On the Efficiency of Labor Market Reforms: How to Solve the Spanish Puzzle?

In this paper the author sheds light on the relationship between labor market policy, entrepreneurship and youth unemployment prior to and in the aftermath of the global financial crisis in Spain. He discusses the situation, where labor market and macroeconomic policies were largely inefficient in reducing high levels of (youth) unemployment after 2007. He rises the question why an increase in (youth) unemployment had been observed although the labor market becomes more flexible due to the associated structural reforms in 2010 and 2012. He calls this the Spanish Puzzle. The main reason for this observation can be found in the phenomena of downward nominal rigidity, the existence of a liquidity trap and pessimistic private expectations regarding future economic developments. Given the recovery of the Spanish economy in 2015, this development is grounded on (besides the increase in private consumption and a trade surplus) several policy interventions in order to strengthen entrepreneurial activity in 2013. The corresponding boost in private investment expenditure can be identified as the sustainable main driver for job creation in the long run. JEL E24 E61 J13 L26


Introduction
The turmoil in the aftermath of the financial crisis, which has its origin in 2007 with the fall of Lehman Brothers, has caused severe economic problems and structural changes worldwide. While the countries in the periphery of the Euro Area face a situation where output lies below potential, a constant rise in sovereign debt and enormous unemployment rates are observed. From our point of view the ongoing debate by economists and policy advisers, on which measurements -such government spending programs and traditional (or even unorthodox) monetary policy interventions -are needed to stimulate global economic recovery, is mainly short-sighted. We claim that one of the most severe problems is the high unemployment rate in Southern Europe in the long-run.
Our emphasis is on the analysis lies of Spain as being a representative economy dealing with the high levels of unemployment. For Europe or, more precisely, the Euro Area we choose Spain over Greece, where the latter country in the European periphery exhibits also an incredible high rate of unemployment. However, Greece suffers from various structural economic problems linked to an inefficient degree of bureaucracy, political reforms and a depressive economic environment. Hence, it seems to be difficult to discuss youth unemployment and the associated measurements without a deep analysis of economic (or even political) transmission mechanisms in Greece. Instead, Spain slightly recovers after the financial crisis and the burst of the Spanish real estate bubble in 2007, which caused a phase of job destruction in the construction sector. Although the country has reimbursed (a fraction of) the financial assistance provided by Euro Area member states via the European stability mechanism (ESM) in order to stabilize its banking sector, Spain still has to tackle imminent labor market problems. 1 .
The objectives of this paper are linked to the understanding of policy measurements and unemployment in Spain. We focus primarily on youth unemployment and follow the definition of youth by the United Nations as the age group between 15 and 24 years, which is common in the literature. Interestingly, the level of young participants of the labor force being unemployed exceeds the total number of the unemployed workers (ILO (2013)). The tendency to a low participation rate for young workers is noteworthy. This observation is striking and resemble the ones made by Görlich et al. (2012).
It goes without saying that high rates of youth unemployment hinders the opportunities of future economic growth and stability. High labor market barriers for young adults and the loss of personal economic perspectives we judge as one of the main obstacles for sustainable and long-run recovery after the crisis in Spain. Indeed, the problem of high youth unemployment is not a recent phenomenon the modern economies. The notions of a young and unskilled labor force are commonly associated with a higher likelihood of a labor market mismatch. However, the recent increase in global youth unemployment is constrained by an economic slowdown and competition in the world economy, while young workers need to find their first job overseas or look for apprenticeship in foreign countries which economies are booming.
First, we show how traditional monetary and, especially, labor market policy interventions are not enough to restore a low level of (youth) unemployment in Spain. Based on the labor market reforms in 2010, the question arises why we still observe an increase in (youth) unemployment -even in the current disinflation environment? For the latter note, that the inflation rate becomes even negative around -0.15 % in 2014. We call this the Spanish Puzzle since at the first glance it seems to be counterintuitive that unemployment rises as the labor market becomes more flexible. We show that the main explanation for this observation are given by the phenomena of downward nominal wage rigidity and the existence of a liquidity trap. Note here that we especially mention the period from 2010 on, where since 2007, not surprisingly, the unemployment rate increased primarily due to temporary contracts hold by the majority of young employees.
