03.11.2023
Stylised facts about the post-pandemic performance of the Spanish
labour market and future challenges*
Closing address at the "Canary Islands, investment hub" forum during the
Canary Islands Money Week/Universidad de las Palmas de Gran Canaria
Las Palmas de Gran Canaria
Pablo Hernández de Cos
Governor
*English translation of the Spanish original
Dignitaries, ladies and gentlemen, good morning.
I would like to thank the distinguished chancellor of the Universidad de Las Palmas de Gran
Canaria, Mr Lluis Serra, and the dean of the Faculty of Economics, Business and Tourism,
Mr Juan Manuel Benítez del Rosario, for their kind invitation to deliver the closing address
of the Canary Islands Money Week, organised by this university.
Of all the building blocks of an economy, the labour market is one of the most fundamental.
A country's macroeconomic performance and the efficiency of its economic and social
policies largely depend on the functioning of this market.
In recent years the global economy has experienced an unprecedented series of shocks,
whose impact on production, aggregate demand, employment and, ultimately, producer
and consumer incomes crucially depends on how the labour market copes with them.
These shocks have occurred against a background of secular trends (such as population
ageing and technological change) with the capacity to transform the functioning of the
labour market and economic activity.
In Spain, moreover, the labour market has traditionally been characterised by serious
dysfunctionalities, which have resulted in very high unemployment rates, affecting the
different population groups very unevenly (with a higher incidence among women, young
people and low-skilled workers), and an excessive prevalence of long-term unemployment.
This market also suffers from an excessive duality between workers on permanent and
temporary contracts that is economically inefficient, socially unfair and not conducive to
productivity growth, and which also leads to adjustments in the event of adverse economic
shocks through job losses to a much greater extent than through wages and makes the
market prone to mismatches between labour supply and demand even in periods of
particularly buoyant economic activity.
The long succession of labour reforms over the past four decades aimed at correcting this
dysfunctional behaviour - the last of which was passed in 2021 - should therefore come as
no surprise.
In this setting, I would like to share some thoughts about the Spanish labour market and its
outlook. To this end, I will highlight some stylised facts about the performance of this market
in Spain in recent years and how it compares to the European labour market.
The first notable aspect of the recent performance of the labour market both in Spain and
in most advanced economies is the resilience of employment.
During the pandemic, despite the sharp drop in economic activity in 2020, employment rates
declined by much less than would be expected based on historical regularities.
The unique characteristics of this crisis - caused by a factor that was exogenous to
economic developments and temporary - together with the economic policy response, help
explain the relatively good employment performance in this period.
Of note among these policies was the role played in many countries by job retention
schemes as an alternative to employment adjustments. The use of job retention schemes
greatly reduced the need for such adjustments and facilitated the subsequent return to
work.1
Beyond its initial response to the COVID-19 crisis, employment has continued to perform
well throughout the subsequent economic recovery, growing above the rate estimated
based on the observed slowdown in GDP.2
This has been particularly the case in the most recent period, as activity in Spain and other
European countries has been dragged down by, among other factors, the economic fallout
of the war in Ukraine since early 2022 and the necessary tightening of monetary policy in
response to the sharp and persistent rise in inflation.
Against this background, however, employment has continued to grow at significant rates.
By way of example, employment grew at about 3% year-on-year in the last two quarters in
Spain, while GDP growth gradually slowed, to 1.8% year-on-year in Q3.3
As a result, apparent labour productivity, whether measured per worker or hour worked,
performed very poorly. For example, in 2023 Q2, in Spain it stood at a similar level to that
observed at end-2019.
Overall, the employment recovery profiles are quite similar in Spain and the euro area as a
whole, although in Spain the decline in the number of persons in effective employment was
somewhat sharper in 2020 Q2 and employment recovered somewhat faster from 2021
onwards.
A second common characteristic of this period is that since 2019 total employment
measured in actual hours worked has grown less than the number of persons
employed.
In other words, the average number of hours worked per person employed has decreased.
In Spain, in 2023 Q3 this figure stood 2.1% below its pre-pandemic level. In the euro area,
on information to 2023 Q2, the negative gap was -0.8%.
