A simple nonlinear dynamic model for unemployment: Explaining the Spanish case

Spanish unemployment is characterized by three distinct regimes of low, medium, and high unemployment and by a fast transition between them. This paper presents a simple nonlinear dynamic model that is able to explain this behavior with multiple equilibria and jumps describing the transition between equilibria. The model has only a small number of parameters capturing the fundamentals of labor markets and macroeconomic and institutional factors. The model is capable of generating unemployment dynamics that encompass the "unique" natural rate hypothesis, the structuralist hypothesis, and the hysteresis hypothesis. Copyright (c) 2008 J. R. Faria and M. A. Leon-Ledesma.