'Actual' versus 'virtual' employment in Europe : is Spain different?

Abstract

We study the evolution of sectoral employment and labor cost in eleven European countries in the last two decades. Our statistical approach consists in decomposing for country, industry and temporal effects. Virtual economies are constructed by filtering country effects. We find that sectoral effects account for more than 80% of the long-run differentials across countries and industries in employment growth, whereas country-specific effects are more important ill the analysis of labor cost dynamics. The initial distribution of labor across sectors plays a crucial role in explaining cross-country differences on employment. We pay special attention to Spain, the country that has experienced a higher persistent unemployment rate, and show that this can be the effect of a severe problem of sectoral reallocation, originating from the very high weight of the agricultural employment in 1975. Our study of the virtual economies also provides new evidence about the relative performance of some industries and/or countries, e.g., the poor performance of Belgium, the relatively good performance of Italy, in particular its textile sector, etc.