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The recovery of productivity in Spain: is itsustainable?Miguel Cardoso
BBVA Research │Head Economist, Spain
2
The recovery of productivity in Spain: is it sustainable?
Main messages
1
2
3
Productivity growth has been low in Spain as growth came through factor accumulation
Literature points towards several key factors to explain this, from the sector allocation of resources, to labor market regulation, to lack of competition.
Recent trends are due to temporary factors, but reforms might insure that mostof the gains are permanent
3
The recovery of productivity in Spain: is it sustainable?
Presentation is a summary of several papers
1
2
3
Cardoso M. and J.L. Escrivá (2009), Reflexiones sobre los sectores de futuro en la economía española. Cuadernos de Información Económica, núm. 219, Noviembre-Diciembre 2010, p. 41-52.
Cardoso M. (2012), 25 años de crecimiento económico, ¿toca ahora austeridad?, Desapalancamiento y Crecimiento (Forthcoming)
Cardoso M., R. Doménech y J.R. García (2012), The effects of the labor marketreform in Spain, in Spain Economic Watch, February 2012.
4
The recovery of productivity in Spain: is it sustainable?
Two significant shocks
Spain: Synthetic real interest rate (ex-post) on credit transactionsSource: BBVA Research
Spain and EMU: working age population (contribution to GDP growth)Source: BBVA Research
0%
1%
2%
3%
4%
5%
6%
7%
8%
1990-1999 2000-2009 2010-2020
-0.1%
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
0.7%
0.8%
0.9%
1991-2000 2001-2010 2011-2020
EMU Spain
5
The recovery of productivity in Spain: is it sustainable?
Growth accounting shows low productivity growth,…
In the period previous to the crisis there were twoshocks: historically cheap credit and significant
immigration flows
Growth was explained by factor accumulation(capital and labor), and not by productivity increases
Factor accumulationSpain: Potential GDP (contribution % yoy)Source: BBVA Research
0,0%
0,5%
1,0%
1,5%
2,0%
2,5%
3,0%
3,5%
1991-2000 2001-2010
Capital Labor Productivity
6
The recovery of productivity in Spain: is it sustainable?
…, and lack of convergence
Spain: Productivity growth (1995=100)Source: BBVA Research
90
100
110
120
130
EE.UU. RU ALE FR
UE15 ESP ITA
Not only was productivity growth historically low, itwas also low by international standards
This is normally viewed as one of the reasons behindthe accumulation of imbalances in countries like
Spain or Italy
International comparison
7
The recovery of productivity in Spain: is it sustainable?
Domestic Investment Rate (GFCF as percentage of GDP)Source: BBVA Research based on INE and AMECO
Investment share of GDP (%)Source: BBVA Research
HousingOther
Construction
Capital goods and
othersTotal
investment
1997 4.7 6.8 10.3 21.8
2007 9.2 8.6 12.9 30.7
Var (97-07) 4.5 1.8 2.5 8.9
2010 4.7 8.1 9.7 22.5
Var (07-10) -4.5 -0.6 -3.1 -8.2
10
14
18
23
27
31
35
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
(f)
2012
(f)
EMU16 Greece Spain Portugal
Causes of low productivity growth: 1. A reliance on low productivity sectors
8
The recovery of productivity in Spain: is it sustainable?
Causes of low productivity growth: 1. A reliance on low productivity sectors
At the peak, a third of investment flows wenttowards the residential construction sector
Productivity growth of residential sector lies in partat the bottom of explaining low productivity in Spain
9
The recovery of productivity in Spain: is it sustainable?
Lack of investment in R&DHuman capital and R&DSource: BBVA Research based on OCDE
Human capital and R&D activities are deeply correlated. Human capital is the basic input of R&D
activities
Coordination of national and European policies to favour innovation in areas in which each country has
its own comparative advantage
Again, huge differences in R&D investment across European countries
US
UK
SP
PT
JP
IT IR
GR
GER
FR
FIN
DEN
CAN
BEL
R2 = 0,7984
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
4,0
4,5
0 2 4 6 8 10 12 14 16 18
Investigadores por cada mil empleados en 2007
Gas
to to
tal e
n I+
D (%
del
PIB
) en
200
7
Number of researchers per 1,000 workers, 2007
R&
D in
vest
men
t ove
r G
DP (
%),
2007
Causes of low productivity growth: 1. A reliance on low productivity sectors
10
The recovery of productivity in Spain: is it sustainable?
Temporary employment rate vs unemployment rate Source: BBVA Research based on Eurostat
Causes of low productivity growth:2. An overreliance on temporary workers
.