It goes without saying that Spain experiences an upward movement in production and economic growth since the beginning of 2015. Reasons for this development can be found in the increase of private consumption and a trade surplus due to the devaluation of the Euro. In addition we claim that the Entrepreneur's Act from 2013 contributes to the recent recovery to a large extent. This law covers policy measurements to strengthen entrepreneurship via the improvement in regulations and incentives for market entry of start-ups. We define entrepreneurship as the bundle of activities in order to start and run a newly founded company, while for simplicity we see this expression being equivalent to a start-up enterprise. Besides training-on-the-job schemes, entrepreneurial activities subsided by government officials seem to be promising in order to reduce unemployment with respect to the entrepreneur herself and the associated job vacancies to be filled by the start-up. Note that entrepreneurial activity can not outrun the problem of downward nominal wage rigidity -where there is evidence for the latter in the Spanish case. However, newly funded businesses in the service sector with focus, for example, on biotechnology industry as well as telecommunication and internet services, can provide a new stimulus to employment of young (high-skilled) adults. Hence, we aim to address the role of entrepreneurship in job creation, while analyzing the business challenges facing by entrepreneurs. In this respect, we identify the Entrepreneur's Act as a sustainable solution approach to the recent structural labor market problems in Spain in the long-run. Our paper is closely related to the work of Jang and Sacht (2015), where in their paper there is no deep analysis with respect to the Spanish economy but a comparison study with focus on Spain and South Korea instead.
The remainder of the paper is structured as follows. In the next section we discuss the macroeconomic situation in Spain before and during the Great Recession period with special emphasis on (youth) unemployment. In section 3, we briefly explain why the labor market reforms in 2010 did not amplify job creation in Spain, while the Entrepreneur's Act can be judged as being a successful policy measurement in this regard. In section 4 we shed light on the business environment in which entrepreneurs and start-up activities can help to overcome the Spanish Puzzle through an increase in the employment rate of young workers. In section 5 we develop solution strategies addressed to policy advisers with respect to macroeconomic measures to stimulate entrepreneurship along with further job market interventions for young workers. We conclude in section 6. Table 1 shows the development of the main economic indicators for Spain over the period 2003-2014. In the pre-crisis period from 2003 to 2007, Spain exhibits a moderate growth in GDP on an annual basis along with an inflation rate around 3%, which turns out to be higher than the European Central Bank's (ECB) inflation target of (below but close to) 2%. Although the short-term nominal interest rate (expressed through ECB's instrument for main refinancing operations) remains almost unchanged on a high level, the boom in the construction sector with respect to real estates has caused an acceleration in housing prices within this period (IMF (2011)). The massive investment in real estates is mimicked by the sharp decrease in the current account balances for the years from 2005 until 2007. The degree of openness expressed by the trade ratio in percentage of GDP has increased slightly during this period. Given the latter observation along with high annual GDP growth, the total unemployment rate shrank by 3% over the whole time period. However, while it seems that labor market policy was successfully established in the pre-crisis period, this development was heavily grounded on the boom in the construction sector. A decrease of 4.5% in the youth unemployment rate indicates that the labor market segment for young adults between 15 and 24 had improved more than the total number of unemployed people. Despite its positive development on the labor market, both unemployment rates are higher than the natural rate, which can be commonly indicated by a value of 4-5%. It goes without saying that this situation is more severe for young unemployed people, where the corresponding unemployment rate is around 10% larger than the total one. A reason behind this dire situation regarding the Spanish labor market can be found in the existence of downward nominal wage rigidity as an evidence for structural labor market failures. Indeed, Schmitt-Grohé and Uribe (2013) report a monotonic increase in the nominal hourly wages for Cyprus, Greece, Ireland and Spain up to 2011 based on Eurostat data. With special emphasize on Spain, this observation is confirmed by the increase in the ratio of average annual wages to current prices from 2003 to 2012. In their study, Schmitt-Grohé and Uribe (2013) suggest that an increase in inflation around 4% in the Euro Area could help the countries of the European periphery to reduce downward real wage rigidity. We will discuss this potential solution approach in a later section.

