Spain increases productivity and reduces the gap with Europe, according to the Bank of Spain.

BarcelonaProductivity is growing in Spain. This is confirmed by the annual report for 2024 published this Tuesday by the Bank of Spain, which indicates that the Spanish economy is closing the productivity gap with the main economies of Europe, an element considered one of the State's main unfinished business in economic matters. The good performance of economic activity explains the productivity improvements in recent years, but the organization does not indicate whether they are structural and will be maintained in the long term or if it is a temporary phenomenon.

For the past two years, the Spanish economy has been the fastest-growing among the large economies of the European Union. This has allowed Spain to close the gap in various areas with the rest of Europe, especially in the countries in its immediate vicinity, such as France, Germany, Italy, the Netherlands, and Belgium. One of these elements, according to the Bank of Spain report, is productivity, which, despite being an abstract concept for most citizens, is very important in the eyes of economists and when developing public policies.

Productivity is the efficiency of production. In other words, a company is more productive if it can produce more with less. This also applies to workers or all types of assets, such as machinery or vehicles. It is a concept that is also closely linked to the development of countries: the higher the productivity of a country's workers, the higher their salaries tend to be. Likewise, the more productive its companies are, the more elaborate and expensive their products or services will be. Therefore, advances in productivity enrich countries and the people who live there.

"The productivity gains recorded in the Spanish economy in recent years have made it possible to reduce the negative gap accumulated over recent decades" compared to the rest of the eurozone, the document indicates. However, the productivity gap between Spain and the main European economies remains "significant" and "reducing it represents one of the greatest challenges facing the Spanish economy in the future."

General Improvements

Thus, the Bank of Spain has detected a "recent upswing in productivity" in Spain in 2024, which contrasts with the situation in the rest of the continent. Thus, productivity per worker grew by 1.4% in Spain last year, while in the states that share the euro it fell, on average, by 0.7% (in Germany, Europe's largest economy, the reduction was even greater, at 1.3%). Per hour worked, productivity rose by 2.1% in Spain and a meager 0.1% in the eurozone. A similar situation occurred with capital productivity (the assets of companies, from machinery to vehicles, including software and patents), which decreased by 0.5% in the eurozone while in Spain it increased by a remarkable 2.5% in one year, and total factor productivity (a measure of productive efficiency between labor and capital) by 0.9% in the eurozone.

The Bank of Spain suggests that this widespread improvement in productivity may be the result of both temporary factors and a hypothetical, more profound change in the production model that is beginning to be detected incipiently. Among the "structural" factors—that is, paradigm shifts—are innovation, human capital, and the quality of institutions. Regarding the former, "Spain presents a position far removed from its neighboring countries," although the comparative deficit with the European Union has "reduced" since the pandemic. Therefore, although it is still far from the levels expected for an economy like Spain's, innovation in the state has recently improved, which could explain part of the productivity increases.

Regarding human capital, the report also finds increases: "According to the results obtained in internationally standardized tests on the skills of the adult population, there has been some improvement in the most recent period," especially concentrated in "population groups with lower educational levels." Finally, the quality of institutions—which includes administrations and public services, but also the quality of the laws that regulate a country's economy, politics, and society—has experienced a "deterioration" so far this century, as has the efficiency of the public sector.

Another element to consider is that business investment has grown, which traditionally favors productivity. This increase in investment is due to the fact that "Spanish households and companies have debt ratios close to the lowest levels of recent decades." These low levels of debt, together with the falling cost of borrowing (a result of the interest rate cuts approved by the European Central Bank last year), make it easier for many companies to use credit to improve their productive capacity with new facilities, renovating software or machinery, or dedicating more money to research.

Jobs held mostly by immigrants

The report highlights the strength of the labor market and the "notable" reduction during last year and the first months of this year in both the unemployment rate and the temporary employment rate, while the number of Social Security contributors has grown thanks to the creation of new jobs. However, the document notes that this expansion of the labor market has occurred largely due to the increase in the foreign population residing in Spain: "In recent years, employment has been particularly concentrated among the immigrant population," the document states, adding that, between the end of 2019 and the end of 2024, around 76% of employment will be foreign. This influx of labor from outside the country has made it possible to "meet the increased demand for employment in the sectors with the greatest difficulties" in finding employees.

Regarding the shortage of workers, the Bank of Spain has found that "since the end of 2022 there has been a significant increase in the percentage of companies reporting difficulties in finding labor," especially in construction and hospitality, two of the pillars of employment and economic activity in the 10th of those critical of the current economic model due to job insecurity and low productivity. However, the report does not clarify whether these difficulties for employers in these two sectors to hire new employees is due to "the cyclical situation of the economy" - that is, a one-off event that will be corrected with the entry of new workers into the labor market, whether local or foreign - or if there is "a decoupling of the nature of more workers from that of skills of skills."