Spain's jobless drop looks like a Phillips curve mirage

The Phillips curve and the jobs mirage

The economy is doing well. Or so the story goes. The argument underpinning the truce is the old Phillips curve: when inflation picks up, unemployment falls noticeably because demand for goods pulls employment along, employment fattens wages and consumption feeds the cycle back. It is the wine and roses stage, according to the formulation that opens the debate. And it adds the kicker: in the long run that same dynamic wrecks the economy, makes production more expensive and brings unemployment back. Enjoy it while it lasts, because the ugly part comes after.

The problem is that the Phillips curve is nearly seventy years old and the world that saw it born no longer exists. A 1958 paper. That is the year cited to recall that the relationship between inflation and unemployment stopped behaving like a Swiss watch in the seventies, when episodes of rising prices with falling employment appeared. Stagflation, it is called. And some argue that is exactly what we have now, not a friendly curve.

Why is everything going up if there is no more demand?

The first sustancia ilegal in the story is the origin of inflation. The initial framing assumes prices rise because people consume more. The most repeated objection points the other way: this is cost-push inflation, driven by raw materials and energy, with logistics problems in the mix. If the price rises come from the supply side, the conclusion flips: there are too many jobs, not too few. And falling unemployment would not be a sign of vigour, but of a labour market that has not yet digested the shock.

That is where the awkward detail comes in: public-sector employment. If a good part of the jobs created come from the state's accounts rather than private activity, the curve loses its meaning. The question posed is simple: if more than half of that employment is public, what exactly does the curve measure? The star indicator is left without its causal mechanism.

The VAT that grows without any tax rise

There is one figure that unsettles anyone who only looks at rates. VAT revenue is soaring even though the rate has not gone up on food and electricity, and even with temporary cuts in force. The explanation is arithmetic: the tax is a percentage of the price, and if the price rises, the public coffers swell on their own. No bracket needs to be touched. It is enough for the shopping basket to get more expensive.

From there, the debate tangles into real fiscal pressure. A wage that rises less than prices can end up paying more income tax because the bracket applies to a nominally larger payroll. Add to that municipal fees, tolls, rubbish collection, water, the land registry and new levies such as the sugar or plastic tax. The conclusion that keeps coming up: taxes rise even though nobody has raised them.

The cost of living as the real thermometer

The indicator people use in the supermarket queue is not the unemployment rate. It is the price of a watermelon in July, which has become the unwitting symbol of the wine and roses stage. Ten euros for one piece. Eight euros a litre of olive oil. Decent wine above sixteen and roses at ten euros each, which is how you get fleeced. The irony writes itself.

Against that, GDP per capita. The argument is that employment was never a reliable gauge and that income per inhabitant is, and that has fallen noticeably. The average wage sinks below the average pension, while public debt finances present-day consumption with no new wealth behind it. Twelve billion in pensions funded by debt is the example given: money created to be spent at whatever price. Excess demand, more money circulating, inflation.

Rates at 5.5% and the cooling to come

Monetary policy appears late in the conversation, but it appears. Central banks have pushed rates to 5.5% to cool the economy, knowing full well that this destroys jobs. They do not care, the argument goes. The rate rise copies the US central bank and from there it is time to come down. The PMIs do not cooperate, core inflation remains high and rates are near their ceiling to avoid triggering bank failures. The downward revision of GDP is already on the table.

The scenario the pessimists sketch is not a textbook recession. It is growing indebtedness, exhausted consumption, mass layoffs and more recession. The end of cheap oil, the lack of foresight on natural gas and an ageing population propping up a geriatric tourism sector. And a warning that sounds like prophecy: in the future you will need an engineering degree to buy a car.

Inequality as the hidden variable

There is a nuance running through the whole analysis that rarely enters the models. The economy is bipolar. Inequality is growing, and with it the gap between those who feel inflation in the shopping basket and those who feel it in the profit and loss account. Aggregate consumption can hold up while part of the population drops out. The macro indicator does not see it.

And a question left hanging: if the theory describes first-world countries, does it apply to economies with stagnant productivity and a fragmented labour market? The answer is not in the 1958 paper. Nor in the headlines.

With these materials, the reasonable prediction is that the truce will last less than the story promises. Rates are already high, demand is cooling and public employment cannot prop up a curve forever. When the mirage breaks is the part nobody will sign off on.