IB Economics Internal assessment summary portfolio cover sheet

School code
002223
Name of school
The Sultans School
Candidate number
0028
Candidate name
Momina Amjad


Candidate name Momina Amjad
Candidate number 002223-0028
Teacher Paul Bird
Title of the article Spain unemployment hits record high on recession
fears
Source of article Huffington Post Business
Date the article was published 25
th
April 2013
Date the commentary was written 14
th
December 2013
Word count (750 words maximum) 747
Section of the syllabus
Please tick the one that is most
relevant

Section 1: Microeconomics

Section 2: Macroeconomics

Section 3: International economics

Section 4: Development economics

http://www.huffingtonpost.com/2013/04/25/spain-unemployment-hits-record-high_n_3153508.html
Date Accessed: 14
th
Dec 2013


Spain Unemployment Hits Record High
On Recession Fears
Reuters | By Paul Day Posted: 04/25/2013 7:50 am EDT | Updated: 04/26/2013 10:12 am EDT






MADRID, April 24 (Reuters) - More than six million Spaniards were out of work in the first
quarter of this year, raising the jobless rate in the euro zone's fourth biggest economy to 27.2
percent, the highest since records began in the 1970s.
The huge sums poured into the global financial system by major central banks have eased
bond market pressure on Spain, but the cuts Madrid has made in spending to regain investors'
confidence have left it deep in recession.
Unemployment - 6.2 million in the first quarter - has been rising for seven quarters and the
latest numbers will fuel a growing debate on whether to ease off on the budget austerity which
has dominated Europe's response to the debt crisis.
"These figures are worse than expected and highlight the serious situation of the Spanish
economy as well as the shocking decoupling between the real and the financial economy,"
strategist at Citi in Madrid Jose Luis Martinez said.
Jobseekers stand in line outside an employment office before
opening in Madrid, Spain, on Wednesday, April 3, 2013. Spain's
government is waiting for the result of negotiations with the European
Union on its budget deficit goals before deciding on its tax policy for
2014. Photographer: Angel Navarrete/Bloomberg via Getty Images


* Unemployment hits 27.2
percent in Q1
* Worse than expected
figure highlights market
decoupling
* Reforms aimed at boosting
economy due on Friday

http://www.huffingtonpost.com/2013/04/25/spain-unemployment-hits-record-high_n_3153508.html
Date Accessed: 14
th
Dec 2013

The collapse of a property boom driven by cheap credit has seen millions in the construction
sector laid off since 2009 and private service sector, worth almost half gross domestic
product, has followed as Spaniards tightened purse strings and investment plummeted.
The malaise has been made worse by billions of euros in state spending cuts and tax hikes to
reduce one of the euro zone's highest deficits and convince nervous markets Spain can control
its finances.
Spain and Italy's costs of borrowing hit their lowest in more than two years this week and EU
officials have begun to talk openly of easing up on deficit targets.
Prime Minister Mariano Rajoy said earlier this week that a new reform plan, to be announced
on Friday, would not include more austerity measures in an effort to calm increasingly
desperate Spaniards and reassure investors the country will soon be able to grow.
Protests have become commonplace across the country and thousands of police have been
drafted in to Madrid to handle a march on Parliament on Thursday.
But few believe the government's plans will be ambitious enough to restart the ailing economy
and create jobs. The International Monetary Fund sees Spanish unemployment at 26.5
percent next year.

Macroeconomics IA Candidate Number: 002223-0028
1

The article is about rising Spanish unemployment which hit a record high of 27.2% or 6.2 million
people in the first quarter of 2013. This means 27.2% of Spanish people of working age are
looking for work yet they cannot find it. This carries many social and economic costs; society
suffers from increased poverty, homelessness and higher rates of crime, and economically, Spain
is at a point within its production possibility curve due to loss of output. It is important to consider
the source of Spains unemployment to suggest any possible solutions for it.
According to the article, there is a growing debate about budget austerity which was the EUs
response to the 2008 financial crisis. Austerity measures involve spending cuts and tax increases;
i.e. a contractionary fiscal policy aimed at reducing aggregate demand (AD). It is evident that one
of the chief causes of Spanish unemployment is decreased demand; leading to demand-deficient
or cyclical unemployment. Tax increases cause consumers to spend less on goods and services,
triggering the firms to cut production and thus require less workers. Furthermore, there might
be reduced investment due to higher corporate taxes resulting in further fall in the demand of
labor. The diagram below illustrates demand-deficient unemployment:

