Unemployment and Profitability in Spain

Abstract

This paper explores empirically the relationship between the high and persistent unemployment in Spain and the profitability on invested capital. It is shown that there exists a negative long-run relationship between the two variables, an unemployment-profit rate trade-off (UPRT). A conditional equation with constant parameters relating the unemployment rate to the profit and capacity utilization rates is derived. Exogeneity tests indicate that profit rate and capacity of utilization are weak, strong, and super exogenous for the parameters of the unemployment equation.