Rafael Doménech (BBVA Research): "We run the risk of consolidating this growth model that doesn't improve individual and social well-being."

Rafael Doménech, head of economic analysis at BBVA Research, warns in an interview with EL MUNDO - the latest in this summer series - that although Spain has grown more than the European average in recent years, all the GDP growth since 2019 is due to job creation, primarily immigrant jobs , and even so, the unemployment rate is still double that of our European partners, which denotes a problem with the functioning of the labor market.

The professor at the University of Valencia believes that this "chronic" unemployment rate is one of the reasons for the country's inequality.

Is the extensive growth model of the Spanish economy healthy?

Since 2019, with the pandemic in the middle, we have indeed had much more extensive than intensive growth. This means that GDP has grown by 8%, while the number of employed people has grown by 8.3%. Therefore, all economic growth—which has been more dynamic than in other European countries, and this is welcome—has been thanks to accumulation, in this case, due to the creation of jobs primarily from immigrants. This has a positive side, which is job creation and activity, but nevertheless, prolonging this growth pattern entails risks, because what truly improves well-being, both individual and social, is productivity growth. In the absence of a much more intensive growth model, and therefore one more based on productivity, we run the risk of consolidating this model that does not improve individual and social well-being as it should and that does not allow us to reduce the per capita income gap that has opened up over the last 20 years with the EU. In 2006, our per capita income was almost 5% above the EU average. Today, despite all the growth we've seen in recent years, our per capita income is only 91.5% of the EU average, so we've lost approximately 13.5 percentage points along the way.

You mentioned the need to base growth on productivity. Is this the biggest outstanding issue?

This is one of them, and this isn't new. A decade ago, we wrote about the problems of productivity in the book In Search of Prosperity , discussing the problems of the labor market and the many other challenges we faced.

Can the current growth model have a limit?

In recent years, it's true that practically 80% of the jobs created have been immigrant jobs, and what we see is that despite all this dynamism in job creation, we're struggling to reduce the unemployment rate. It has been reduced, but it's still around 11%, double that of our European partners, so we have a problem in terms of the functioning of the labor market. On the other hand, when the resident population in Spain increases as a result of this migratory flow—which is mainly concentrated in the most dynamic areas of the country, in the large cities—this generates additional pressure on the housing market that we have to address. What has happened in recent years? The construction of new homes has been far below the creation of new homes, partly due to this influx of immigrants. This has generated additional pressure on demand that has not been accompanied by an increase in supply. Therefore, the housing market becomes a bottleneck for migratory flows. Immigration, while absolutely necessary because we're going to have to address the massive retirement of the baby boom generation, faces the challenge of how to integrate them effectively, not only from an economic perspective, but also from a social, educational, and other perspectives.

How is immigration influencing the labor market?

What we see is that immigrants are taking up jobs in very low-skilled professions, such as caregiving. These positions must be filled, and in that sense, it's welcome, because it's clear that for many companies and productive sectors, if it weren't for immigration, production bottlenecks would have occurred, and the number of vacancies relative to the unemployment rate would have increased significantly. While this is true, we also have to ensure that this doesn't only occur in the segments of the labor market currently being filled by immigrants. We also need to address more highly skilled job vacancies that become available as the baby boomers retire. This could happen in healthcare—we're already seeing it—and in many other skilled professions.

If 80% of the jobs created are immigrants, and immigrants tend to occupy low-skilled positions, is Spain growing on the basis of low-productivity employment?

Yes, as I was saying, if GDP has grown by 8% and employment by 8.3%, that means that GDP per employed person has fallen by three-tenths of a percentage point, but that doesn't mean that everyone's productivity is declining. It's perfectly possible that productivity in many segments of the labor market, in many occupations, in many jobs, is increasing, but as the economy grows in occupations with below-average productivity, a composition effect occurs when they are added, offsetting the productivity gains we're seeing at the top, neutralizing the average.

Do you think it's possible to achieve full employment in this term?