Macroeconomic Development in Spain
However, downward nominal wage rigidity alone does not account for the high rate of youth unemployment. One of the major characteristics of the Spanish labor market is given by the amount of temporary jobs for young employed people. 2 In 2008, the rate of a temporary contract is about 59% in comparison to fixed-term employees. The average time to find a fixed term position is about six years. It has been widely seen that the rate of temporary contracts was already higher than 40% in the recession periods from 1984 until 1987 and 1993/94. According to the young-adult unemployment ratio, the lower bound of this value is around 2% over the past 25 years. Hence, it can be said that youth unemployment is a common phenomenon of the Spanish labor market.
Overall, long-term youth unemployment has been tripled since the burst of the housing bubble in 2007 (Sánchez (2012)). The reasons for this observation are manyfold. The economic upward movement accounts for one third of the total amount of jobs created in the EU (Corujo (2013)). However, after the bubble had burst, 66% of the jobs for young employees in the construction, manufacturing and sales sectors became lost between 2008 and 2012. No recovery of these (primarily) temporary jobs could be observed over this period as reported in Sánchez (2012). The author states that those job contracts, which prevailed during the crisis, had been adjusted with respect to a change in the working time agreement.
This development in the number of temporary contracts is explained by structural issues. First, employers face a minimum wage for a 19-year old workers of around 1009 US Dollar per month, according to the World Bank project 'Doing Business'. 3 Second, a maximum length of a single fixed-term contract is 36 months depending on the type of a particular task. Along with a high degree of firing costs, the limitation of the fixed-contract length can be interpreted as market barriers for young unemployed people since it is commonly associated with a high degree of job turnovers. The latter effect applies most likely to young employees, who gain their first job experience, i.e. basic skills in order to fulfill specific tasks related to the position. Hence, employers will expect to lose experienced (and thus productive) workers after the contract lengths had been expired and there is no need or even possibility to transfer the job into a permanent one.
Keeping these characteristics of the Spanish labor market in mind, from 2008 until 2013 -we call this simply the after-crisis period -the country suffers from an incredible and massive increase in the rate of unemployment up to 24.5% in 2013. From the last column of Table 1 it can be seen clearly for the same year that the situation on the labor market for the youth is becoming dramatic by observing an value of 56.1% for this specific unemployment rate. After the real estate bubble had burst in 2007, foreign financial investment decreases rapidly according to the changes in the current account balance. In total, the GDP growth rate became negative for most of the after-crisis period, while this severe downward movement had been dampened by the increase in the trade ratio and a period-to-period decrease in the short-term nominal interest rate. The latter observation stands for a quite expansionary monetary policy impulse coming from the ECB. However, several studies show that the transmission channel of monetary policy is hindered due to the unwillingness of private institutions to lend money (see Ciccarelli et al. (2013) as well as Al-Eyd and Berkmen (2013) among others). While private investment dried up, the Spanish government was able to successfully consolidate government debt, instead of boosting economic recovery by government expenditure itself. Hence, the inefficiency of monetary policy under existence of lower-zero bound of the nominal interest rate, can be construed as a liquidity trap.
Empirical evidence for 2014 and the beginning of 2015 reports an economic recovery in Spain. The last entries in Table 1 show that economic growth is around 1.40 % for 2014, while there is a small (moderate) decrease in (youth) unemployment down to 23, 7 % (51, 4 %). With respect to business fluctuations, Corujo (2013) claims that an 1% increase in the growth rate of GDP is required for a positive stimulus on job creation in Spain. While this level of growth is not obtained from 2008 until 2013 -again, the GDP growth rate had been negative for almost the entire after-crises period -the development in 2014 indicates a spark of hope for a sustainable decline in unemployment among all age groups. Two out of three pillars of this recovery can be identified by the increase in real private consumption expenditure and a trade surplus. Private consumption expenditure had dropped within the after-crisis period, where data provided by DSI Rheinberg's Global Economic Indicator (DSI for short) reports annual changes to the previous period up to 2013 around −1, 52 % on average. 4 However, in 2014 the change in direct relation to 2013 is given by 2 %, making this year the first one with a positive growth rate since 2011. With respect to the trade surplus, according to the same data base, exports increased slightly since 2012, while imports remained almost unchanged over the same time interval.
