Why productivity has stagnated in Spain

The political debate on the possible reduction of the working day has once again put productivity in the spotlight.

Before raising salaries or reducing hours, something must be done about the low productivity of the Spanish economy, some say.

Without a minimum of well-being for workers, we are condemned to perpetuate a country model based on low prices and salaries, say the others.

In a science as inexact as economics, finding a winner of the debate is more difficult (and less productive, perhaps) than beginning the analysis with the common points of the two positions: that productivity is a variable everywhere. key to improving the standard of living and that Spain has a lot of progress to make in this area.

The first premise is beyond question.

Gaining productivity means that increases in the country's wealth are greater than the increase in total work hours added by the economy.

An essential condition to finance sustainable increases in salaries and improve working conditions without reducing business profits.

About the second part, unfortunately, there is no doubt either.

As stated in its report last January by the recently created Observatory of Productivity and Competitiveness in Spain (OPCE), although total factor productivity has been slowly improving since 2013, it has not yet recovered the cruising speed it had when we start the century.

In Spain, total factor productivity - a concept that is defined as the difference between the growth rate of production and the average growth rate of the factors used to obtain it - was 7.3% lower in 2022 to that of the year 2000, says the report, which compares this poor performance with the more positive performance of the United States and Germany, where the indicator improved by 15% and 12%, respectively.

Among the usual suspects are the always questioned economic weight of the real estate sector, the lower investment of national companies in intangible capital, the difficulties that small companies face in growing, and the excessive importance of sectors such as construction or tourism, with less margin to introduce productive improvements.

In the words of Matilde Mas, from the Valencian Institute of Economic Research (Ivie), co-creator, together with the BBVA Foundation, of the OPCE, “there is not a single culprit, but rather many aspects in which all parties have to work to improve productivity. ”.

One of these aspects is the desire of families, investors and companies to acquire real estate properties thinking about the revaluation of the asset rather than maximizing its productive utility.

Between 1995 and 2007, the report says, the rise in real estate prices contributed to hospitality, energy and many service activities companies attracting enormous investments to acquire warehouses, commercial premises or offices that turned out to be unproductive.

“These investments led to excess unused capacity, which emerged especially when the economy entered a recession,” the Observatory explains.

With more than 80% of the business fabric made up of SMEs with less than three workers, the small average size of the Spanish company is the other major culprit of low productivity, and the smaller they are, the more difficulties they have in incorporating new technologies, professionalize management, or access financing mechanisms.

Interior market

According to María Jesús Fernández, an economist at the Funcas study center, the growth of these companies goes against a State of the autonomies that has fragmented the internal market, imposing a brake on free competition due to “the costs of complying with all the regulations.” .

“Another problem that discourages their growth is the bureaucratic and regulatory burdens that they begin to face after 50 employees on staff,” she explains.

Antonia Díaz, deputy director of the Complutense Institute of Economic Analysis, agrees in pointing out the average size of the Spanish company as an obstacle to productivity, but she does not share Fernández's reasons.

“The 50 employees is not working as a limit and this is demonstrated by the fact that the average number of workers in the Spanish company is far below,” she says.

In Díaz's opinion, where we must look for obstacles to the growth of SMEs is in the lack of access to credit markets, as well as in a tax policy that leaves them at a disadvantage in relation to large companies.

Initiatives like the digital kit are going in the right direction, he says, but they are limited by definition because they depend on the budget of each government: “Small German companies have an advantage that Spanish companies lack and that is that there is a clear and continued to help them grow.”

Another argument that is often used to talk about productivity problems in Spain is the lack of training of workers, a reasoning that according to the Complutense Institute expert is difficult to reconcile with “the overqualification that exists and with all the graduates who leave universities and can't find work."

“You cannot blame low productivity on workers when engineers are leaving.

The problem is that companies do not create jobs with great technological content,” she adds.

The comparison with other European countries seems to confirm this: elementary-skilled occupations are much more important in the Spanish economy (12.1% of the total) than in European countries such as Germany (7.7%), or Sweden ( 4.4%), according to OPCE data.