During the pandemic, this decline was largely due to job retention schemes being used
extensively to protect jobs (in Spain, these schemes covered over 20% of employees in
April 2020).4
However, since 2021 the number of hours worked per person employed has never fully
recovered, either in Spain or the euro area, reflecting various conjunctural factors, such as
the greater importance of certain services sectors (for example, public sector employment,
where the average working hours are shorter) and the increase in sick leave, which remains
above pre-2020 levels.5
At the same time, average working hours in most advanced economies have historically
trended downward due to technological progress and other structural factors, such as the
growing importance of the services sectors, greater female participation in the labour market
and the higher part-time employment rate.6
Third, the resilience of employment in recent years has been relatively uneven across
sectors and, although qualitatively there are no significant differences between Spain and
the euro area as a whole, some quantitative differences can be seen.
Thus, since end-2019 employment grew relatively faster in the public sector than in the
private sector and its share of total employment stood at 16.6% in 2023 Q3, 0.4 percentage
points (pp) more than four years earlier.7 This gap is higher in Spain than in the euro area
overall.8
By activity, employment growth was higher in the services sector (except trade and
hospitality, which were initially strongly affected by the restrictions approved in response to
the pandemic) than in construction, industry and agriculture. Of note in the services sector
is the sound performance of professional, scientific and technical activities and information
and communication.9
These changes in the sectoral composition of employment appear to be associated with
two fundamental processes.
First, the necessary reallocation of employment that took place during the COVID-19
pandemic, arising from the uneven sectoral impact of the health measures adopted, which
initially hit the most contact-intensive services sectors the hardest.10 The greater need for
public sector employment in human health activities had analogous effects that partly
explain the behaviour of this variable in this period.
The second fundamental process, which is likely to become more relevant in the medium
term, relates to the impact of the ongoing technological changes prompted by growing
digitalisation and, more recently, the development and greater penetration into productive
tasks of artificial intelligence (AI) and robotics.
In this respect, some studies11 show that such technological developments do not have an
adverse effect on the jobs most exposed to them. Indeed, the relative share of employment
in jobs involving the tasks where AI has progressed the most, particularly jobs with a higher
proportion of young people and workers with a high educational attainment level, has
increased.
This evidence is in line with the theory that technological change is biased towards
highlyskilled employment, reflecting its greater complementarity with technological capital.
Although there is some cross-country heterogeneity, employment rates in the occupations
most exposed to AI-enabled automation are generally not seen to decline.
The cross-country heterogeneity appears to be linked to the pace of technological uptake
and education, as well as product market regulations (which affect the degree of
competition in these markets) and employment protection legislation. Employment growth
in technology-intensive occupations is greater in countries where technological progress is
more advanced and that have fewer regulatory rigidities in product markets.
Fourth, labour market participation rates have recovered in recent quarters, after
falling during the COVID-19 pandemic.
There are two trends worth mentioning here, relating to migratory flows and population
ageing.
First, migratory flows lie behind most of the labour force developments in Spain during this
period.
Indeed, after immigration flows dried up during the worst-affected quarters of the pandemic,
the foreign population has driven virtually all of the strong increase in the number of
residents in Spain. In particular, residents in Spain have grown by around 700,000, with
foreign nationals accounting for nearly all of that increase.
That population growth has been the main driver behind the expanding labour force, which
has increased by roughly half a million people during this period. It is worth noting that the
labour force participation rate of the foreign labour force is somewhat higher than the
national figure and has risen slightly since end-2019 (by 0.3 pp, to 77.6%).
Employment has grown by 900,000 workers in the period, roughly one in three of which are
foreign nationals.
Going forward, the demographic projections available12 agree that immigration will remain
strong over the coming years, with net inflows of between 300,000 and 500,000 people in
2023, and between 200,000 and 500,000 in 2024 and 2025, making this a key determinant
of labour force and employment developments in Spain.
In addition, the progressive ageing of the population has had visible effects on the labour
market in the most recent period.
Indeed, alongside technological progress, population ageing is the other major structural
trend that has been influencing the labour market, and one that will do so increasingly in the
foreseeable future. Population ageing could have ramifications not only in terms of the size
of the working-age population and the aggregate level of employment, but also the
occupational and sectoral composition of employment. In the near term, changes in the
working-age population are shaped entirely by the low birth rates of previous decades and
immigrant inflows.
For instance, the working-age population has shrunk as a proportion of the total population,
a product of the large baby boom generation reaching retirement age, low fertility rates and
a steadily increasing life expectancy.
