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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