The Legacy of the Crisis: The Spanish Labour Market in the Aftermath of the Great Recession

Marcel Jansen y Sergi Jiménez-Martín

Non-technical Summary

In this first report of New Skills at Work we focus our attention on the employment prospects of the jobless in Spain. The report analyzes the profiles of the unemployed and evaluates their job finding probabilities using basic econometric techniques. Our main objective is to identify the most vulnerable groups and to call for effective measures to minimize the risk of social and economic exclusion.

The report is motivated by concerns over the unprecedented rise in long-term unemployment during the crisis. Long-term unemployment is a concern in many countries, but our analysis unveils several aggravating factors that turn it into a policy priority in Spain.

The analysis is divided in three parts. The first part of the report offers descriptive evidence on the legacy of the crisis. It documents the incidence of unemployment by age, education, gender and duration and offers a comparison between Spain and the rest of the countries of the OECD. The reported evidence indicates that long-term unemployment is more pervasive and entrenched than elsewhere in the OECD. Fourteen percent of the civilian labour force is unemployed for more than a year and out of this group almost seventy percent is unemployed for more than two years. Moreover, we document a strong concentration of the longest unemployment spells among disadvantaged groups such as workers from the construction sector, the low-educated and older workers above fifty. In the second part of the report, we proceed with a formal econometric analysis to determine the relative importance of workers’ characteristics and the duration of unemployment for the observed job finding probabilities between 2007 and 2015. Finally, in the last part of the report we use longitudinal Social Security data to study the cumulative effects of the crisis for selected groups of workers.

Our results indicate that the high incidence of long-term unemployment cannot be attributed to a single cause. There are problems on both the demand and the supply side of the labour market that require a different policy response. A clear indication of the adverse effects of a lack in labour demand is the strong negative impact of unemployment duration on the subsequent job finding probabilities of the affected workers, a phenomenon known as negative duration dependence. Controlling for workers’ characteristics, we find that an unemployment spell of two or more years is associated with a 13 percentage point drop in the quarterly job finding probability. This drop is twice as large as the absolute difference in the corresponding job finding rates of university graduates and high-school dropouts.

Several factors may explain the occurrence of negative duration dependence. The skills of unemployed workers may depreciate over time or the unemployed may reduce the intensity of their search as they fail to encounter a job. Moreover, employers may have a preference for workers with recent work experience. All these factors help to explain how a protracted reduction in labour demand may turn into a chronic problem due to the buildup of a large stock of long-term unemployed whose job finding probabilities are falling over time. On the contrary, for the most vulnerable groups with the longest spells, mostly older and low-educated persons and workers from the construction sector, the causality runs predominantly in the opposite direction. Their low job finding probabilities are mainly explained by personal characteristics rather than duration, pointing to problems on the supply side of the labour market. This observation is important because the optimal policy response is radically different depending on whether long-term unemployment is the outcome of duration dependence, skill mismatch or the age profile of the unemployed. In the case of pure duration dependence targeted hiring subsidies may produce good results. On the contrary, the reinsertion of the most vulnerable groups of long-term unemployed requires intensive assistance from the public employment services that often involves some form of training.

Finally, the third part of the report offers evidence on the cumulative losses of displaced workers. It illustrates the enormous difficulty for the displaced workers to rebuild their working careers. The persons in our sample who were unemployed at the end of the first recession in October 2010 still suffered unemployment rates over 75% at the end of 2014, and in this four-year period they managed to work on average less than 20% of the time. Moreover, they receive lower wages and are much less likely to hold a permanent contract than the workers who managed to keep their job during the first recession.

Our overall conclusion is that the combination of pervasive long-term unemployment, low outflow rates and ill-equipped Public Employment Services create a substantial risk of social and economic exclusion. The job finding probabilities of the most vulnerable groups are stuck at an exceptionally low level since the end of 2011 and many of these workers may lose the connection to the labour market before the recovery is completed. To revert this situation, Spain will have to step up its effort to improve its active labour market policies. The concluding section of the report identifies the main priorities and stresses the need of a profound reform of the Public Employment Services.

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