Labour Market Flexibility and Regional Unemployment Rate Dynamics: Spain (1980-1995)

substantial impact on the trajectory of the unemployment rate. Altough benefits, taxes,
and competitiveness influence the unemployment rate, their role is less important. Had
these variables remained at their 1985 levels, the resulting unemployment rate would
not have been much different than the actual one in both groups of regions. On the
contrary, had the capital stock remained at the (low) value of 1985 (in other words,
had the economy not engaged in a strong investment process during the second half of
the eighties) the uneployment rate would have been much higher, especially in the high
unemployment group of regions.

Our results are in line with the work of Henry et al (2000) for the UK. They show
that over the 1964-1997 period the NRU was reasonably stable (around 4%), and the
long swings in unemployment were due to prolonged after-effects of transitory but long-
lasting shocks: the oil price shocks of the 70’s and the slowdown of investment in the
90’s. These results are clearly against a conventional wisdom which claims that changes
in unemployment are mainly caused by changes in the NRU, commonly due to changes
in taxes and benefits.

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