:The article tells us about unemployment in Spain which has rose and hits the record as the new Prime minister Mariano Rajoy’s government imposed the biggest budget cuts in the country’s democratic history. Spain’s economy sank into recession, therefore number of jobless has reached 6 million people, the rate increase 1.01 percent from 25.01 to 26.02 percent for the last three months. This has lead Spain to become the third of the euro region’s which unemployed.

Unemployment refers to people of working age who are actively looking for a job but who are not employed-(Tragakes). According to the article, unemployment is happened because of the government cuts budget in addition as we know in general the Euro Zone is still experiencing recession. Therefore, this is an example of cyclical unemployment. Cyclical unemployment occurs as the term suggests, occurs during the down turns of the business cycle, when the economy is in a recessionary gap. The downturn is seen as arising from declining or low aggregate demand (AD) and so also know as demand deficient unemployment -(Tragakes).

Low employment level in an economy is clearly the objectives of macroeconomics. However, according to the article the unemployment has hit its record (highest level),which means that the economic has not reach one of its objectives since labor forces are not fully used (inefficient). Economy of Spain is wasting scare resources by not using resource efficiently; market does not produced at its maximum potential level.

Figure 1 is showing the situation of employment is Spain. Since general economic decline “government impost the deepest budget cuts” this means there is a fall in Aggregate Demand leads to shift in AD1 to AD 2. The Aggregate Demand shift creates recessionary gap as the real output falls from Yp to Yrec. The recessionary gap indicating that the unemployment is greater than its natural rate, this will increase the Natural Rate of Employment in Spain (NRU).

To reduce the unemployment in a country, the government should increase Aggregate Demand. For example, government should increase its spending or increase export in order to increase injection in the economy; this will help to strengthen the weak economic activity.

According to the article, Lattore mentioned “the concentration of a large part of the budget cuts approved to boost income and cut spending, as tax on sales was raised and public sector employees’ year-end bonus scrapped. While budget cuts have a negative impact on output in the short term, they are necessary to regain investors’ confidence” From this statement we suggested that Spain government was cutting the budget in order to regain the investor’s confidence. However for Spain, this process will take time and there is high chance of possibilities that investors wouldn’t gain their confidence seeing the economic performance of Spain. It might not be possible to increase injection since Spain now is in huge amount of debt, the Euro zone is also in its recession.

For Government, in short run the cuts in budget might be a benefit for the Spain Government since now they will have more saving. However, in the long run, if the cuts in budget is unsuccessful in gaining investor confidence, government will experience more economic consequences due to increase in unemployment rate. Government will loss real output (real GDP), loss of tax revenue, increase cost to the government of unemployment benefits and also costs of dealing with social problems will result-(Tragakes).

For Spain labor force, the cut in budget will bring view disadvantage since now the unemployment has increased, unemployed workers will lost of income and make them worst off, in short run. In long run, if the cutting in budget will successfully gain the investor confidence new jobs field will be made and the unemployment labor force will be able to work again and once again will be able to gain income. However if its unsuccessful, labor force will also experience personal and social consequences, in long run this will leads to greater social problems such as increased crime and violence, drug use and homelessness- (Tragakes).

For the EU Economy, in short run the cutting budget had clearly worse off the economy, now Spain is sitting on the third country which is unemployed. In the long run, if cutting in budget will be successful on gain the investor confidence, EU Economy will slightly improve since Spain will increase its Aggregate Demand and lower the unemployment rate. If it’s going to be unsuccessful, undoubtedly EU economy will be worst off and fall into deeper recession.

Work Citied: Tragakes, Ellie. “Unemployment.” Economics for the IB Diploma. Cambridge: Cambridge UP, 2009. 265+. Print.