{"id":21884,"date":"2012-11-29T19:05:10","date_gmt":"2012-11-29T09:05:10","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=21884"},"modified":"2012-11-29T19:05:10","modified_gmt":"2012-11-29T09:05:10","slug":"differences-on-the-eurozone-periphery","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=21884","title":{"rendered":"Differences on the Eurozone periphery"},"content":{"rendered":"

\t\t\t\tThis will be one of those blogs that lays out what a researcher does in a day as opposed from the blogs I write that use what I do in a day as an evidence base for advocacy. The former type of blog is based on data digging and observing some interesting patterns. In the current context, the “digging” is not finished and so the story presented is incomplete. But if you have a penchant for statistics and data patterns like me, then you will find the following story interesting. This work is part of a larger work I am pursuing that considers the question of cyclical labour market adjustments. That will become a completed book in a few years (there are others in the queue ahead). But today I was examining the relative responses of real GDP and employment over the course of the economic cycle and some interesting patterns certainly emerged. What we find, among other things, is that the Eurozone nations on the periphery have behaved quite differently to each other over the crisis (and prior to the collapse).
\n<\/p>\n

Consider the following graph (which is in fact a series of graphs). They use the IMF annual – World Economic Outlook<\/a> – database (most recent release October 2012) and show real GDP and total employment (indexed to 100 at 2007). The peak of the previous economic cycle varied across the sample with some peaking in 2008. But the choice of 2007 as the index base doesn’t alter the story at all.<\/p>\n

Real GDP is blue and employment is red. I created a common vertical axis scale on all graphs to allow readers a chance to better appreciate the amplitude of the recession impacts in each nation. In effect, Australia distorts the sample (if I excluded Australia then the maximum value of 105 on the indexes would have contained all the other nations adequately).<\/p>\n

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<\/div>\n

While there is a lot to talk about in these graphs, several things really stand out, which require further discussion.<\/p>\n

First, Australia is in a world of its own in this sample of Eurozone (foreign currency users) and major currency using nations. I could have included other nations but the graph would have become too large and essentially not a lot would have been added at this stage.<\/p>\n

Australia avoided the recession (officially) despite experiencing a slowdown because it introduced a major fiscal stimulus in late 2008 and early 2009, centred on cash handouts (in the first of the packages) and then public infrastructure spending (second package). This intervention allowed key sectors, which normally crash in a downturn (such as construction) to continue growing.<\/p>\n

Second, several nations experienced increasing labour productivity (measured in persons employed) in the lead up to the crisis – employment index growing more slowly than the real output index. Only Italy, Spain and Portugal did not enjoy this status.<\/p>\n

Third, excluding Australia, there are three broad behaviours after the crisis hit. For Finland, France, Germany, Italy (to some extent), the UK, and at a push, the US, real GDP fell sharply but the employment decline was less severe (and for Germany didn’t happen).<\/p>\n

For Greece, both the real GDP and<\/strong> the employment collapse has been very severe. The real GDP index from 2007 to 2011 fell from 100 to 81.6\twhile the employment index fell from 100 to 83.2. That means the Greek economy (and its labour market) has contracted by nearly a 20 per cent so far and there is no end in sight to that decline.<\/p>\n

The so-called bailout agreement sealed earlier this week will not help and already it is clear that the Greek economy will continue to unravel despite the drivel from the Government about it being a new dawn, a new day, a new beginning for the nation. I will write about that problems with that package another day.<\/p>\n

Then we have Ireland and Spain as the third distinctive grouping. Relative to Greece, the collapse in real GDP has not been as severe for these two nations. The real GDP index fell from 100 in 2007 to 95.7 for Spain and 93.5 for Ireland. A substantial contraction to be sure (and no end in sight) but much less severe when compared to the near 20 per cent contraction in the size of the Greek economy.<\/p>\n

But in terms of employment, the behaviour depicted in the three nations is similar. The employment index fell from 100 in 2007 to 83.2 for Greece (2011), 85 for Spain, and 84.6 for Ireland. So roughly between 16 per cent and 18 per cent contraction in the labour market, which is a huge collapse by any measure.<\/p>\n

So why has employment fell so much in Spain and Ireland when the overall contraction in the economy was smaller than it was for Greece? Researchers love these sort of puzzles.<\/p>\n

In this case, the answer is not very far away though.<\/p>\n

The next Table is constructed using OECD Short-Term Labour Market Statistics – quarterly employment by industry data. The table presents the annualised proportion of employment by broad sector – Construction, Industry excluding construction, Manufacturing and Services – in total employment for 2007 and 2011 (per cent).<\/p>\n