Needless to say, this population ageing is driving a very marked increase in the relative
share of older workers in the working-age population. Between 2019 Q4 and 2022 Q4, the
proportion of older persons (aged 55-69 years) in the labour force grew by 2%, while that
of young persons (aged 16-24) climbed by 1%, spurred by the recovery in employment.
Meanwhile, the share of adults (aged 25-54) shrank by nearly 1.5%. This fall was not caused
by a declining labour force participation rate, which in fact has followed a trajectory similar
to that of the unemployment rate. Rather, it was entirely attributable to the shrinking
population in the intermediate age group.
The recent increase in the participation rate of older individuals is also noteworthy. For
instance, in Spain the participation rate of the over-55s has risen by 3 pp since end-2019,13
although it remains well below that of the intermediate age group.
Overall, population ageing is estimated to have reduced the labour force participation rate
by just over 3 pp.14 According to the projections currently available, by 2030 it will have
decreased the participation rate by a further 3 pp.
Given the better education levels of the new population cohorts, the working population
with high levels of education has also risen markedly. The share of the workforce with low
education continues to shrink, while growth in the labour force with medium levels of
education remains scant, a shortcoming traditionally associated with the limited availability
of vocational training. Indeed, the recent education reforms were intended to bolster dual
vocational training.
As a whole, these trends are set to be accentuated in the longer term. The various
projections tend to envisage a further easing of migration flows, with these failing to offset
the effects of population ageing on the labour market, leading to a significant reduction in
the working-age population as a percentage of the total population. According to these
projections, population ageing will accelerate in Spain over the coming decades, outpacing
both the EU and the euro area as a whole.15 Far from being a temporary phenomenon, this
will become a permanent trend, as illustrated by a dependency ratio that is set to remain
above 50% from 2045.
Fifth, as a result of the developments I mentioned earlier, the unemployment rate rose
slightly during the pandemic, followed by a subsequent sharp fall.
Favourable employment developments have driven a steady decline in Spain's
unemployment rate, which stood at 11.6% in 2023 Q2, its lowest level since the outbreak
of the global financial crisis in 2008. This came alongside a reduction in the euro area as a
whole, which in 2023 Q2 posted its lowest ever unemployment rate (6.3%). In any event,
Spain's unemployment rate remains almost double the euro area average.
The favourable unemployment performance was seen across all population groups. In
Spain, as compared with the same quarter in 2019, the unemployment rate has fallen more
sharply among the under-25s (-5.2 pp, although this group still has the highest
unemployment rate, at 27.9%) and in the intermediate age group (-2.6 pp) than for the
over55s (-1.3 pp). The patterns in the euro area are similar, although the declines have been
more consistent across the age groups.16
By level of educational attainment, less educated workers have the highest rates of
unemployment (17.4% in 2023 Q2, albeit down by nearly 3 pp on four years earlier).17 In any
event, the gap to the highest-qualified cohorts remains sizeable, with an unemployment rate
for the university-educated group of 6.6%.
Overall, the strong labour market performance has prevented any increase in long-term
unemployment that might have entailed a structural impairment to the labour market. In fact,
in 2023 Q2 the incidence of long-term unemployment stood at 34.9% in Spain (37.1% in
the euro area), down by 3.7 pp on four years earlier (-7.6 pp in the euro area).
Sixth, the changing sectoral and occupational composition of labour demand (driven mainly
by the pandemic and technological progress) and the supply-side developments (induced
by population ageing and immigration) have prompted some labour market tightening.
Indeed, as unemployment declined, the proportion of unfilled job vacancies (the so-called
vacancy rate) increased, albeit more so in the euro area overall than in Spain.
Unoccupied job vacancies are difficult to measure using the customary statistical
instruments and therefore the statistical information should be interpreted with caution. That
said, there appears to be a perceived labour shortage for certain occupations in some
sectors of activity.
This shortage is observed both in medium and low-skilled sectors (in services such as
hospitality) and in those requiring some professional qualifications (particularly among
technology and engineering firms).
Business survey data show that these labour supply challenges are widespread. In the case
of Spain, according to the results of the latest Banco de España Business Activity Survey
(EBAE), nearly 40% of the companies surveyed reported labour shortage as a factor limiting
their activity, with this figure following a rising trend in recent quarters.
These problems are fairly broad-based across sectors of activity, but are somewhat more
pronounced in sectors such as hospitality and construction, where more than 50% of firms
say they have been adversely affected.
