A Tale of Two Neighbour Economies: Labour Market Dynamics in Spain and Portugal

Spain and Portugal are two neighbour economies which share many characteristics. Spanish unemployment is more than double Portuguese unemployment, however. In this chapter we resort to Structural Vector Autoregression (SVAR) techniques to ascertain which shocks and what propagation mechanism underlie the functioning of the labour markets in both countries. Our results show that price adjustment is more sticky and that real wage flexibility is higher in Portugal. In line with this evidence, we find that, although shocks hitting both economies since the beginning of the eighties were not too dissimilar, their effects on unemployment were much more long-lasting in Spain than in Portugal.