On the Efficiency of Labor Market Reforms: How to Solve the Spanish Puzzle?

In  this  paper  the  author  sheds  light  on  the  relationship  between  labor  market  policy,entrepreneurship and youth unemployment prior to and in the aftermath of the global financialcrisis in Spain. He discusses the situation, where labor  market and macroeconomic policieswere  largely  inefficient  in  reducing  high  levels  of  (youth)  unemployment  after  2007.  Herises  the  question  why  an  increase  in  (youth)  unemployment  had  been  observed  althoughthe  labor  market  becomes  more  flexible  due  to  the  associated  structural  reforms  in  2010and  2012.  He  calls  this  the  Spanish  Puzzle.  The  main  reason  for  this  observation  can  befound in the phenomena of downward nominal rigidity, the existence of a liquidity trap andpessimistic private expectations regarding future economic developments. Given the recoveryof  the  Spanish  economy  in  2015,  this  development  is  grounded  on  (besides  the  increase  inprivate consumption and a trade surplus) several policy interventions in order to strengthenentrepreneurial activity in 2013. The corresponding boost in private investment expenditurecan be identified as the sustainable main driver for job creation in the long run

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