EA12
Bel
Bul
CRep
Den
Ger
Ire
Gre
Spa
FraIta
NetAus
Por
FinSwe
UK
Nor
0
5
10
15
20
25
0 5 10 15 20 25 30 35
Percentage of employees with temporary contracts (2007)
Un
emp
loym
ent r
ate
(20
11)
The temporary work share in Spain is the highest in the OECD
It also means an overreliance on them to do adjustments
Negative effects on productivity due to a) reduced company training, b) lower geographic mobility, c)
lower rotation of workers
11
The recovery of productivity in Spain: is it sustainable?
Causes of low productivity growth: 3. A rigid labor market and lack of competition
Inflation Accounting. Euro Area-12 Based on GDP Deflator, 1999-2011 (contributions to change) (annual average growth rates in percentage)Source: BBVA Research based on AMECO
Total Wages Productivity Markup TaxesEA-12 1.71 1.14 0.31 0.68 0.20
Germany -0.93 -0.47 0.10 -0.38 0.01France -0.04 0.23 0.02 -0.21 -0.04Ireland 0.30 0.38 0.38 0.29 0.01Italy 0.41 -0.07 -0.29 0.17 0.01Portugal 0.73 0.42 -0.07 0.09 0.15Greece 1.33 0.12 -0.10 0.94 0.17Spain 1.28 0.39 0.00 0.83 0.06
Deviation from EA-12 average
Most of competitiveness losses in Spain did notcome from productivity losses, but from higher
wages and markups
A rigid wage setting system
Lack of exposure to competition, both inside and outside
12
The recovery of productivity in Spain: is it sustainable?
Spain: real labour compensation vs labour productivity. Annual growth distribution(21 industries, 25 years)Source: BBVA Research based on EU KLEMSBBVA Research based on INE
-12
-8
-4
0
4
8
12
-12 -8 -4 0 4 8 12
Real productivity growth per employee (%)
Rea
l lab
or
com
pen
sati
on
g
row
th p
er e
mp
loye
e (%
)
.
A very low share of workers’s working conditions are covered by firm agreements (15%)
Wage determination is centralized but very few are unionized
Internal factors do not weigh enough on salaryconditions, preventing efficiency during crisis
Causes of low productivity growth: 3. A rigid labor market and lack of competition
Lack of flexibility for firms
13
The recovery of productivity in Spain: is it sustainable?
Regulation and productivity growth in retail tradeAverage 1995-2007
Regulation and productivity growth in professional servicesAverage 1995-2007
Causes of low productivity growth: 3. A rigid labor market and lack of competition
14
The recovery of productivity in Spain: is it sustainable?
Only 12% of Spanish firms exported goods and 9% services not related to tourism over the period 2001-
2011
The productivity threshold to be able to export isconsiderably above the average of the sector
Behind the low percentage of exporting firms lies a self selection effect
A notable degree of concentration: the 1% of firmswith higher export volume represents around 70% of
all exports (UK, France: 40%, Italy 30%)
Lack of external competition
Causes of low productivity growth: 3. A rigid labor market and lack of competition
Proportion of exports accounted for top exporters(%)Source: BBVA Research based on Bank of Spain and Meyer and Ottaviano
0
10
20
30
40
50
60
70
80
90
100
Spain France U.K. Italy Germany
Top 1% Top 5% Top 10%
Note: Germany, France, UK, and Italy data are for 2003; Spain
15
The recovery of productivity in Spain: is it sustainable?
Company size and productivity(Correlation: 0.7)Source: BBVA Research
AUS
AUS
BEL
GER
DINSPAFIN
FRA
U.K.
GRE
IRL
ITAJAP
NTH
NZL
POR
SWE
US
45
50
55
60
65
70
75
80
85
90
95
100
105
5 10 15 20 25 30 35 40
Labour productivity per hour worked in 2008 (U.S..=100)
Employment in companies under 20 employees (%, 2006)
Causes of low productivity growth: 4. Lack of size
Productivity is low in small firms, which account for a large part of employment and output
Other determinants of productivity seem to be correlated with size
Economies of scale seem to be important in some sectors, and to export
16
The recovery of productivity in Spain: is it sustainable?
Productivity is low in small firms, which account for a large part of employment and output
Other determinants of productivity seem to be correlated with size
Economies of scale seem to be important in some sectors, and to export
Features of exporting firms in comparison with non-exporting firms in the yearManufacturing. Ratio of medians, average 1990-2010Source: BBVA Research based on ESEE, Fundación SEPI
0 1 2 3 4 5 6 7 8 9 10
R&D and technology adoption*
Foreign capital participation*
Size
Real K stock per employee
Real productivity per employee
Share of high-skilled labour*
Market share in main market*
Share of white-collar workers
Average real cost of debt
Temporary employment rate
Bank debt over own funds
Note: Pool of total observations. * Ratio of means of the corresponding distribution.