We believe that if the growth rates we have projected for this year and next are maintained, we could reach unemployment levels close to 10% by the end of 2026, but it would be difficult to drop significantly below that figure with rates of 8%. And in any case, settling for an unemployment rate of around 8% and considering that the full employment rate for the Spanish economy is a symptom of a labor market failure. Full employment, on average, in other economies is around 4%; that should be the goal that an advanced society like Spain should aspire to. The high and chronic unemployment rate is one of the causes of inequality in this country.

"Today, the percentage of GDP dedicated to public investment remains one of the lowest in Europe."

In terms of both employment and activity, do you find the large gap between the north and south of the country worrying?

On the one hand, we need to review the policies or barriers that are preventing us from having a homogeneous unemployment rate in Spain; and, on the other, we must promote labor mobility. It is indeed unnatural that there is such a large gap in unemployment rates; that some provinces aspire to have a natural equilibrium unemployment rate, like that of our neighboring economies, and others do not, resulting in unemployment rates in some regions that are double those of others in the same country. This is a source of inequality, both individual and territorial.

Do you think European funds have been as transformative as intended?

There was a huge consensus that European funds were an unprecedented opportunity for the Spanish economy, and for European countries in general, to undertake transformation and modernization, but a very interesting study by the European Central Bank shows that the results we are seeing so far are below expectations. What is certain is that we should have seen a leap, a much greater change, in the recovery trend of public investment, and today the percentage of GDP dedicated to public investment remains one of the lowest in Europe. Nor have we seen this have the expected multiplier effect on private investment.

Why isn't investment taking off?

First, because of the general economic uncertainty. Second, because of all the barriers to adopting investment plans and implementing them. We saw this this summer, where a lack of political consensus has prevented the approval of a whole package of measures aimed, among other things, at promoting investment in renewables and eliminating many of these uncertainties. Third, as a consequence of all the above, because of the low profitability we are seeing in Spanish companies, which systematically have lower profitability on average than German, French, and Italian companies. And fourth, because in Spain, as in other economies, there has been a progressive deterioration in institutional quality, which makes economic decisions difficult for all economic agents and, undoubtedly, for companies. In fact, some studies show that European funds have a greater driving and stimulating effect—and, therefore, a greater impact on economic growth—in those European regions where institutional quality and the efficiency of public administrations are better.

Since Spanish companies are less profitable, does this lead them to pay lower wages than in other countries?

Well, indeed, if productivity is low, business profitability will be lower, and wages will inevitably be lower as well. The only unlimited driver of improved individual and social well-being is productivity, and that improvement is achieved precisely through wages. If productivity doesn't improve, it's very difficult for labor income or capital income to do so. So, when it doesn't, then growth in one can only come at the expense of the other, or wage growth for some groups can only come at the expense of growth for others. This zero-sum thinking emerges. The only way for society as a whole to improve, like when all floating boats rise at the same time when the tide rises, is for productivity to increase.

Now that you mention that zero-sum philosophy, we're seeing something similar with the well-being of retirees versus young people...

It is the result of one of the major fiscal and silent imbalances within the Spanish economy. By the end of 2024, if we include the contributory portion of the pension system, the non-contributory portion, and pensions for retired workers, the sum of all financing needs that cannot be covered by social security contributions reaches 4% of the Gross Domestic Product. And all projections, for example from AIReF or the European Commission, indicate that these financing needs, which currently stand at 4%, will increase to over 6% in the coming decades. This creates a redistributive dilemma between generations. It is a dilemma that society must resolve, but it must do so with all the information available. To decide which is the best pension system, an analysis of its costs and benefits must be taken into account. Right now, that 4% is coming out of the public accounts through a massive injection of transfers, charged to taxes that also have an opportunity cost, meaning they could be allocated to other policies, for example, housing, productive public investment (which is at a minimum), etc. There is a dilemma here between having to allocate more taxes to current spending—in this case, transfers for a portion of the population—versus allocating more resources to productive spending that increases long-term growth potential.

When you say society must choose, it seems as if there are more options at the ballot box, but in practice, all parties opt to maintain the system as it is...

The only thing we can do at BBVA Research is contribute to the social debate in a transparent manner, putting this information on the table. What are we giving up for the future when we decide to allocate more resources to current spending? International comparisons teach us many lessons in this regard: there are countries that base their welfare states on ensuring higher pensions in absolute terms and higher wages, based on a much more productive economy and with investment as a driver of growth, capable of generating higher wages and pensions, with public pension systems like Sweden's, for example.

