Rivers of ink have been written about the long list of structural problems that have dragged down the Spanish economy in recent decades, and although explanations for this situation, as well as the measures necessary to reverse it, vary among the different political currents, there is a consensus that the situation must change. Now, after the pandemic, there are signs that the Spanish economic model is finally transforming, thanks to a blend of public measures and broad-scale economic evolution.
First of all, the Spanish labor market is buoyant, with record numbers of Social Security affiliation and unemployment at its lowest since 2008. This enormous creation of jobs has occurred in parallel with three crucial legislative changes: the formalization and extension of ERTEs, the elimination of temporary contracts in favor of fixed-discontinuous contracts, and the rise of the minimum wage to reach 60% of the average wage.
“The labor reform driven by the Government, as well as the extension of ERTEs, have helped the Spanish labor market”
The first two changes were part of the reform approved by the Coalition Government, and have allowed and will allow a more stable labor market both at macroeconomic and individual levels. The extension of the ERTEs—used during the pandemic to stabilize employment and prevent massive layoffs—will ensure that future sectoral crises do not lead to layoffs that depress demand, creating a new vicious circle of job losses as occurred during the Great Recession.
On the other hand, the adoption of the fixed-discontinuous contract as the main variant in cases of seasonal employment has greatly reduced temporary work, and allows many workers in the most precarious sectors to gain year-to-year job stability. This also translates into higher productivity for these firms, which do not need to retrain their workers every season. Alongside the strong rise in the minimum wage since 2018—compatible with job creation on the scale of millions of jobs—, the result is a much stronger economic situation for lower-skilled workers.
A change in the economic model?
Although this upturn in employment has been largely supported by the tourism surge—a traditional cornerstone of the Spanish economy—there are increasingly clear signs of a foundational shift in the structure of the national economy. If this shift solidifies, in the coming years Spain will occupy a much stronger economic position and real wages will rise significantly.
For instance, one of the traditional problems facing the Spanish economy is the relatively small size of firms, smaller than in neighboring European countries, which is associated with low productivity and limited investment capacity, and therefore with lower wages. However, data indicate that since the pandemic the number of firms with fewer than 5 employees has fallen, while the number of firms with more than 10 employees has grown, especially the large firms with more than 250 employees.
And the changes are even more notable when compared with the years of the Great Recession. It is expected that this improvement of the business ecosystem will continue in the coming years, given the appetite for mergers and acquisitions, and the ever-increasing number of firms with rapid employment growth in high-skilled technology sectors.
These changes are already beginning to be felt, with employment in sectors such as information technology or technical activities — sectors highly productive — leading growth and pushing the importance away from activities such as hospitality. This push is supported by measures from the Strategic Recovery and Economic Transformation Plans (PERTE) to foster investment in technology and R&D, and by longer-term shifts in Spanish investment toward intellectual property and capital goods, away from housing investment linked to the real estate bubble.
“Spain is one of the European countries where the number of patent applications has grown the most since 2014”
Consequently, Spain stands out as the big European country where European patent applications have risen the most, by 43% since 2014. All these changes are reflected in official statistics. For example, the innovation of the Spanish economy— measured by the European Commission— has grown faster than that of our neighbors since 2018, gradually narrowing the gap with the European average, and sectors such as digital and pharmaceutical are expected to lead growth in the coming years.
Moreover, since the burst of the housing bubble, Spain has gained international competitiveness, with a massive boost in exports. Initially, this export growth was driven by weak domestic demand and depressed wages and labor rights, with a heavy emphasis on tourism. However, after the end of the pandemic, strong export growth has positioned Spain as the European export leader, and export vigor is sustained by high-value-added non-tourism services (consulting, engineering services, etc.), moving Spain away from its traditional image of precarious, low-value-added services.
The challenges to completing the shift in the model
Despite all this, the transformation of our economy is not guaranteed, and depends on multiple factors that must be protected and reinforced to solidify this change. It has already been noted how the labor reform helped curb the temporality of employment and strengthen its resilience to future crises. In addition, other regulatory changes such as the Ley Crea y Crece—to bolster the startup ecosystem—or the reform of the Insolvency Law—which will prevent viable companies with financial problems from closing—will contribute to pushing the more advanced sectors forward and to protecting the productive fabric, respectively.