40
Causes of low productivity growth: 4. Lack of size
17
The recovery of productivity in Spain: is it sustainable?
Human capital is one of the main determinants of GDP per working-age population and other
economic variables (U, R&D, etc.)
Increasing human capital levels in some countries will be a very slow process (demographics) -> on-
the-job training (labour markets reforms)
Huge differences among European countries
Schooling of adult population and GDP per WAPSource: de la Fuente and Doménech (2012)
DEU
FRA ITA
ESP GRC
PRT
IRL
BEL AUT
FIN
NLD SWE
DNK
GBR
USA R² = 0.81768
10.4
10.5
10.6
10.7
10.8
10.9
11.0
11.1
11.2
11.3
7 8 9 10 11 12 13 14
GD
Pper
WA
P,201
1(in
logs)
Years of schooling of adult population, 2010
Causes of low productivity growth: 5. Human capital
18
The recovery of productivity in Spain: is it sustainable?
Spanish productivity vs European average (GDP per worker)Included countries: Austria, Finland, France, Germany,Greece, Ireland, Italy, Netherlands, Portugal, Spain & United Kingdom
Productivity has increased substantially over the crisis
Productivity has increased substantially over the crisis
Spain is where productivity has increased themost in Europe
Spain is where productivity has increased themost in Europe
Most of the adjustment has come from jobdestruction
Most of the adjustment has come from jobdestruction
Nonetheless, productivity has gone up after the crisis
90
92
94
96
98
100
102
104
106
108
110
2008
2009
2010
2011
Max Spain
19
The recovery of productivity in Spain: is it sustainable?
Spain: economic growth and breakdown of difference in number of hours worked (cumulative change 2007-09, %)Source: BBVA Research based on INE and EC data
GDP (-4%)
2
1
0
-1
-2
-3
-4
-5
-6
-7
-8
Employment Average working day in the year
Total hours GDP
Germany Spain
GDP (-3%)
This might be the result of non efficient ways to adapt
Spain: Contributions to employment growth by type of contract ( % YoY)Source: BBVA Research based on INE
-8
-6
-4
-2
0
2
4
6
8
Mar
-01
Mar
-02
Mar
-03
Mar
-04
Mar
-05
Mar
-06
Mar
-07
Mar
-08
Mar
-09
Mar
-10
Mar
-11
Mar
-12
Rest of employed Employees with permanent contracts
Employees with temporary contracts Total
20
The recovery of productivity in Spain: is it sustainable?
Composition and growth of real exports by product(average 2010-2012 (% yoy)Surce: BBVA Research from MINECO
Recovery has been strong,…
…, and diversified enough.
Surprising export growth
-7
-2
3
8
13
18
23
28
33
38
0 10 20 30 40
Annual
aver
age
real
gro
wth
Share in total exports
Oil refining, electronic components,others
Electric engines, chemical products,Beverages, others
Basic chemistry, mechanicalEquipment, textiles
Agriculture, other machinery
Motor vehicles, pharmaceuticals
Furniture, Motorcycles
But there are reasons to think some is permanent
21
The recovery of productivity in Spain: is it sustainable?
Spain: response to labour market reform (% deviation from trend)Source: BBVA Research
Labor market reform simulation in REMS
REMS is a DGE of a small open economy within a monetary union, calibrated to fit moments of
Spanish economy
REMS is a DGE of a small open economy within a monetary union, calibrated to fit moments of
Spanish economy
Key features of reform: lower dismissal costs, reduce negotiating power of unions, better active
labor market policies
Key features of reform: lower dismissal costs, reduce negotiating power of unions, better active
labor market policies
The model delivers on impact a strong improvement in productivity
The model delivers on impact a strong improvement in productivity
-2
0
2
4
6
8
10
12
14
16
18
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
GDP Employment
But there are reasons to think some is permanent
22
The recovery of productivity in Spain: is it sustainable?
Main messages
1
2
3
Productivity growth has been low in Spain as growth came through factor accumulation
Literature points towards several key factors to explain this, from the sector allocation of resources, to labor market regulation, to lack of competition.
Recent trends are due to temporary factors, but reforms might insure that mostof the gains are permanent
23
The recovery of productivity in Spain: is it sustainable?
The recovery of productivity in Spain: is itsustainable?Miguel Cardoso
BBVA Research │Head Economist, Spain