LAGGED ADJUSTMENT PROCESSES AND THE NATURAL RATE IN SPAIN: A COMPARISON WITH PORTUGAL
This paper provides new evidence on the recent evolution of the unemployment rate in Spain. Specifically, we interpret the movements of the unemployment rate under the Chain Reaction Theory, whereby unemployment is viewed as the outcome of the interplay of a series of lagged adjustment processes in the labour market with persistent shocks, such that the unemployment needs a certain span of time to endogeneize the effects of such shocks. We show that persistent shocks make the actual Spanish unemployment rate depart from its natural level for prolonged periods of time. Portugal, on the contrary, shows greater labour market flexibility, which allows for faster adjustment, and hence, lower unemployment persistence.
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