A Sectoral Anatomy of the Spanish Productivity Puzzle

Abstract

Income per capita in Spain relative to that of other advanced EU countries held stable at around 90% from 2000 to 2016. Stagnant labour productivity is at the root of this lack of convergence. This paper examines these developments from a sectoral perspective based on recently released EU KLEMS data. Our main findings are as follows: (i) Spain has lower productivity levels vis-a-vis other EU countries in most sectors, with only 4 out of 23 sectors exhibiting higher productivity in Spain: accommodation and food services, agriculture, electricity and gas supply, and information and communication services. Moreover, the allocation of employment towards low-productivity sectors accounts for half of the aggregate Spain-EU productivity gap in levels; (ii) turning to the changes in the 2000-2016 period, the overall lack of convergence is driven by a divergence in productivity relative to EU countries, especially within services sectors; (iii) while both ICT (Information and Communication Technology) and non-ICT capital in Spain converged towards European levels, Total Factor Productivity (TFP) divergence in most sectors explains the lack of convergence in labour productivity. Finally, we explore one potential explanation for this pattern: the TFP divergence and ICT capital convergence can be rationalised in the presence of complementarities between ICT-capital and labour force skills. Indeed, our industry-country regression analysis suggests that the dismal performance of Spanish TFP might be related to the significant deficit in the population’s skills as proxied by PIAAC-OECD scores.