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 financial crisis in Spain. He discusses the situation, where labor market and macroeconomic policies were largely inefficient in reducing high levels of (youth) unemployment after 2007. He rises the question why an increase in (youth) unemployment had been observed although the labor market becomes more flexible due to the associated structural reforms in 2010 and 2012. He calls this the Spanish Puzzle. The main reason for this observation can be found in the phenomena of downward nominal rigidity, the existence of a liquidity trap and pessimistic private expectations regarding future economic developments. Given the recovery of the Spanish economy in 2015, this development is grounded on (besides the increase in private consumption and a trade surplus) several policy interventions in order to strengthen entrepreneurial activity in 2013. The corresponding boost in private investment expenditure can be identified as the sustainable main driver for job creation in the long run.