Labor Flexibility, Inequality, and Financial Crisis

The most striking feature of the current economic situation in Spain is the huge unemployment rate, above 25 percent. From an orthodox perspective, we suggest that this unemployment is the result of a highly inflexible labor market, which needs to be reformed by introducing flexibility measures. The paper argues, however, that labor market reforms introduced since the early 1980s, allowing an excessive use of temporary employment contracts, have had perverse effects on the Spanish economy. They have affected negatively not only aggregate demand and supply, but also income distribution. The emergence of these market reforms helps explain the current rate of unemployment as well as the deep impact of the global financial crisis on overall Spanish economic activity.