The last cornerstone for the upwards movement is given by the boom in real private investment expenditure. Given the data provided by DSI, after a stagnation in 2011 (0.09 %) and even a dramatic decline in 2012 (−4.57 %), the annual changes to the previous period increase dramatically by 4, 06 % and 4, 03 % in 2013 and 2014, respectively. We claim that this stimulus has its origin in the implementation Entrepreneur's Act in 2013. The reversal in investment activity can be seen as the most sustainable solution to the Spanish Puzzle. On the one hand private consumption relies heavily on households' expectations and benefits from the temporary decrease in the oil price. Note for the latter that inflation becomes even negative at a rate of −0.15 %, i.e. a deflationary environment can be identified which will be not long-lasting according to the ECB's forecasts (ECB (2014)). On the other hand, the movement in the exchange rate depends heavily on the development of the European sovereign debt crises and, hence, turns out to be hardly predictable.
We are going to combine the effects by the Entrepreneur's Act under consideration of the downward nominal wage rigidity and the liquidity trap in a theoretical framework in the next section. Based on the empirical observations presented here, we first shed a light on the impact of the Spanish labor market reform in 2010 first.

Labor Market Reform and Entrepreneur's Act
We claim that the labor market reforms in Spain failed to reduce the high unemployment rate in Spain. The reason can be found in the observed downward wage rigidity and the inefficiency of monetary policy in the liquidity trap. In order to show this we undertake a graphical analysis in the well-known AD-AS framework. Although there exist more elaborate macroeconomic models in order to analyse the impact of supply and demand shocks, for our purpose the AD-AS one keeps this analysis sophisticated simple. Figure 1 represents the aggregate demand (AD) and aggregate supply (AS) curves, respectively in a price (P) and income diagram (Y ). The AD curve has a negative slope until the liquidity trap is reached. Along the price-elastic path, a decrease in the price level leads to a downward adjustment of the nominal interest rate in order to stimulate private investment. At a certain point the further price reductions can not be offset by a reduction in the nominal interest rate since the latter reached the lower zero bound. On the supply side, the phenomena of downward nominal wage rigidity leads to a positive slope of the AS curve: an increase in the price level will let the real wage decrease and, hence, reduce the excess supply on the labor market. Note here that is assumed that the nominal wage is not only downward but also upward rigid in an unemployment conomics Discussion Paper situation. Upward rigidity of the nominal wage holds due to the limited power of labor union to negotiate on higher nominal wages when an excess supply on the labor market is observed.
The impact of the labor market reforms known as 'Royal Degree Act 10/2010' can be interpreted as a reduction in the non-wage labor costs (L). An overview of the corresponding main characteristics of this reform can be found at the top of Table 2. In its core, this policy measurement lead to a relaxation of labor market barriers with respect to duality. The latter stands for the conflict of young (high-skilled) outsiders versus older members of the labor force with long-term contracts and a high degree of labor market protections. Hence, a decrease in non-wage labor costs resembles e.g. a reduction in social security contributions and costs of dismissal. Within the AD-AS framework, as we see from Figure 1 we reach the equilibrium point Q 0 as the AS curve shifts to the right since the cost of labor decreases. Here, an increase in the level of GDP is observed, where the excess supply on the goods market causes a decrease in the price level. The central bank lowers the nominal interest rate in order to trigger an increase of the price level, i.e. aggregate demand is increasing by a boost in private investment. However, the new equilibrium point Q 0 is reached in the liquidity trap, where no further increase in private investment can be applied due to the zero lower bound. It seems to be obvious that the labor market reforms had a positive effect on employment and GDP up to this point.
The question arises how a decrease in GDP and, hence, an increase in unemployment can be explained after the Royal Degree Act 10/2010 had been implemented. The reasons can be found by i) the slump in private investment since the burst of the real estate bubble in 2007, ii) the inefficiency of monetary policy in the liquidity trap and iii) downward nominal wage rigidity . 5 We show this by a left shift of the AD curve since the expectation on investment revenues (E) becomes intensively pessimistic. 6 Given the reduction in the non-wage labor cost we end up in the final equilibrium point Q 1 . In this situation the massive decrease in aggregate demand causes a further decrease in the price level. Given downward nominal wage rigidity the real wage increases which leads to an increase in the excess supply on the labor market, i.e. the unemployment rate increases. It can be conclude that the positive effect by decrease in the non-wage labor costs is overcompensated by the negative effect of the slump in private investment expectations.