These difficulties appear to be influencing companies' hiring decisions, with 40% of the
affected firms reporting a reduction in hiring intentions. In turn, a similar percentage of
companies said that these challenges were leading to higher wage pressures, while a lower
proportion also reported an adverse impact on investment decisions, with smaller firms
particularly affected.
Although the information available makes it difficult to conduct an in-depth analysis of why
firms are struggling to find labour, the data from the EBAE suggest a mismatch between the
skills needed by firms and those offered by the workforce, with more than half of the affected
companies reporting a shortage of suitably qualified workers for their job vacancies.
The differences in the skills composition of the employed and the unemployed also point in
this direction. While more than 50% of unemployed individuals have a low level of
education,18 that figure is less than 30% among the employed. This problem is somewhat
more marked in jobs requiring intermediate or higher vocational training and, by sector of
activity, in industry, construction and transportation.
The second reason most frequently cited by firms is difficulty in retaining employees, a
problem that tends to be more acute in relation to low-skilled workers.19
Other indicators based on employment inflows and outflows also suggest greater labour
market tightness. For instance, job separation rates have fallen sharply; this despite an
increase in voluntary terminations, a phenomenon that has been far more marked in other
20
countries, such as the United States, giving rise to term "the Great Resignation".
The fall in employment outflows is therefore associated with the decrease in labour
shedding, which could reflect different factors, such as the greater readiness of firms to
retain their employees given the difficulties in attracting new hires or the impact of the legal
reforms approved in 2021.
Labour market tightness may be explained by a number of factors.
First, workers may be more demanding when it comes to the working conditions they expect
when accepting a job offer, which would be reflected, among other things, in an increase in
their "reservation wage".
Another potential factor, and one I have already mentioned, is a growing mismatch between
the skills required in new jobs and job seekers' qualifications, which seems likely in a setting
of rapidly advancing technology and an education system that is struggling to keep up with
such change.
A third factor is that, following the pandemic, employers face greater difficulties and
uncertainties when hiring new workers and may therefore be more reluctant to shed
workers, leading to an increase in so-called "labour hoarding". The importance of the latter
phenomenon is shown in the results of the EBAE, according to which the percentage of
firms retaining or increasing their workforce despite a decline in their production or sales
has increased.
One or other of these explanations is more likely depending on the labour market segment
in question. For example, the effect of the rise in reservation wages on labour market
tightness appears to be greater in low-skilled sectors and jobs where wages are close to
the national minimum wage. Conversely, the skills mismatch is probably a more prevalent
factor in high-skilled sectors and jobs, whereas labour hoarding may be more frequent in
sectors where recruitment is more complex and labour is in shorter supply.
Seventh, the significant decline in the temporary employment ratio, following approval
of the labour market reform in 2021.
The labour market reform approved in late 2021 reduced the scope for using temporary
contracts and broadened permanent hiring options, making the use of permanent seasonal
contracts more flexible and modifying the causes for terminating permanent contracts in the
construction sector, to the effect that, under certain circumstances and conditions,
completion of building work became a legitimate cause for termination of employment.
These legal reforms have no doubt had an impact on the labour market. In particular, the
temporary employment ratio has declined sharply, especially in the private sector,
approaching the levels observed in other European countries.
The fall in temporary employment has been accompanied by a marked increase in
permanent seasonal contracts, which, according to the latest social security registrations
data, account for almost 25% of the decrease in temporary employment, while a further
25% would be accounted for by permanent part-time contracts and the remaining 50% by
permanent full-time contracts. These permanent seasonal contracts are indeed permanent,
but are characterised by frequent rotation between periods of employment and inactivity
over the course of the year.
The increase in other full and part-time permanent contracts (other than those of a
permanent seasonal nature) has coincided with a rise (albeit from low levels) in the
destruction rate of such jobs since the reform. The average rate of daily deregistrations of
workers on permanent contracts was 0.14% between 2015 and 2019. However, following
the reform, that figure had doubled to 0.28% by September 2023.
Thus, the aggregate decline in the rates of transition to inactivity since early 2022 is
associated with the composition effect stemming from the higher share of permanent
contracts.21 However, there has been no reduction in employment volatility, at least for the
time being, for workers on permanent seasonal and temporary contracts. In fact, recent
developments show labour turnover among permanent seasonal workers rising to levels
22
approaching those observed for workers on temporary contracts.