Here, aggregate demand has fallen from ADL to ADL1. The previous equilibrium b shifts to the new
equilibrium c. This should mean that the real wage should fall from We to W1, but in reality that
doesnt happen. Average real wages in Spain and elsewhere are sticky downwards- real wage
may increase after some time but its very unlikely that it will decrease because firms dont want
to demotivate workers. Moreover, there is significant trade union power in Spain
1
that tries to
ensure that real wage doesnt drop. So the end result is that unemployment a-b is created. Since
wages dont drop, firms employ less people and workers are laid off.

1
Khler, Holm-Detlev and Jos Pablo Calleja Jimnez. Trade Unions in Spain: Organization, Environment,
Challenges. 2013. 17. E-book.
ADL ADL1
AS
A
v
e
r
a
g
e

r
e
a
l

w
a
g
e

r
a
t
e

Number of workers
Q1 Qe
We
W1
c
a b
0
Spanish labor market
Macroeconomics IA Candidate Number: 002223-0028
2

Spain also suffers from other types of unemployment. The article mentions millions in the
construction sector laid off since 2009 due to the collapse of the property boom. This signifies
structural unemployment in Spain; there is a permanent fall in the demand for construction
workers. This becomes problematic when workers dont have skills to do the jobs that are
required in the economy and lack occupational mobility. Prolonged demand-deficient
unemployment, as is the case in Spain, also leads to structural unemployment. Often new forms
of labor are required when the economy picks up for the changing economic climate. Although
not stated in the article, Spain also suffers from significant seasonal unemployment due to its
tourism sector being most active during the summer, after which many young people become
unemployed
2
.
The solutions to Spains unemployment are diverse and complex due to there being various
unemployment types. Demand-deficient unemployment can be solved by increasing aggregate
demand via expansionary fiscal and monetary policies. Lower taxes and lower interest rates
would urge consumers to spend more and save less, thereby increasing consumption; it would
also promote investment, both increasing the aggregate demand level. However, this demand
side policy is only a short term solution and is not necessarily guaranteed to work due to low
consumer or business confidence in a difficult economic climate.
Structural and seasonal unemployment require reshaping of the entire labor market, which is
much harder to achieve. This is a long term supply-side solution wherein the LRAS curve shifts to
the right or the production possibility curve moves outwards. This involves training the workforce
to be more occupationally flexible so that workers can change jobs easily. Apprenticeship
programs that train the youth to adapt to changing economic conditions are required. Retraining
programs for adults that reskill them in jobs other than construction are also important because
it decreases Spains dependence on the construction sector. The government can also subsidize
firms that provide training for their workers. However, all of these policies have a high
opportunity cost- Spain has to forego spending in other areas to be able to afford these
strategies, and they are only effective in the long run. The public may get impatient if it doesnt
see rapid results.
In conclusion, Spain suffers from demand-deficient, structural and seasonal unemployment and
their solutions lie in expansionary fiscal and monetary policies and supply-side policies
respectively. Although the solutions might initiate new issues, if Spain does not tackle its
unemployment problem in time, there will be political unrest- as the growing protests in the
article indicate- which will become very problematic for Spain.

2
Burgen, Stephen. "Spain youth unemployment reaches record 56.1%." the Guardian, 2013. Web. 14 Dec 2013.
http://www.theguardian.com/business/2013/aug/30/spain-youth-unemployment-record-high
Word Count: 747



Bibliography
Burgen, Stephen. "Spain youth unemployment reaches record 56.1%." the Guardian, 2013. Web.
14 Dec 2013. http://www.theguardian.com/business/2013/aug/30/spain-youth-
unemployment-record-high
Khler, Holm-Detlev and Jos Pablo Calleja Jimnez. Trade Unions in Spain: Organization,
Environment, Challenges. 2013. 17. E-book.