On the persistence of Spanish unemployment rates

This paper tests the hysteresis hypothesis for the unemployment rate of the Spanish regions over the period 1976-2004. For that purpose, we employ a large battery of recently developed panel tests which explicitly control for cross-sectional correlation in addition to the panel stationarity test of Carrion-i-Silvestre et al. (Econom J 8:159-175, 2005) which allows for multiple structural breaks and cross-sectional dependence. Overall, our confirmatory analysis with three different proxies for the excess of labour supply renders strong support for the hysteresis hypothesis in regional Spanish unemployment. The results are robust across panel techniques and datasets and accord well with the common belief among scholars that attaches a high degree of persistence to Spanish unemployment due to labour market malfunctioning. We provide a detailed description of the clusters of breaks identified in the analysis, which appear to be closely associated with some macroeconomic shocks and institutional arrangements.