Spain Must Address Low Labor Productivity To Resume Economic Growth

Includes: EWP, TEF
by: Timothy Woods

History has much to teach us and if we are to avoid economic crises we should study more of it. At least, that is, according to the Spanish economist Gabriel Tortella. Though rather than look to the past, the Spanish government seems to prefer to just do what everyone else is doing and cut spending without focusing on other areas where improvement could be made. As one of Europe´s largest economies, Spain´s handling of their economic woes is being watched very closely not only in Europe but abroad too, especially in the United States.

Spain´s main problems do not lie with their national debt, at 66% of their GDP, which is not so high in comparison with that of other countries, such as Italy, whose national debt stands at 120% of GDP.

Of course, Spain is still in the grip of La Crisis, their main problems being huge unemployment figures (currently above 20%, with youth unemployment at a whopping 40%) and a slump in their property sector. The newly elected People´s Party, led by Mariano Rajoy, has just announced some fierce budget cuts, in line with much of the rest of Western Europe in an attempt to revitalise its stuttering economy and pull Spain back to the good old bull market days of pre-2008. Will this be enough?

While reducing the budget deficit is sound policy, precedent is quickly demonstrating that slashing spending across the board is by no means a sure-fire way of kick-starting an economy. One need only look to the UK as a prime example. Since assuming power in 2010 the Conservative-led Coalition government has gone about enacting a severe, controversial program of cuts. In response and most likely to the surprise of Prime Minister Cameron and Chancellor George Osborne, the British economy has failed to see any real sign of significant growth in almost two years of the cuts program.

Spanish productivity problem

Spain´s work culture and practices set Spaniards apart from the rest of Europe as unique. According to the 2006 Eurostat Labour Force Survey, the average working week in Spain, at 38.4 hours, is above the European Union 27 average, at 36.8 hours. In the 2003 edition of the National Working Conditions Survey, Spain´s work productivity level was found to be among the lowest out of the fifteen European countries (EU15) assessed. At 83% of the EU15 average it is significantly lower than that of France (123.1%) or Belgium (120.1%). In eight years since the study this clearly problematic issue has not been addressed, despite being discussed in Spain at length. Now could be that time. It may very well be the key to galvanizing their economy.

Mariano Rajoy´s government has been given an overwhelming mandate by the Spanish people at the polls to employ the necessary means to improve the economic state of the country. With recent news that Spain missed its deficit target for 2011, clearly a different tack is needed. If he were to address the problem of work productivity and convey to the Spanish people that some long-standing traditions and indeed parts of the Spanish way of life must change for Spain to recover economically, it could be embraced by the people. Rather than work longer hours, as was put forward as the only way for Spain to return to growth by Isidro Fainé, president of the influential Spanish bank, La Caixa, surely it would make more sense to simply work better within a regular working week. That is to say, to be more productive at work.

Spain´s precarious financial position remains a worry for the markets. Low confidence in the Iberian country´s ability to climb out of its slump is prevalent. Financial stocks would undoubtedly benefit from any economic gains made from addressing the country's low work productivity levels. It really is quite baffling how nobody in the corridors of power in Spain nor Europe seems to realise how important an issue Spanish low work productivity is and how if addressed, it could realistically give Spanish financial stocks and by domino effect, the Eurozone, the boost that they are crying out for. In 2012 alone, Eurozone GDP contracted by 0.7%. If addressed, Spanish stocks would likely be looked upon with more confidence in general. Even to demonstrate that they are prepared to try such measures to shore up their financial problems, Spain would undoubtedly receive recognition for this through improved confidence in the markets.

Though the Spanish government´s strict austerity measures are designed to reflect to investors that Spain is capable of getting its financial house in order, investors will continue to tread carefully with regard to Spanish stocks. Spanish stocks are not being strongly tipped right now for 2012. Telefonica (NYSE:TEF), for example, after finishing 2011 on a low, is predicted to continue this trend in 2012 mainly due to European economic woes in general placing a strain on the company´s performance. The company has restructured its entire business model and is being urged to focus more on its lucrative Latin American market. In 2011 the communications company reported a loss of 8.8% in the Spanish market. Arguably, addressing Spanish work productivity levels would directly and indirectly affect occurrences such as this and would certainly give investors more confidence when approaching Spanish stocks. For 2012, however, investors are urged to look beyond Spain for profitable stocks.

Why are productivity levels so low in Spain?

First of all there is the time structure that is different from the rest of Europe, making any inter-European communication move at a slower pace. The Spanish working day is usually longer, drifting into the evening, rather than the typical 9-5 European working day. Whereas in Britain or Ireland, for example, lunch is usually one hour or even half an hour, the Spanish norm is two hours, where a long, heavy meal is normal. What´s more, the lunch break usually takes place from 2pm, much later in the day than other European countries. As stated by Antonio Corral, “the country’s rather unique time structure makes it more problematic to communicate with other European countries.”

Second, family is of utmost importance in Spain. Generally families are close-knit, certainly more so than the majority of European countries. It is normal for a young Spanish person to live at home with their parents until they reach their late twenties or early thirties before moving into their own home. Longer working hours have been found to lead to higher stress levels among Spanish people, as in order to work longer, they must spend less time with family and on leisure activities. This is very likely to demotivate people at work, leading to lower productivity levels. In addition, this is said to also be a fundamental reason why the birthrate in Spain is so low, standing at 1.32 per woman (Eurostat 2004). This would be yet another reason why the government should act now.

How the new Spanish government could proceed

The 2005 White paper, “Working Time Structure in Spain,” found that the problem could be tackled by focusing on some key areas.

Rather than the current culture of working long hours, a change in approach should be made towards a more target-driven, results-oriented workplace.

The government should adapt the education system to make for more wide-ranging extra-curricular activities, allowing parents to work without having to worry about their children. Schools and institutions could also adapt their schedule in line with that of regular working hours. It is common practice for a school day to last from 8:30am until 5pm in Spain, much longer than many other European countries.

In addition, as reported by Antonio Corral, “retailers should identify customer needs by district and sector, and adapt opening hours according to customer requirements."

Beyond these measures, a general focus on improving efficiency and approach to work is needed in Spain or the country risks falling behind the rest of Western Europe. As one of the continent´s larger economies, if Spain can get its financial house in order and return to growth, it would be a shining example not only to the rest of Europe but to the world. Addressing the endemic problem of low work productivity, a problem which has dragged on too long for a country that seeks a voice on the world stage, and that seeks to be recognized as a significant voice in the G20 group of nations, it is time for action to be taken.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.