Unemployment benefits and unemployment rate in Spain

Abstract

In this paper we investigate the role of social benefits paid in Spain to the unemployed in determining the unemployment rate. Although in economic theory, mainly at the microeconomic level, the idea prevails that social benefits reduce the willingness of the unemployed to accept jobs and, ceteris paribus, increase unemployment. In this paper we offer empirical evidence with a macroeconomic approach, using a VEC model, for the period 2003 – 2016 that reveals the opposite: unemployment benefits have acted as a powerful automatic stabilizer in favor of GDP growth and the containment of the unemployment rate. A reform that reduces the "generosity" of the benefit system would raise the equilibrium unemployment rate