Spain also scores poorly in high-skilled occupations, with only 35.9% compared to 46.7% in Germany or 57.5% in Sweden.

Everyone agrees that without productivity improvements there can be no sustainable wage increases.

Also, labor productivity—which is measured by dividing the economy's gross added value by the total hours worked—has been growing very slowly since the 1990s.

But what happens when these improvements, even though they are humble, are not accompanied by salary increases?

That is what according to economist Nacho Álvarez is happening in Spain, “where real wages have stagnated since the early 1990s.”

“These productivity growths, which today are lower than they were 35 years ago, are being distributed much more unequally, going entirely to the growth of capital income and not to improvements in real wages,” explains Álvarez. , who between 2020 and 2023 was Secretary of State for Social Rights.

In his opinion, there are several possible explanations to understand why improvements in productivity have not translated into real wages.

One of them is that technological change may have generated “an unequal appropriation of profits, so that low-skilled workers now find it more difficult to incorporate productivity gains.”

Another explanation attributes the disconnection to the loss of importance of collective bargaining, the erosion of union membership, and the internationalization of value chains.

In any case, the disconnection that occurred in these years between the two variables is, according to Álvarez, the best argument to accompany productivity improvement policies with income distribution policies.

Not all companies can afford to reduce hours or increase salaries, but those that do have the option should study the measure as a way to improve their productivity, says Matilde Mas.

With better working conditions, supervision costs are reduced (because the fear of losing a good job increases) and fewer employee turnover occurs, thus saving the employer the time and money lost “in hiring and training new workers.”

“The idea is not new, it comes from the eighties and is called efficiency wage theory, whose parents are the Nobel Prize winner [George] Akerlof and his wife Janet Yellen,” explains Mas.

“For companies that have the necessary conditions to do so, it is a way to move towards higher quality employment instead of the model of minimizing costs, the cheap model... Countries that charge less than Spain, there are all the that one wants.”

A worker at a plant of the Deoleo oil company in Córdoba.

Angel Garcia (BLOOMBERG)

Management capabilities

The training of employees in the workplace is not the only intangible in which Spanish companies fail.

Another major deficiency is the low quality in the management positions of companies, a variable that has always been relevant and that in the opinion of the Ivie expert will be even more so in the near future, when artificial intelligence forces people to make decisions. decisions in companies to design forms of organization that are “more horizontal and with more initiative for workers.”

“Right now national accounting considers these intangible capitals not as investment, but as current expenditure, like someone buying pencils, but the literature has been highlighting for a long time that it is a crucial variable to understand the poor behavior of some economies,” says Mas.

“In Spain, and to make a somewhat drastic summary, we have little organizational capital and too much real estate.”

Of the many ills that plague productivity, none have a quick solution.

The excess in real estate will weigh on the balance sheets of companies for many years and investments in intangible capital take time to convert into productivity improvements.

But an underlying policy that does not require large outlays and generates virtuous circles is the improvement of the conditions of free competition: nothing stimulates the adoption of technologies and organizational improvements as much as the possibility of a (more productive) competitor taking over your market. .

According to Antonia Díaz, the work to be done to improve competition has been evident with “the difficulties of the National Markets and Competition Commission [CNMC] in doing its work.”

In a round table that the Association of Regulatory Compliance Professionals convened recently, experts pointed out the need to strengthen the deterrent power of the CNMC by increasing the amount of the maximum fine for managers (so that it exceeds the current limit of 60,000 euros), include the possibility of its disqualification, and increase the maximum fine for the company that incurs abusive market practices, now set at 10% of the business volume.

Of course, for that the fine would first have to be applied.

According to the CNMC report, one in two sanctions on non-compliant companies in 2022 were revoked by the National Court.

According to information published by Cinco Días, so far in 2024 alone the high court has stopped, in a precautionary or definitive manner, sanctions on companies for a combined value of 287 million euros (the last CNMC fine that the Court Nacional left in suspension went against Apple and Amazon for restricting competition in its

marketplace

).

In the opinion of Matilde Mas, there is good news for productivity that we can now begin to celebrate and it is the incipient change in the way companies react to crises.

