A tale of two neighbour economies: labour market dynamics in Portugal and Spain

Abstract

Portugal and Spain are two neighbour economies which share many characteristics. However, Spanish unemployment more than doubles Portuguese unemployment. In this chapter we resort to structural VAR techniques to ascertain which shocks and what propagation mechanism underlie the functioning of the labours markets in both countries. Our results show that price adjustment is more sticky and that real wage flexibility is higher in Portugal. In line with this evidence, we find that, although shocks hitting both economies since the beginning of the eighties were not too dissimilar, their effects on unemployment were much more long-lasting in Spain than in Portugal.