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Unemployment in Spain: The failure of wage devaluation

Published online by Cambridge University Press:  01 January 2023

Paloma Villanueva Open the ORCID record for Paloma Villanueva [Opens in a new window]  and
Luis Cárdenas Open the ORCID record for Luis Cárdenas [Opens in a new window]
Paloma Villanueva*
Affiliation:
Complutense Institute for International Studies and Complutense University of Madrid, Spain
Luis Cárdenas
Affiliation:
Complutense Institute for International Studies and Complutense University of Madrid, Spain
*
Paloma Villanueva, Complutense Institute for International Studies, Complutense University of Madrid, Finca Mas Ferré, Edificio A, Campus de Somosaguas entrada 3, 28223 Pozuelo de Alarcón, Spain. Email: pvillanuevacortes@ucm.es
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Abstract

This article analyses from a Keynesian approach the effect of wage devaluation on the Spanish labour market during the Great Recession post-2008. It challenges the pro-flexibility literature, which attributes to labour relations reforms the prevention of larger job destruction in the recession and a larger reduction in unemployment during the subsequent expansion. Instead, we examine the role of wage devaluation in the operation of Okun’s law and gross domestic product, using an extended version of the Bhaduri–Marglin model. We find that wage devaluation has not significantly modified Okun’s law and that through its impact on income distribution, the unemployment rate rose by 1.9 percentage points. We therefore provide evidence for the negative effect of wage devaluation on gross domestic product and the positive effect on the unemployment rate.

Keywords

C22E11E24Bhaduri–Marglinlabour marketSpanish economywage devaluation
Type
Original Articles
Information
The Economic and Labour Relations Review , Volume 32 , Issue 4 , December 2021 , pp. 552 - 574
Copyright
Copyright © The Author(s) 2021

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