Tuesday, July 06, 2010

Canadian Myths About Spanish Employment

Stephen Gordon at "the Worthwhile Canadian Initiative" blames the disproportionate job losses in Spain compared to the allegedly smaller differences in job losses between different American states, on the lack of fiscal federalism or alternatively monetary nationalism (the existence of national currencies).

First of all, Gordon's use of Fed districts are arguably misleading. If we look at data on the American state level you can see even bigger differences than between Euro area states. For example between May 2007 and May 2010, Nevada saw a 14% drop in employment while North Dakota saw an increase in employment by nearly 4% during the same period. Does that mean that Nevada should be sorry for having the U.S. dollar as currency instead of a "Nevada dollar"?

Secondly, I have discussed the Spanish situation before, and as I pointed out then, contrary to popular myth the drop in output has in fact not been bigger than in the rest of the euro area.

Why then has employment fallen more in Spain than in the rest of the euro area? Well, because output per worker has increased more. There are in turn two main explanations for that obvious accounting identity truth. One that I discussed in the previous post: namely that during the boom a lot of immigrants with low productivity got jobs in Spain, something which contributed to a much stronger increase in employment than in output during the boom years. When the crisis came, these low productive immigrant workers lost their jobs first, something which meant a bigger drop in employment than in output.

The other reason for why output per worker has been stronger in Spain than elsewhere is that some other countries , most notably Germany, has paid companies to reduce working hours per employee rather than reduce the number of employees when demand falls. Regardless of what you think of the merits of this policy, it is not related to the issue of monetary unions. By contrast, Spain has not pursued such a policy.