The adjustment from the equilibrium point Q 0 towards Q 1 , where we observe both a lower price and income level, describes the so-called Spanish Puzzle. As a potential solution to the latter, a supply-side oriented policy to support entrepreneurial activity in order to boost labor demand seems to be fruitful. In fact, the Spanish Entrepreneur's Act from 2013 lead to an improvement in the regulations and incentives for a market entry of start-ups. The corresponding measurements are shown in the bottom of Table 2. In translation to the AD-AS framework, Figure 2 shows that in this case we observe a rise in the income, while the price level declines. The latter observations is ambiguous, i.e. it depends on the net effect with respect to the increase in aggregate demand and supply, respectively. We assume that newly founded companies (as they remain on the market and do not exit) introduce and utilize new technologies in the production process. This technology shock (K) leads to an increase in the productivity of capital and, therefore, in aggregate supply, i.e. the AS curve shifts to the right. The whole adjustment process will be incomplete without an improvement in the expectation on investment revenues (E). The latter follows simply from the need of en-  trepreneurs to invest in capital in order to start the business. Obviously, no change (or even a decrease) in E seems to be counterintuitive since in this case an entry of a new firms goes along with an expected zero (negative) return on investment.
Two final comments regarding our analysis above must be made. First, someone would prefer a stimulus by an increase in government spending over a supply shock. While monetary policy becomes inefficient in case of a liquidity trap, fiscal policy might boost aggregate demand and prices, i.e. the AD curve would shift to the right. The question arises if there is some room for such a maneuver for the Spanish government when facing a tight situation in times of fiscal consolidation. The 2014 value of 92,1 % for the Spanish debt-to-GDP ratio raises some doubt that a fiscal package on a higher magnitude can be initiated. In comparison, with respect to a relaxation of law regulations towards the market entry of entrepreneurs, this measurement consists on lower costs. Hence, a mix of both macroeconomic policy interventions, i.e. a demand and a supply stimulus can be seen as a promising measurements to be undertaken.
Second and most importantly, the magnitudes of the technology shock and the increase in investments are not entirely clear ex ante. 7 It goes without saying that newly founded and successful firms can enhance the opportunities of job creation. In fact, Haltiwanger et al. (2013) show for the US that 3 % of new job are created by start-ups in the US per year. Awogbenle and Iwuamadi (2010) as well as Salemi (2011) report equivalent results for developing countries. On the contrary, start-ups as sources of job creation are inherently volatile with a high exit rate. Haltiwanger et al. (2013) report that about 40 % of the jobs initially created by start-ups between 1992 to 2005 have been eliminated by exit. On the contrary, the authors claim that those early firms, which survive in turbulent times, can grow more rapidly than older ones. This can be explained most likely by the economies of scope effect and, hence, the efficient use of new technologies. In this respect, the government should provide support for start-ups, as well as small and medium-sized firms, in order to increase their life span. Hence, we claim that a policy measurements like the Entrepreneur's Act from 2013 accounts for long-term sustainable economic growth based on entrepreneurial activity. This, however, depends on the business environment and conditions, start-ups are confronted with. We discuss this issues in greater detail in the following section.

On the Business Environment of Entrepreneurial Activity
As we turn to an investigation of the business environment of entrepreneurs, the focus is on the investment in start-ups and the associated costs. To begin with, we consider the total amount of venture capital and number of companies, which receive the former at the seed, start-up and later stages. Here, the 'seed', 'startup' and 'later' stages define the periods 'before', 'at time of' and 'after' the establishment of the start-up, respectively. The corresponding numbers are given in Obviously, the number of companies is positively correlated with the amount of venture capital. It can be argued that entrepreneurs in Spain have to deal with a tense situation when it comes to market entry. This can be probably explained by the strong decrease in total venture capital in the percentage of GDP received on all three stages over the whole period since 2007. This observation indicates that the process of starting a company has been terminated throughout the stages over time, in which neither entrepreneurial projects are promising (or better: efficient) enough to boost the market entry (after the seed stage) nor they are substantially successful (after the start-up stage). While the numbers are indeed quite low for Spain, it must be emphasized that numbers in the range of 0.001 to 0.050 account for a tightness in private financial investment capacity with respect to start-ups in all countries of the European Union (EU) on average. In particular, the amount of Spanish companies, which had managed to gather start-up capital, is distinctively less in relation to new firms in the same situation across the EU, where e.g. the number of new firms in Germany (as a proven economic role model for job creation in the EU) is 6 to 8 times higher in comparison over the whole period from 2007 until 2012. Under consideration of the Entrepreneur's Act in 2013, this policy measurement had been implemented at the right time: it improved the situation of start-up through a better access to venture capital by e.g. less capital requirements. Indeed, the Entrepreneur's Act might help to overcome the stagnation in the strength of legal right index. The latter measures the degree to which collateral and bankruptcy laws protect the rights of borrowers and lenders and thus facilitate lending. This index remains on a moderate level in Spain from 2003 until 2013. In other words, there had been room for improvements regarding collateral and bankruptcy laws being better designed to expand access to credit.