In short, the information available to date points to an increase in job stability, but an even
larger decrease in the temporary employment ratio, reflecting higher labour turnover among
workers on permanent contracts.
In any event, a comprehensive assessment of the impact of the labour market reform will
have to consider multiple issues, such as employment, unemployment, wages, productivity
and other key macroeconomic aggregates such as consumption and household saving. It
will also require a longer time frame and data analysis that is performed with as much
granularity as possible, since the reform is expected to have asymmetric effects on different
groups of workers and firms.
Eighth, the significantly moderate wage growth in this period, given the high inflation
environment.
Wage-setting through collective bargaining in Spain has undergone two major shocks. One
was the slowdown in wage bargaining during 2020-2021, associated with the pandemic.
The other, more recent shock is the upturn in inflation observed since the second half of
2021 - following a long period of very low inflation -, which has prompted a notable change
in the economic conditions under which collective agreements are negotiated. This
inflationary shock has meant that, despite negotiated wage increases having risen from
1%2% in the pre-pandemic years to slightly more than 3% in 2022-2023, they remain well
below cumulative inflation in the last two years.
Moreover, marking a departure from previous decades, the degree of wage indexation in
collective agreements appears to have declined significantly in the Spanish economy. The
percentage of workers covered by indexation clauses against inflation has risen somewhat
despite the inflationary environment, to around 25% in recent months, but is well below the
coverage provided in the past.23 Furthermore, the degree of protection afforded by these
clauses is also lower than before, since, on the whole, they only partially offset higher
inflation.24
In this respect, the 5th Employment and Collective Bargaining Agreement, signed in March
this year, sets out general recommendations for wage increases during the period
20232025 (the term of the agreement). This will help recoup some of the purchasing power lost,
thus contributing to sustaining employment growth while substantially mitigating the risk of
second-round effects emerging via prices and wages.
Wage moderation may also explain, at least in part, the favourable performance of
employment since the start of the inflationary episode. Similarly, the gradual decline in
inflation anticipated by the macroeconomic projections of the Banco de España and the
European Central Bank (ECB) for the Spanish economy and the euro area, respectively, is
based on continued wage moderation going forward. Indeed, these inflation projections
hinge on the gradual recovery of real wages which, in a setting of likewise gradually
recovering productivity, would allow for moderation of unit labour cost growth. This
moderation in unit labour costs, along with the expected fall in profit margins, is essential to
ensure convergence towards the ECB's 2% inflation target over the medium term.
However, since early 2023, total labour costs in Spain have risen more sharply, by around
6%, reflecting the substantial increase in non-wage cost components, mainly concentrated
in social security contributions following the various regulatory changes approved. Average
wage increases are higher than the wage settlements in collective agreements, reflecting
different composition effects stemming, for example, from the higher wages of first-time
employees or those changing jobs,25 against the background of labour market tightness that
mentioned earlier. These increases could begin to have negative repercussions on the
demand for labour, particularly if productivity growth remains low, as in recent years.
Concluding remarks
One of the most striking features of advanced economies, including Spain, in recent years,
is the overall resilience of their labour markets. Looking ahead, this resilience should not be
taken for granted in an environment such as the present one, characterised by a high level
of uncertainty and many downside risks to growth. Indeed, economic activity has already
slowed significantly in Spain, Europe and worldwide, while the medium and long-term
growth outlook is subdued.
Moreover, some of the changes currently taking place in the labour market are structural
and may even gather pace. The latest wave of breakthroughs in artificial intelligence, for
example, poses major challenges when it comes to ensuring that such developments lead
to improvements in productivity and, hence, in workers' wages, and not to the destruction
of jobs in the areas most exposed to this technology. Population ageing also presents key
challenges for the labour market, beyond the need to adapt the pension system to the new
demographic context.
Furthermore, improving the functioning of the Spanish labour market is essential to correct
the factors that have hindered convergence with per capita income in the euro area in recent
decades, namely, low productivity and a low rate of employment. In fact, raising productivity
and the employment rate are key elements of any strategy aiming to achieve a sustainable
reduction in inequality.
Addressing these challenges requires ambitious reforms, which include improving the
institutional framework of the Spanish labour market, implementing active and passive
employment policies, adapting the education system, developing migration policies and
implementing social protection programmes, in addition to ensuring that the labour market
is aligned with the new technological and demographic context. In my opinion, these
reforms should be an economic policy priority in the years to come.
Thank you very much.