“The model that the EU developed to exit the Covid-19 crisis has been a success, and we must continue with this line of structural reforms”
The model adopted by the European Union to exit the economic crisis caused by the pandemic—structural reforms in exchange for European money—has generally been a success, as it funded PERTE while reforms to strengthen our economy were adopted. In this sense, we should continue with structural reforms that favor the most advanced sectors without degrading the labor or social conditions of our country.
Among those future sectors, digital and new industries of the ecological transition undoubtedly stand out. As already mentioned, digital jobs are at the forefront of growth, propelled by the progress of the startups, the arrival of international companies, and the explosion in the opening of data centers. On the other hand, Spain is expected to lead green employment in Europe in the coming years, mainly thanks to the abundance of cheap renewable energy in our country. The green reindustrialization focused on the industries of the ecological transition is therefore a great economic opportunity for Spain, as acknowledged by public administrations with their support through the PERTE and other initiatives.
But despite the positive signals discussed here, the economy of Spain still has a long way to go. For example, the slow progress of productivity is repeatedly pointed out by international bodies as one of the main drags for Spain. Although—unlike previous growth cycles—productivity is currently rising at a healthy pace, it is undeniable that Spanish productivity is lower than that of other countries in our environment, and raising it —and distributing it equitably— is crucial to improve workers’ purchasing power.
To achieve this, the advances in innovation described above must be consolidated and expanded: although Spain has substantially improved in these indicators, it still lags far behind its more advanced European partners. Attaining this convergence will require all available levers from public administrations: from the technology transfer of academic science to boosting technology startups.
But overall, the improvement in productivity will have to come from sustained and growing investment in intellectual property and capital goods. Private investment has suffered since the pandemic despite the knock-on effect of European funds due to uncertainty and high interest rates, and therefore stimulating private investment should be a priority. While the current decline in interest rates will help relaunch investment, the new trend toward saving by families and businesses (though very positive in placing Spain as a net creditor for the first time) poses a difficulty, as it depresses consumption and private investment.
Therefore, institutions must promote productive investment in key sectors, both with an appropriate legislative framework and with tax incentives and direct subsidies. This is one of the long-standing problems that Spain has faced: the allocation of capital to inefficient and unproductive projects (such as housing during the real estate bubble) ahead of productive sectors. This is reflected in the fact that work productivity has risen markedly since 2000, while capital productivity has plummeted. Improving the educational level of Spanish entrepreneurs (for example, with soft loans for their executive training) would help improve the quality of many investments.
“We must find ways to reduce the high unemployment rate, because it subtracts demand and drags down per-capita productivity”
In addition, smart public policies such as tax deductions on large fortunes — which are fueling a boom in venture capital companies that will feed the startup ecosystem— are crucial to changing this dynamic. In this sense, it would be excellent news to move forward with plans to reform the regime of the SOCIMIs, with the aim of eliminating the tax advantages for those that do not make their real estate assets available to the public under affordable conditions. This would prevent contributing to the housing affordability problem, and would divert capital away from these unproductive investments.
Finally, Spain must find ways to curb its high unemployment rate. In addition to its effects on workers themselves, high unemployment reduces aggregate demand in the national economy, drags down per-capita productivity, and drains public coffers. Achieving full employment would also force companies to raise wages and invest in productivity to improve their results, as growth through hiring becomes much more difficult.
Improving worker training and better matching them with the needs of companies is crucial to achieving this goal. In this regard, the promotion of Vocational Training (FP) and, in particular, Dual Vocational Training by the coalition government is a crucial tool to quickly train workers in the most demanded sectors and one of the main reasons for the improvement achieved in reducing early school leaving.
“Reducing the working day would improve workers’ quality of life and would generate an incentive to improve business productivity”
On the other hand, the reduction of the working day to 37.5 hours should not only improve workers’ quality of life but also provide an incentive for improving business productivity so that productivity per worker not only does not deteriorate but continues to rise. Finally, housing access problems and demographic imbalances between saturated areas and the Empty Spain are a long-term challenge for our economy as they depress consumption and birth rates, and hinder labor mobility. Meeting this challenge will require multiple measures with the collaboration of all administrations.
In conclusion, although still embryonic, the Spanish economy appears to be undergoing a transformation toward the most productive sectors, propelled by legislative reforms that are enabling productivity to rise while jobs are created and working conditions improved. Safeguarding and accelerating this change of model should be a state policy across all political groups, with the aim of finally solving the chronic problems of our economy and improving citizens’ living standards.