One main characteristic of the Entrepreneur's Act is given by the improvement in bureaucracy procedures related to the founding of a new firm. Here, procedures are defined as any interaction of the company founders with external parties (e.g. government agencies, lawyers, auditors or notaries). While the amount of procedures in Spain remains high given in relation to the EU countries on average (ten versus five procedures), empirical evidence shows, however, that the business environment in Spain improved in this respect already before 2013. The development of the corresponding indices are given in Figure 3. 8 These numbers indicate that the implementation of steps in order to start a company becomes less costly, where we observe a strong decrease in the cost of procedures by 12.1 % of the gross national income (GNI) per capita from 2003 until 2013. Furthermore, it takes much less of time (measured in days) until a start-up is established. The erosion in this number is remarkable, where over a period of 10 years a time saving of one quarter occurs. Figure 3 allows for a positive statement about a successful establishment of start-ups -at least from a legal point of view. Again, it seems that policy makers had already implemented large improvements in the administrative procedures related to entrepreneurship before 2013.

Proposals for Policy Interventions in the Future
Based on our analysis we claim that entrepreneurship has the potential to reduce the high level of (youth) unemployment in Spain. For a more efficient policy interventions we propose the following policy advises, where we put our emphasis on the connections along the dimensions of labor market barriers and the market entry of entrepreneurs.
As one of the main problems with respect to youth unemployment, Spain lacks of institutional characteristics for apprenticeship, which ensure a smooth transition from school to work. In other words, this part of the Spanish educational system is not connected to the countries' labor market programmes, e.g. the successful workplace training-on-the-job scheme as being implemented for e.g. 8 All numbers (including those for the 'strength of legal right index' and 'procedures') are again provided by the World Bank project 'Doing Business', where the definitions in the remainder of this section are directly taken from. The interested reader may visit http://www.doingbusiness.org in order to get detailed information on the underlying assumption and overall methodology. The theoretical basements for the installment of these indices can be found in Djankov et al. (2002Djankov et al. ( , 2007 in Germany (Ryan (2011)). On both the local and global levels, policy makers had been already aware of these shortcomings. The Spanish government initiated several laws in order to target the transition of young people from temporary to permanent contracts (included in the Royal-Decree Law 10/2010), the promotion of vocational training under the provision of the education system (Royal-Decree Law 1529/2012) and the stimulation of employers for job creation with respect to young unemployed people simply by associated financial incentives (Royal-Decree Law 4/2013) as reported in Balaram (2014). However, these measurements turned out to be less successful due to more severe structural issues on the Spanish labor market (as we discussed in Section 3). In this respect, we claim that the recent so-called 'Youth Guarantee' programme by the European Commission might help to reduce high youth unemployment rates by the implementation of apprentice systems, offering wage subsidies and to support start-ups. 9 In a nutshell, we propose that the limitation of a contract's runtime should be directly connected to a training-on-the-job scheme for young members of the work force.
Furthermore, we would like to motivate an intensive discussion on the level of the minimum wage, which can be seen as a direct barrier to labor market entry for young unemployed Spanish people. The existence of a minimum wage is closely related to the phenomena of downward wage rigidity. Here, we claim that a temporally increase in the inflation rate by 4%, which is suggested by Schmitt-Grohé and Uribe (2013), is not relevant for the Euro Area. Instead we believe that the establishment of such an increase in inflation might lead to disturbances in the economic transmission channels across all EU member states, where different rates are observed. This heterogeneity in the inflation rates becomes more important to be considered as the temporally increase will be cut back to the common level of around 2 % after some period of time as suggested by Schmitt-Grohé and Uribe (2013). For Spain we propose to reduce the minimum wage instead along with a reform of the temporary contract regulations in order to stimulate employer's incentive to hire young unemployed people -especially those with low productivity, whose marginal product of labor lies below the real wage.
