Internal devaluation in Spain and unemployment

By Luis Arroyo, in Madrid | I give you today a couple of graphics, which measure how the process of internal devaluation is going in that peripheral crown, Spain. First, the industry labour costs (wages, red line) and producer prices. Then, industrial production. Everything in annual variations.

As readers can see, the boom years were not quite as buoyant in terms of industrial production. Meanwhile, wages were well above the prices, at 4%, trimming production margins. It is a reflection of the brick-and-morter boom, which revitalised wages and sturdy houses while diverting resources from other sectors.

When the financial implosion and the consequent recession, with industrial production falling by 20%, wages rose no less than 5%. That, economically, was pure nonsense, whichever way you consider it. In the short-lived recovery, wages always grew more than industrial prices.

Now production falls at rates of 5% per year. For the first time, prices have risen faster than wage costs.

The internal devaluation is an adjustment of costs to competitive levels. For a product to be competitive export, price-cost margins should be sustainable because you lose productive capacity, otherwise: the industrial structures end up destroyed.

So far the internal devaluation adjustment has been by means of large numbers of dismissals. Meanwhile, wages have continued with their positive increases over prices. This reflects the correlation of forces unions/companies in a context of depression, of vanishing demand.

It seems we haven’t come a long way. Now, the industrial production is in recession and further declines approach.

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