Unemployment as a constraint on labour supply and goods demand in Spain

Abstract

In this paper the implications of unemployment on labour supply and goods demand functions in Spain are analysed during the period 1964–91. To this end, the labour supply and goods demand is jointly modelled using a dynamic linear expenditure system under the condition that labour supply has been rationed due to the increasing number of unemployed in the last three decades. After proof that the model exhibits neither autocorrelation nor dynamic heteroscedasticity problems, it is found that food, beverages and tobacco, gross rent, fuel and power and miscellaneous goods are necessities, while other goods are luxuries. Labour has an expenditure effect below zero. The own-price Marshallian and Hicksian elasticities are negative for consumption goods and positive for labour, and indicate that all consumption goods are price inelastic. Finally, the cross-price values indicate that the goods are complementary.