Spain’s Persistent Problem

The fifth largest economy in the EU is currently suffering the highest level of unemployment in the developed world. A staggering 20.6% of the Spanish working population is jobless, or nearly 5 million people (compare that with 3 million jobless in Germany which has a population twice the size). However, the absolute level of Spanish unemployment is not the only problem; its persistence is equally worrying.

Historically, we observe that the US jobless rate (blue line) seems to continually return to a base level of 4-5% whereas the EU rate (black line) and especially the Spanish rate (red line) do not exhibit this tendency. In other words, Spaniards must face the likelihood that high unemployment is going to stick around for a while.

Why should there be such a dramatic discrepancy between two highly developed countries such as Spain and the USA? There are many proposed explanations, ranging from labour market malfunctions to cultural differences. However, there is one theoretical explanation which I find particularly appealing and intuitive. It has to do with Employment Protection Legislation (EPL). The role of EPL is to prevent unfair practices in the hiring and firing of employees and consequently represents a barrier (or cost) to firms in changing their level of labour employment. The theory is that these costs are sufficient to discourage firms from terminating contracts but also from taking on new ones (since they expect it is a decision which will not be easily reversible). So as a result of strict EPL, employment levels do not adjust easily, temporary shocks have long term effects and unemployment becomes a very persistent problem. Where does Spain rank on the spectrum of EPL strictness?

Although this model makes no predictions regarding the absolute level of unemployment I find it to be a compelling example of the way in which over-regulation can clog up markets and well-meaning legislators can exacerbate the problems they are looking to solve.

There's an interesting animation that shows how the unemployment figures are rising in the USA at: http://www.latoyaegwuekwe.com/geographyofarecession.html

Post written by Stephen Devlin - 3rd year MA (Hons) Economics

Suspicious Economics

Do you have trust issues? Well, as an economist you certainly should! The validity of every theory and statement should be checked and verified before you can use it as your source or let it influence your personal opinion. And the recent article that I read in the Financial Times highlights this issue.

The article defends Gordon Brown’s decision of “selling off national silver (gold)” between 1999 and 2002, underplaying potential gains which could have been realized if UK gold was sold at a later date. However, it is not the actual content of the argument but the following discussion by the readers that drew my attention. Almost every single comment disagreed with the article and pointed out to other important issues that needed to be looked at. Overall the comments provide you with much more diversified information than the article itself, thus representing a less biased view of the issue. This allows us, students, to look at an issue from different perspectives, which is crucial for the study of economics.

Despite the fact that the columnist represented a highly biased view in well-respected newspaper-Financial Times, it is important to note that it is purely his opinion. FT columnists are free to express their opinions on economic issues, even if some may not necessarily agree with it. Economics allows almost every question could be answered with “It depends...” However, us as students (due to the lack of expertise) rely heavily on opinions of established economists, and if those opinions are not questioned properly they might be misleading. So even in such quantitative subject as economics different subjective opinions must be considered before you can make your own judgement.

However, the extent to which economics can be “subjective” is debatable. Expressed opinions of some people might have the power to move markets and manipulate animal spirits of the investor. For example, in the midst of the recent financial crisis leading rating agencies attempted to shed their responsibility for ignoring potential threats from overrated CDOs by emphasizing that their ratings merely represents their opinion and should not be solely used for making important financial decision.

If you are interested in reading the article and the following heated debate, follow the link: http://on.ft.com/kAhovE

Written by Daria Rusanova - 3rd year MA (Hons) Economics and Economic History

Shanghai Securities News

I am proud to share the news that some of us at the School of Economics are becoming regular contributors to China's leading financial newspaper: Shanghai Securities News.

In March, Stuart Sayer and Kohei Kawamura gave valuable viewpoints in an article about the effect of the earthquake on the Japanese economy (see http://finance.qq.com/a/20110321/001615.htm).

Today Angela Nolte and Stuart joined three other experts in discussing the European debt crisis in an article entitled "The European Sovereign Debt Crisis in EU: How about the future of monetary union" (see: http://money.cnstock.com/waihui/mrzxbd/201105/1283749.htm).

You might want to try using Google Translate, unless your Chinese is very good, and interestingly, Stuart's name translates as Stuart Tesar Jersey for some reason.