Reviving Broadly Shared Productivity Growth in Spain

Executive Summary

Spain has been confronted with weak wage and productivity growth for several decades. This report provides an overview of the role that labour market policies as well as other policies can play in reviving broadly-shared productivity growth in Spain. The emphasis is on wage setting institutions, employment protection and job retention support, consistent with the focus of recent reforms.

Wage-setting institutions have been strengthened to promote a broader sharing of productivity growth

Spain has significantly increased its minimum wage and strengthened sector-level collective bargaining to promote a broader sharing of productivity gains with workers, particularly those with low wages.

The minimum wage has become an important part of the policy toolkit in Spain. It was increased from a relatively low level of about 45% of the gross median wage in the private sector in 2018, well below the OECD average, to 58% in 2022 and is set to increase further to 62% of the gross median wage (which corresponds to 60% of the net average wage). Most of the increase was realised in a single step in 2019.

The OECD’s evaluation of the 2019 minimum wage reform suggests that it significantly boosted the wages of low-wage workers without causing substantial job losses: it increased the wages of directly affected workers by almost 6%, while it reduced employment by only 0.6%.

Progress has been made in addressing labour market duality, with potentially important payoffs in terms of higher productivity growth

A key feature of the labour reform of December 2021 was to reduce the excessive reliance on temporary contracts by restricting their use. As a result, Spain is now the country in the OECD with the third strictest rules for the use of fixed-term contracts according to the OECDs Employment Protection Indicators.

The reform has resulted in a large reduction in the incidence of temporary contracts. It fell from 21% in 2021 Q4, the second highest in the OECD, to less than 15% in 2023 Q1. The fall in temporary contracts did not result in lower employment as it was more than offset by an increase in permanent contracts. Indeed, the employment rate is now at a record high.

About a fifth of the increase in permanent employment reflects the increased use of open-ended intermittent contracts (contrato fijo-discontinuo). Such contracts offer more employment stability than temporary contracts, although earnings and hours can vary within certain limits.

Reforms to the system of job retention support have enhanced labour market resilience

Ever since the devastating experience of the global financial crisis, there was an ambition to strengthen the Spanish job retention scheme (ERTE) to support labour market resilience. However, it was not until the COVID-19 crisis struck that an effective scheme was put in place. As a result, support was provided promptly and widely, covering almost one in four workers at its peak.

Job retention support played a crucial role in preventing a surge in job losses in response to the COVID-19 crisis. Rather than shedding jobs, as during the global financial crisis when job retention support was little used, adjustment mainly took the form of reductions in working hours as in most other countries where job retention schemes were widely used. The positive impact of job retention support on employment is also confirmed in an ongoing evaluation by the OECD.

Building on the success of ERTE during the COVID-19 crisis, the labour reform of December 2021 introduced an explicit framework for scaling up support in times of exceptional need (the RED mechanism). It allows for government discretion over its activation while the parameters of the crisis scheme are defined in advance.