With respect to the market entry of entrepreneurs as mentioned in the end of the previous section, the strength of legal right index accounts for an important characteristic of the business environment. Given a more institutional approach, the government must ensure a sufficient degree of collateral and bankruptcy laws 9 The initiative "calls on member states to ensure that all young people under 25 receive a good quality offer of employment, continued education, an apprenticeship or a traineeship within four months of leaving formal education or becoming unemployed" (European Commission (2012)). in order to protect the rights of borrowers and lenders. This institutional policy measurement might help to break down the tightness in private investment capacity expressed through the low level of venture capital spent on start-ups. This step to be undertaken becomes much more appealing as we consider a decrease in the development of the costs associated with firm creation, where the latter we observed empirically in this paper. With respect to Spain and, again, in the spirit of the 'Youth Guarantee' project, the European Commission (2012) seeks to improve the access to finance and guidance based on courses and support services in the spirit of the Entrepreneurs' Act. As a core measurement the cooperation between employment services, business support and providers of (micro)finance should be boosted up. 10

Conclusion
In this paper we argue that labor market policy alone had not been successful in order to reduce the high rate of unemployment in Spain in the aftermath of the economic crises. While the corresponding reforms in 2010 exhibits measurements, which target the relaxation of the Spanish labor market, the unemployment rates increased rather than decreased. With respect to this labor market policy this observations is surprising and this so-called Spanish Puzzle could be explained by the phenomena of downward nominal wage rigidity and the existence of a liquidity trap. We claim that the Entrepreneur's Act in 2013 stands for a promising policy attempt in order to overcome the slump in the Spanish economy while leading to a sustainable development. Entrepreneurship is often regarded as a challenging, resource-demanding, and risky activity which is undertaken by (young) members of the work force. The instability and riskiness related to this activity might lead to a high probability of failure but stands also for an enormous potential of growth. We claim that the Spanish economy in its current situation gains fruitful employment possibilities when businesses are successfully established.
With respect to future policy activates, an additional promising attempt would be a start-up activity in future-oriented business sectors such as bio-as well as telecommunication and information technology, with special emphasis on internet products. These sectors exhibit enormous growth rates over the last two decades due to new information processing and technology shocks in general. For example, an increase in the employment of young high-skilled workers can be realized from 10 A step in the right direction had been already undertaken by Spain with respect to the expenditure of active labour market programmes on start-up incentives in the percentage of GDP. Data provided by OECD shows an increase in the corresponding number from 0.05 to 0.1 % from 2003 until 2009. The interested reader will check on http://www.allthatstats.com for further information. overall strong development in the service sector. A cornerstone can be identified by job possibilities in research and development activities, while the latter is, of course, not limited to the service sector and start-ups. Low-skilled members of the group of (young) unemployed people might profit by entrepreneurship as the establishment of a business goes along with jobs being created, which does not require higher educational training. Based on a traditional neoclassical view, given a high level of the minimum wage (like in Spain), the real wage exceeds the marginal product of labor for low-skilled workers due to their low productivity. In fact, Spain is confronted with a high amount of people working on a temporary contract in the absence of training-on-the-job schemes, where the latter can prevent young people from participating in stable school-to-work transition processes. A minimum wage law (in terms of a decrease in this threshold) may create an increase in youth unemployment under consideration of young workers' low productivity.
Furthermore, we suggest that macroeconomic stability (along with an appropriate funding of entrepreneurs) is one of the most important determinant which can increase the life span of firms and ensure job creation. As an overall conclusion, the focus of policy makers must be on a structural labor market policy in the case of Spain. Associated measurements which help newly founded companies to navigate through difficult times can be seen as preferable policy steps in the medium-and long-run. While in this paper we focus on the description of the data in relation to the AD-AS analytical framework, we insist to apply econometric methods in future research in order to receive a much more clear picture on the Spanish labor market dynamics.