Low productivity in the Spanish economy compared with the euro area, and the widening gap with the EU average in terms of income and competitiveness, is eroding Spain’s convergence with Europe. That viewpoint came from experts at the General Council of Economists and the Foundation for Applied Economic Studies in the morning as part of a debate series on structural issues in the Spanish economy promoted by both organizations.
By autonomous communities, the Basque Country, Madrid, Navarre, and Catalonia lead Spain’s productivity, while Castilla-La Mancha, Andalucia, the Canary Islands, Murcia, and Extremadura trail in terms of value added per hour worked.
Income per capita and productivity
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According to Javier Ferri, professor of Economic Analysis at the University of Valencia and research fellow at Fedea, Spain’s per-capita income converged with the eurozone average up to 2006, when the gap widened to 5%. Since then, through 2023, the gap expanded to 17%, with 14 of those points attributed to weak productivity performance, Ferri estimated.
Gap between regions
Experts noted significant disparities in regional productivity and a noticeable gap with the European average, with little sign of narrowing in the last two decades. Delving into the roots of these differences, factors such as innovation intensity, firm size, worker education, the structure of production, and job quality are closely tied to true productivity and vary markedly across regions, explained José Carlos Sánchez de la Vega, professor of Applied Economics at the University of Murcia and technical director of the CGE Regional Competitiveness Report.
Data from Sánchez de la Vega’s analysis showed that the regional economy’s productivity (value added per hour worked) in the Basque Country, Madrid, Navarre, Catalonia, La Rioja, and the Balearic Islands stood above the national average in 2022. Specifically, the Basque productivity reached 122.4% of the national average, followed by Madrid at 114.5%, Navarre at 113.4%, Catalonia at 105.1%, La Rioja at 102.5%, and the Balearic Islands at 100.9%.
In the first three cases – the Basque Country, Madrid, and Navarre – productivity even exceeded the European Union average.
Other regions, such as Cantabria and Aragon, hovered around 100% of the national average. Galicia, Asturias, Castilla y León, and the Valencian Community also posted productivity above 90% of the national mean. At the lower end, Castilla-La Mancha, Andalucía, the Canary Islands, Murcia, and Extremadura registered rates between 89.1% and 82.2% of the Spanish average.
Impact of Next Generation
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The training session also featured Valentí Pich, president of the CGE, Ángel de la Fuente, executive director of Fedea, and Juan Pablo Riesgo, former secretary of State for Employment, EY Insights partner, and EY Spain People Advisory Services partner.
Experts emphasized that there is no clear evidence that Next Generation funds boosted productivity; in a first assessment, the average annual growth in real productivity for 2021-2022 barely exceeded 0.5%. They added that these funds are expected to positively affect efficiency across different sectors and regions, but probably only in the coming years.
“Investments are taking much longer to deploy than expected—and longer than what has been observed in the United States thanks to tax incentives as a channel,” noted Juan Pablo Riesgo. He added that reforms in education, labor relations, and active and passive employment policies have been limited, which has tempered the impact of the recovery and resilience mechanism on Spain’s productivity improvement. Yet José Carlos Sánchez de la Vega remained optimistic, stating that these funds should positively affect efficiency across sectors and regions, and he would clearly bet on a positive productivity contribution.
“Time to roll up sleeves”
Valentí Pich highlighted that in the last quarter of 2023 productivity per hour fell by 0.06% in Spain, marking the first decline since the second quarter of 2022. He explained that several factors are at play: limited and not very competitive investment in intangible assets, evident mismatches between job supply and demand, persistent part-time work, and financing barriers for small, especially tech-focused, firms.
De La Fuente stressed that it is crucial to rethink these issues in Spain, as the country has been losing ground for forty years relative to its peers. In the long run, productivity is the main driver of living standards and social well-being, he noted.
Juan Pablo Riesgo welcomed the planned creation of a Productivity Council by the government as important news. Regarding public policy, he called for urgent investments in training and a clear, widely supported regulatory framework to raise the quality of the education system at all levels and to ensure stability over time. On the labor market, he added that facilitating the recruitment of foreign talent and actively integrating the around three million unemployed people remaining in the workforce are essential steps.