Abstract

This paper aims to investigate the evolution of the persistence of Spanish unemployment by embodying the output gap in a state-space model over the period of 1972-2015. While the adult unemployment rate is analyzed as the benchmark to explore the aggregate condition, with the use of the disaggregated data by age and gender we aim to further unveil the conceivable heterogeneity among the subgroups. Unlike the existing literature which identifies labor market rigidity as the triggering factor of high unemployment, we utilize the output gap extracted by the Kalman filter in order to discriminate between impacts originated from (demand side) shocks and labor market institutions. The time-varying parameter approach allowing for both abrupt and smooth structural changes of parameters facilitates to explore how unemployment persistence evolves over time in the country whose history is full of crises and labor market reforms. Our estimation results reveal that the presence of lags between the implementation of the policy and its influence on the economy and the interactions between the shocks has induced direction towards the gradual changes in Spain. Estimation results providing evidence in favor of hysteretic effects during the late 1970s and the early 1980s reveal a declining (rising) coefficient for lagged unemployment (output gap) in the subsequent years. Whereas abrupt changes of coefficients after 1984 and 1994 reforms coincided with the start of recovery phases, smooth transition of persistence coefficient after 2008 underlies different dynamics.

Key words: Unemployment persistence; Output gap; Time-varying parameters; Kalman filter; Spain. JEL Codes: C32, C51, E24, E65.

Article Language: EnglishTurkish