Why are labor markets in Spain and Germany so different?

Abstract

The volatility of unemployment fluctuations has been about 3 times higher in Spain than in Germany over the recent business cycles (1996-2013). In contrast, fluctuations of the rate of wage inflation were significantly more volatile in Germany than in Spain. We estimate a New-Keynesian model and find several explanatory factors: wage rigidity has been higher in Spain, the labor force has been more elastic in Germany than in Spain, large and persistent shocks augmenting the labor force have been estimated for Spain whereas in Germany there have been substantial shocks reducing the intensity of hours per worker, and the ECB’s policy design brought monetary shocks with much greater influence to the Spanish unemployment.