Spain distinguished itself from its European partners by overreacting in its layoff policy in the face of each recession, he says, which generated in the short term a mirage of better productivity (those who remain employed have to multiply their efforts to reach what they previously did between several) and caused the company to lose valuable human capital due to the training it had for its job.

“With the implementation of the ERTE during the pandemic, the response was to behave like the rest of the Western countries, we are no longer the strange ones,” explains Mas.

“We kept the job because the alternative, laying off people in whom we had invested, would have been enormous destruction due to the need to incur the costs of incorporation and training again…”

Although state financing has had a lot to do with this change in attitude, this expert believes that “the message has penetrated” among businessmen.

Tax news

Another change underway that could have repercussions on the growth of small businesses, and therefore on improvements in productivity, is the minimum of 15% in the corporate tax that corporations with a turnover of more than 750 million euros must pay.

Agreed by the OECD, the measure partially reduces the competitive disadvantage suffered by small businesses by paying higher taxes.

The bill has not yet been approved but the Government has already said that the minimum tax will have effects for profits generated from January 1, 2024.

According to Nacho Álvarez, the dozen programs (Perte) that have been launched since 2021 can also generate a positive effect on productivity indicators to promote industries with traction capacity, such as microchips, renewable hydrogen, electric automotive and decarbonization.

“One of the best industrial policies that Spain can apply at this time is to value the attraction factor of renewable energy,” says the former Secretary of State.

“Spain can be placed in the European context as an economy capable of producing energy significantly cheaper than its surrounding countries because half of our energy mix is ​​already renewable.”

“When the State has made these interventions to try to favor certain sectors, they are not very successful either and end up being more wasteful than anything else, not only in Spain but in general,” María Jesús Fernández counters.

In his opinion, it would be more useful to introduce measures that correct the fragmentation of the internal market, that eliminate regulatory obstacles to the growth of small businesses, and that improve the minimum skills of students in solving mathematical problems and reading comprehension, among other policies. .

Although she recognizes progress in legislation related to risk capital, the Funcas economist also considers necessary fiscal regulation “that does not punish those who assume the risk of investing in activities with greater technological content and productive potential” if what is wanted is to create a ecosystem that favors “the generation of ideas and investments in these areas of greater productivity.”

Between the years 2000 and 2022, Spain's economy grew more than that of Europe's locomotives such as Germany and France.

Despite this advantage, Spanish per capita income has been moving further and further away from the European average: according to OPCE data, it went from being 2.4% below in 2000;

to be 14.4% below in 2022. This apparent incoherence is what happens when there is a delay in productivity.

While other European economies advanced by doing things better, Spain grew its GDP, among other factors, by the seven million it has registered as an increase in population.

In a country with high levels of unemployment, any strategy that incorporates citizens into working life is welcome.

Doing so by improving the wealth generated by each of them is even more so.

AI and the risk of the gap growing

If it happens as in other technological revolutions, the arrival of artificial intelligence (AI) will first improve the productivity of start-ups and large companies, according to The Productivity Institute researcher Dirk Pilat.

Start-ups, because they start from scratch by incorporating AI from the beginning.

And the large ones, because they have a better capacity in their management teams to adapt the organization to the possible new products and processes that technology allows.

Pilat, who previously worked for the OECD as deputy director in the area of ​​Science, Technology and Innovation, is concerned that this difference in the pace of adoption will end up becoming another reason for widening the productivity gap between large and small companies.

A factor to take into account in a country like Spain, where SMEs have so much weight in the productive fabric. 

Aware of the risks of leaving unregulated a technology that in the not-so-distant future will be able to make medical, legal, or hiring decisions, Pilat also talks about the need to leave room for companies to innovate in processes and products based on technology. AI.

“Many of my American colleagues would say that Europe has been too quick to regulate AI, especially for a continent that doesn't have any big players in the sector,” he says.

In any case, he explains, there is still some time before we start to see AI-induced changes in the way traditional companies work, “not only at Meta or Google but in small banks, stores and hotels.”

Follow all the information on

Economy

and

Business

on

Facebook

and

X

, or in our

weekly newsletter

Subscribe to continue reading

Read without limits

Keep reading

I am already a subscriber

_