21/01/2015
As we argued in the previous instalment, inadequate investment in productive capital, technological backwardness and the limited organisational changes that have characterised the Spanish economy, as a result of our productive specialisation, have marked its delay in productivity and losses in competitiveness. And while the restructuring of the productive sectors as a consequence of the crisis, with weight losses both in terms of production and in terms of low-skilled labour intensive sectors, have helped to recover part of competitiveness, the fact is that increased productivity, while an important factor that can help to remain competitive in the long run, is just one of the factors that can explain this improvement, especially when you consider that it has been slow. So we must ask what other facts have taken place in the Spanish economy in order for competitiveness to improve the way it has.
In this regard, as we argued in the first instalment, we must remember that traditionally, and while the peseta was our currency, Spain temporarily appealed to competitive devaluations to boost exports. This fact, although it improves the balance of trade, is undoubtedly an impoverishment of the Spaniards compared to citizens of other countries. However, this measure, directly at least, is not possible since the control over money supply, and therefore the exchange rate, does not depend solely on the decisions of the Spanish monetary authorities. The euro, which has had very positive effects on the Spanish economy, such as trade stability or the decrease of interest rates, has deprived us of this measure to correct the external deficit. However, there are alternative ways to achieve similar effects.
Thus, a slight improvement in productivity, along with a reduction of wages and labour costs, which will end up doing the same with prices, can have the same effect as a devaluation of the currency. In short, it is possible to replace the nominal devaluation by an internal devaluation. This is clearly reflected in the behaviour of the real exchange rate – which will be discussed in future issues – as it is a priority to get to know first the behaviour shown by wages and labour costs as a result of the crisis.
As far as wages are concerned, and contrary to what one might expect, the average wage of Spaniards showed an average annual decrease of 0.38 percentage points during the expansion period. While this same wage increased during the recession, especially in the early years of the crisis, from 2010 growth seemed to slow down until becoming negative as of 2011.This is explained by the fact that during the expansion period, the employment of low-skilled labour, hired with high-wages but always lower than those of skilled labour, increased, so the average wage of Spaniards experienced some decrease. Meanwhile, during the first years of the crisis, Spanish companies tried to evade it, as was already discussed in previous instalments, with the dismissal of the same workforce hired during the expansion. Only a situation of enduring crisis helped to lower wages. Thus, as shown in Figure 1, Greece, Portugal, Spain and Ireland, joined by the UK, are the countries which have reduced their average wage by more than 1 percentage point in 2010-2012. Thus, as can be seen, the Spanish economy reacted to the crisis, although with some delay.
Graph 1. Average annual change in average wages (2010-2012)
Similarly, during the expansion, Spain showed a clear rise of labour costs as a result of structural problems burdening the labour market. This growth, second only to the one taking place in Luxembourg, was particularly high from 2002, and remained at those levels until 2008, when the growth of labour costs exceeded 5.5%. Despite the delayed response of the labour market before the crisis, the truth is that Spain has been the only country, along with Greece, Ireland and Portugal, capable pf correcting the excessive growth of its labour costs during the precedent period of expansion (see Table 1).
Table 1
However, this correction of labour costs has not taken place in the same manner and with the same intensity in all sectors of the economy (Figure 2). While the correction has been particularly intense in the construction sector (with a cumulative drop of more than 18 percentage points) and in the primary sector (in average, more than 2 percentage points per year), has hardly been felt in the sector industry, while the service sector has only shown slight losses in the 2010-2012 period, with a positive cumulative change over the crisis period (1.0%).
Figure 2. Changes in unit labour costs in Spain by sector (1995-2013)
However, it is necessary to know whether the response of lowering wages, especially labour costs, has had a positive effect on prices and the real exchange rate, and if such effect has been sufficiently intense to improve the competitiveness of the Spanish economy compared to our major trading partners. These facts will be discussed in the next instalments.