What model do you propose?

I have always defended a pay-as-you-go system based on notional accounts. I believe it generates far greater incentives for investment, productivity growth, ongoing training, and the improvement of human capital, leading to a more prosperous society.

Pensions cause "one of the greatest silent fiscal imbalances we have within the Spanish economy."

With the CPI rising 2.7% and fresh food prices increasing by nearly 8%, can we say that inflation is under control?

At the aggregate level, there are currently no expectations of worrying future price increases or inflationary pressures. But this is perfectly compatible with seeing changes in relative prices, which are clearly redistributive and asymmetrically affect different social groups. There are two that are worrying, and especially so in an economy where productivity growth is slower: food and housing, due to this problem of insufficiency that can exacerbate inequality.

Should the government be working on measures to mitigate these effects?

Of course, the government must always be analyzing these types of problems, but we must not forget that some European policies, such as the Common Agricultural Policy, also have an impact. In any case, even if there is stable inflation, this is compatible with permanently higher prices. That's why productivity and wage growth are important, because with high productivity growth, wage growth will be greater, and therefore household purchasing power will significantly improve.

I wanted to ask you about measures the Executive is focusing on, such as the approval of special funding for Catalonia...

We don't know the details of how it will work, but I can tell you what the regional financing system should look like or under what principles it should operate. There's an optimization criterion that I really like, the Rawls criterion, which would involve negotiating under the veil of ignorance, that is, designing a system as if those responsible didn't know which region they'd be residing in. This would ensure that the system was as equitable as possible, that no one wins at the expense of others. First, we have to cover certain needs, certain public services that we can consider essential, minimum, to guarantee equal opportunities regardless of whether a person resides in one region or another. Then, based on this, the autonomous communities must have sufficient autonomy so that if they want to improve those services, they can do so by increasing taxes in that region.

It sounds very different from what seems to have been agreed...

Likely.

Another measure on the table is the reduction of working hours. What do you think about it?

The reduction of the working day, when it is the result of productivity improvements, is an excellent sign that an economy is growing and progressing. Productivity improvements allow companies and workers to decide, through collective bargaining, what portion of productivity goes to wage increases and what portion of those productivity improvements goes to reduced working hours. This is nothing new; it's something we've been observing throughout the 20th century, and it's something we observe when we compare countries with each other. We systematically see that in countries with higher productivity levels, the number of hours worked throughout the year is lower. However, if we reverse this causality that runs from productivity to wages and reduced working hours, and try to impose reduced working hours without prior productivity improvements, what we will obtain are results that harm aggregate employment and competitiveness, because, as designed, what this entails is an increase in labor costs. Some companies may react by concentrating on their most productive activities, at the cost of lower job growth, while other companies may become unprofitable, become loss-making, and thus be forced to close.

Which will ultimately affect GDP...

The result is lower job creation and, yes, a lower rate of economic growth. In response to rising wage costs and this environment of lower job growth and lower activity, in the short and medium term, it is very likely that companies and workers will be forced to negotiate more modest wage increases than would have occurred in the absence of this shock . Therefore, the short-term gain will likely disappear in the long term: wage costs will tend to balance out under the new economic conditions, but they will do so through a period of unfortunately lower job creation and lower growth.

Could it be that this negative forecast will not be fulfilled as with the Minimum Wage?

There is a broad consensus that increases in the Interprofessional Minimum Wage have had a negative effect on employment growth, and we also see a before and after in terms of the number of hours worked. That is, part of the adjustment has occurred not only through lower job creation but also through fewer hours worked. The best news, or one of the best news a country can have, is that, thanks to productivity improvements, minimum wages can increase, but without artificially compressing wage distribution, with a secondary effect in terms of job creation or hours worked.

Have you ever failed a subject for September?

No, fortunately I was a good student.

Is the place where you spend your summer already saturated with tourists?

I spend my summers on the Levantine coast, and there are still places where there's space and you can be very comfortable.