A striking result is that for Spain and Ireland, the growth in the construction sector associated with their real estate bubbles was significant. In Ireland’ case, the relative importance of the construction sector rose in the years leading up to the crisis. It was around 12.6 per cent of total employment in 2005 and rose to a peak of around 14 per cent in 2007 and then collapsed to 5.9 per cent of total employment by 2011. In the case of Spain, the relative growth of the construction sector was similar, going from 12.4 per cent in 2005 to a peak of around 13.3 per cent in 2007 and then collapsing to 7.7 per cent of total employment by 2011.<\/p>\n

That behaviour sets these two nations apart and helps explain why the collapse in employment has been so severe. It is likely that if the respective governments had have intervened early in the crisis and sustained employment growth (via fiscal stimulus) then the private debt insolvencies would not have been a severe and the real estate boom would have come to a less severe end.<\/p>\n

The spectacular rise of the construction sector in the period leading up to the crisis in Spain and Ireland also highlights the gross lack of oversight that their respective governments had on the financial sector.<\/p>\n

\"\"<\/a><\/p>\n

<\/div>\n

Construction is typically a highly pro-cyclical industry and is one of the leading indicators of where the economic cycle is heading. That is, it starts to contract before the other sectors in the economy start to go into the slowdown. This is because housing starts fall and business investment in buildings contracts before the rest of the economy contracts.<\/p>\n

So Spain and Ireland were very exposed by the ridiculous absolute and relative growth in its construction sectors prior to the crisis.<\/p>\n

The collapse of the construction sectors in Spain and Ireland is also to be compared to what happened in Australia, where a similar real estate boom was experienced in the period leading up to the crisis, although our property bubble was already slowing by 2004-05.<\/p>\n

As noted above, the construction sector in Australia started to contract in early 2008 consistent with the impending recessionary forces. But the fiscal stimulus, targetting large public infrastructure projects stopped that normal behaviour and was a significant factor in warding off a recession in Australia.<\/p>\n

No such opportunities were given to the Spanish and Irish construction sector given that the EU elites forced austerity on to the ailing economies. Things would have been much less severe had the Troika not formed and had the EU disregarded their contractionary-biased Stability and Growth Pact fiscal rules.<\/p>\n

The following graph shows the OECD measure of underemployment (share of involuntary part-timers in labour force) for Greece, Ireland and Spain from 2000 to 2011. Spain stands out. It has been one of the few European nations to follow the Anglo trend in casualising its labour market.<\/p>\n

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<\/div>\n

Related data from the OECD, which I haven’t time to publish today, shows that this increased underemployment in Spain in the period leading up to the crisis was accompanied by a significant shift in the way the labour market was organised.<\/p>\n

Spanish workers are increasingly forced to work under temporary contracts (some 32 per cent of total employment by 2007 according to the OECD data). For Greece the corresponding proportion was around 10 per cent.<\/p>\n

These temporary contracts have made it easier for Spanish firms to reduce their workforces. So for other Europe as a whole, firms sought other labour market adjustment options (shorter-hours, shorter-weeks) as well as shedding employment. But for Spain, it was easier for firms to adjust to the contraction in aggregate demand by sacking workers.<\/p>\n

The data shows that the bulk of the job losses between 2007 and 2012 have been endured by temporary workers in Spain. So not only were Spanish workers becoming increasingly disadvantaged in the growth period prior to the collapse but once the economy moved into recession their lack of job security meant they were in the front-line of the contraction. A double-whammy.<\/p>\n

The trend to increased underemployment and rising casualisation in Ireland is post-crisis and in that sense the comparison between Ireland and Spain, pre-crisis does not hold. But what it means is that Irish workers (and workers generally) are being disproportionately forced to endure the costs of the recession and the failed government policies.<\/p>\n

Conclusion<\/strong><\/p>\n

In all recessions, it is the lower ends of the labour market – the precarious workers with low pay and less skill – that bear the brunt of the adjustment. That is not any different this time around.<\/p>\n

Usually, the losses in the downturn given way to a return to previously held working conditions when the economy returns to growth. So while the losses in the downturn in the form of unemployment and the accompanying lost income are permanent, the workers get back on track once employment growth resumes.<\/p>\n

However, the imposition of fiscal austerity in many nations in the current crisis will ensure not only that the current losses are enormous but that the working conditions previously enjoyed will be lost forever. Years (decades) of hard-won gains by the workers are evaporating in the cause of austerity.<\/p>\n

There is no surprise. The neo-liberals have used the prolonged crisis to re-assert their program of wealth and income transference to the elites and to put the last nail in the welfare state coffin. That is their agenda and all the financial gobbledegook – about impending insolvency and bond market revolts – is just a smokescreen for their more venal ambitions.<\/p>\n

That is enough for today!<\/p>\n

(c) Copyright 2012 Bill Mitchell. All Rights Reserved. <\/p>\n","protected":false},"excerpt":{"rendered":"

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