Imbalance in the labour market and inflation during the Great Recession (2007-2014) in Spain

Abstract

In an effort to analyse the events during the Great Recession (GR) in the Spanish labour market, the authors have carried out a research by using a theoretical concept: the modified output gap. This concept, based on the Beveridge and Phillips curves, which are widely recognised in the economic field, was developed at the end of the last century in order to determine the relationship between the efficiency of the labour market adjustment, searching for a balance (to reduce unemployment), and inflation. This way, two basic elements are connected in order to determine the degree of macroeconomic stability achieved by a certain economy in a specific period of time.

This article contains the main conclusions of such research, not including its econometric data. These conclusions show the importance of the so-called modified output gap and from its analysis significant conclusions are obtained about the implementation of an economic incentive plan developed by Spanish government during the first years of the GR, revealing the positive explicit relationship between the vacancy rate and the rate of inflation. This shows that a loss of efficiency of labour market adjustment, along with the increased demand in goods and services markets, can result in a boost to inflation and this involves several macroeconomic consequences (losses in external competitiveness, among others).