Monday, 23 May 2011

Analyse ways in which Spain can improve its long run growth potential.

Spain has experienced continuing losses of international competitiveness over the past decade or so, and it is clear that in order to regain competitiveness, they will have to impose measures to improve their long run growth.

The first way Spain can increase its long-run growth potential is to improve the human capital of its workers so that they are more productive in their current industries. The government could achieve this by training the population. A similar strategy would be to improve the education that the state provides. The effect of this would be to improve the adaptability of the work force, reducing unemployment due to labour immobility. Reducing unemployment should be seen as an important task for the government of Spain, as it has been very high for quite a long time, which can lead to serious social problems, as well as causing workers to become unemployable.

One of the main reasons why Spain has poor growth at the moment is that a large sector of its economy is based around construction, and industry in which there is currently large amounts of supply, but very little demand for the houses they are constructing. Therefore it could be a good idea for the Spanish government to subsidise a new type of industry, such as technology manufacturing, which clearly has a place in the future of global trade.

Spain, along with the rest of the PIIGS, has relatively high unit labour costs. This can be a cause of lack of international competitiveness, and it should be an objective of the government to reduce these costs if it wants to increase its long run growth potential. One way of doing this would be to reduce the National Minimum Wage (NMW), in order to reduce wages.


  1. If NMW is high, surely this creates demand for labour....(as those on low income have high mpc) so why is unemployment high?

  2. "Spain, along with the rest of the PIIGS, has relatively high unit labour costs. "

    why - and what can be done about this?

  3. Sally - Unemployment is high because benefits are also high.. People would probably rather live off benefits without working than gain the extra money and have to work full time.

    This is known as the unemployment trap.


    The unit labour costs are high due to low productivity combined with high wages. Wages are high because it is very difficult to lower wages, even though the market may say that they should be reduced.

    Productivity may be low due to a lack of training or education in an economy. Off the top of my head the figures for school drop-out rates in Portugal were something like 60%.. This can lead to long-term productivity/labour mobility problems.

  4. Hi,

    I must say I disagree with your analysis. Unit labour costs are high in Spain due to low productivity, not high wages. Wages in Spain have traditionally been and remain lower than in the other big European economies.

    I would also like to point out the temporary nature of unemployment benefits in Spain, which are linked to the number of months of work prior to claiming the benefit. Certainly unemployment benefits are more generous than in other countries, but only for a limited period of time. They are hardly an incentive to stay out of work indefinitely.