The significant issue in this article is that in Spain, unemployment rate is high because of recession in Europe. Spain has the second highest in the eurozone trailing greece. Greece now has the highest unemployment rate and Spain is now already 26.02 percent.
Unemployment refers to the people that are considered in the working age or labour force that are actively looking for jobs but are not employed. According to the article, there are already almost 6 million people that doesn’t have any jobs. The unemployment rate of spain is now 26.02% meaning around 2.6 people out of 10 people will be unemployed. This unemployment is caused because there is a recession in the Spain economy. Recession is the period of time where there is a sustained decrease in the general price level.
As you can see in the Neo Classical model in figure 1, the current real GDP of Spain would be lower than the LRAS. This will cause the recessionary gap or the deflationary gap from Ye to the LRAS. When the economy is on the LRAS, that means that the economy is putting its full potential without any unemployment excluding the natural rate of unemployment. Natural rate of unemployment are structural, frictional, and seasonal unemployment. When the economy is on its full potential, that means that the unemployment in the country is equal to the natural rate of unemployment. If the unemployment is bigger than that, then that means that the economy is not going on its full potential which is visible on the Neo classical model graph as the LRAS. In the graph, you can see that the deflationary gap is the cyclical unemployment. Cyclical unemployment is the unemployment caused by the recession. So the recessionary gap will be the cyclical unemployment.
Now in figure 2, there is a decrease in the AD. In the graph the AD moves to the new AD curve in AD1. There is a decrease in the AD because the consumer consumption decreases. This causes the real GDP of Spain to decrease. This will then cause recession in Spain’s economy because as you can see when the AD shifts to the left, the average price level changes from P to P1. Recession is again the sustained decrease of the average price level which is in this case a decrease from P to P1. When Spain’s economy is already in recession but then goes into an even deeper recession, the recessionary gap of the graph now extends even more because the new economy is now further from the LRAS. This will also mean that the cyclical unemployment will also increase as the recessionary gap increases.
In this graph of labour vs wage graph in figure 3, we can see that there is a decrease in ADL from ADL to ADL1 because in recession, firms will demand less workers because their business is not doing well. Then the ASL will also decrease to ASL1. Now you can see that the NRU also increases to NRU1.
So because of the recession happening in Spain, then the workers will get affected as they cannot find jobs anymore. They will have difficulties finding work as firms are not demanding them as much as before. Even if they have a job, firms will most likely pay less wages. Firms are also affected because their business is not doing will, they cannot have enough money to hire workers but to cut off workers or lower the wages. When they have less workers, that means that production will also be less. In the long-run, firms will have to find a replacement for labour like technology and then find workers that are skilled to operate these technologies. Then there will be new jobs available for people. Another stakeholder that can be affected are other firms from outside the country that sells their products to Spain but then they don’t have enough money to buy as much quantity as they usually do and therefore affecting the imports of Spain.
Here the AD will automatically shift back to the LRAS, then the rate of unemployment will go down; but keynesian economists doesn’t believe the economy going to the LRAS automatically. But if the economy doesn’t go back to the economy and the real GDP stays low, then there will be a lot of people that will still be jobless. People will either move out or the country will bankrupt.