Multiple equilibria in Spanish unemployment

The dynamics of Spanish unemployment in the last thirty years has been characterized by a high and persistent unemployment period (from 1982 to 1999) and by two transition periods, one of massive employment destruction (from 1972 to 1982) and one of massive employment creation (from 1999 to 2007). After that, unemployment has raised again. This behavior is well captured by a non-linear smooth transition autoregressive (STAR) model and our analysis indicates the existence of two regimes with a fast transition between them: a high regime with an equilibrium value of unemployment of 18.3% and a low regime with a equilibrium value of 7.6%.

Research Highlights▶ The analysis indicates that a non-linear smooth transition autoregressive (STAR) model is well suited to describe the behavior of the Spanish unemployment in the last thirty years. ▶ We find evidence of two equilibria and a fast transition between them (the high regime has an equilibrium value of unemployment of 18.3% and the low regime an equilibrium value of 7.6%). ▶ The effect of a negative shock is greater than the effect of a positive shock of the same magnitude, i.e. unemployment increases faster when the economy is hit by negative shocks rather than it decreases when positive shocks occur. ▶ Small shocks (either positive or negative) are absorbed faster than larger shocks. ▶ The nonlinear model outperforms a linear counterpart in terms of prediction.