## LABOR PRODUCTIVITY DYNAMICS IN SPAIN: A FIRM-LEVEL PERSPECTIVE (sipea2023002)

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---

### A. Introduction — productivity patterns and challenges
- Labor productivity in Spain: levels significantly lower than some peer economies; growth rate low; considerable regional differences in output per hour worked (IMF, 2018).
- Post-Global Financial Crisis (GFC) dynamics:
  - Counter-cyclical productivity pattern driven by large reduction in employment.
  - Strong productivity growth from 2009 to 2013 mainly driven by labor market developments: rapid decline in working hours increased the capital-labor ratio.
  - Employment destruction biased toward less productive occupations, raising average productivity of those remaining employed.
  - Capital deepening contribution settled at a lower level (negative in 2014–19) reflecting lower capital accumulation since the GFC.
  - Pandemic measures (strengthened furlough scheme, ERTE) improved labor market dynamics relative to past crises, but labor productivity performed worse in Spain than in other countries.
- Total factor productivity (TFP) has been consistently low and lagging peers for decades. Contributing factors identified:
  - Structural labor market weaknesses (high share of temporary workers; wide use of sector-level collective bargaining agreements).
  - Capital misallocation linked to financial frictions from size-dependent borrowing constraints.
  - Product market regulation and size-related regulations and policies.
  - Weak business innovation.
- Recent reforms and policy changes:
  - December 2021: substantial changes in regulation of temporary contracts; early results show decline in share of temporary workers.
  - Reforms established incentives for provision of training and revamped vocational and training system.
  - Spain’s Recovery, Transformation and Resilience Plan (RTRP) contemplates improvements to active labor market policies.
- Purpose: updated assessment of drivers of labor productivity focusing on TFP and firm investment using firm financial statements to analyze differences by firm size and age. Pandemic productivity developments excluded due to data lag. Concludes with recommendations.

### B. Data and Empirical Strategy
- Microdata:
  - Firm-level data covers over 1.2 million Spanish firms during 2003–2019.
  - Source: Orbis Bureau Van Dijk (BvD) database, compiled by IMF’s Research Department (Díez et al., 2018).
  - Selected 10 economic sectors covering about 80 percent of total value added and 70 percent of total employment.
- Investment empirical specification:
  - Dependent variable: firm net investment (change in fixed assets normalized by one-year lagged fixed assets); interpretable as percent change of firm capital stock.
  - Explanatory variables: debt-to-asset ratio, debt service ratio, profits, sales growth, firm size, age, local product market concentration.
  - 휅휅푠푠푠푠푖푖 denotes sector-region-year fixed effects.
- Misallocation and TFP measures:
  - Misallocation measured as dispersion of firm-level return to capital (log MRPK) and return to labor (log MRPL), from firm profit-maximization/growth accounting framework.
  - Firm-level TFP estimated using De Loecker and Warzynski (2012) and Ackerberg, Caves, and Frazer (2015) with value-added on the left-hand-side; estimation by IMF’s Research Department.
- Common explanatory variables:
  - Local Market Concentration: defined by NACE 2-digit sector × autonomous community; total of [209] local product markets; concentration measured using Herfindahl–Hirschman index (HHI).
  - Firm Size: two approaches — employee-based categories (0–9 micro, 10–49 small, 50–249 medium-sized, 250+ large) and book value of fixed assets quartiles.
  - Firm Age: number of years since establishment; at establishment firm is considered one year old.

### C. Results — firm-level investment, balance-sheet effects, and misallocation
- Firm-level investment patterns:
  - Pre-GFC: firm net investment rate averaged about 20 to 30 percent.
  - Post-GFC: investment dropped to negative territory and only recently started to increase again.
  - Investment rate positively correlated with firm size (by fixed asset value):
    - Before GFC, a 10-percent increase in firm asset value could raise investment rate by about 0.6 percentage points.
    - By 2015, difference between investment rates of large and small firms had largely disappeared.
  - Change in size-dependency of investment mainly driven by: real interest rate; total deposits growth; economic policy uncertainty.
  - Large firms lower investment disproportionately when real interest rate increases, total deposit growth declines, or economic policy uncertainty rises — implication: supporting systemic firms during downturns could help sustain business-sector investment potential.
- Balance-sheet health and investment:
  - Firms with healthier balance sheets (lower leverage ratios and debt service ratios) invest more regardless of business cycle.
  - Relevance of balance-sheet stress increases when financial conditions are tighter.
  - Tangible capital investment responds more strongly to changes in financial conditions.
  - Higher firm-level investment positively correlated with stronger future sales growth and return on asset.
- Resource misallocation:
  - Examined dispersion of MRPK and MRPL; significant and positive correlations between MRPK and observed indicators of financial constraints.
  - Firms with higher MRPK pay higher effective interest rates and hold on average a larger share of intangible assets.
  - Analysis focuses within sectors (sector-specific factor prices assumed), not across sectors.
- Additional empirical notes:
  - Unbalanced panel with about 8 million total observations.
  - Wedge parameter 휏휏 models reduced-form measures of labor and capital market frictions in line with Hsieh and Song (2015).

### 12. Allocative efficiency: recent stabilization and international context
- Within-sector allocative efficiency in Spain’s capital market has stabilized in recent years, consistent with rising TFP (Moral-Benito and Fu, 2015; García-Santana et al., 2020).
- Potential drivers:
  - “Cleansing effect” of credit contractions as bank lending declines (Osotimehin and Pappadà, 2017).
  - Accommodative monetary policy found to positively affect allocative efficiency (Albrizio et al., 2021).
- Spain remains more inefficient relative to early 2000s compared to France and Germany.
- Comparison exercise fixes sectoral share of gross value added at initial level and normalizes MRPK dispersion in 2005 as 1; country comparison starts 2005.

### MRPK, financing costs, and firm heterogeneity
- Elevated misallocation implies large variation in firms’ marginal productivity of capital; firms with higher MRPK face larger financing costs and are more financially constrained.
- Empirical bins: charts divide sample into 50 equal bins by estimated effective interest rate or share of intangible assets and plot median values.
- Firm size and capital-market frictions:
  - Firms with lower fixed assets pay a higher cost of capital.
  - Micro, small, and medium-sized firms by fixed asset value pay higher cost of capital compared to large firms, both before the euro area crisis and in recent years.
  - Firm size measured by employment does not show a robust correlation with cost of external financing.
  - Robustness: findings hold after controlling for aggregate financial market conditions and industry specifics.
- Firm age, entry, and survival:
  - Start-ups age < 2 years face significantly higher capital-market frictions.
  - Spain has lower entry rates and lower post-entry survival rates compared to EU peers; gaps in entry and survival within first two years declined before 2015 but widened again in recent years.
  - Conditional on surviving after 2 years, the probability of surviving within 3 to 5 years is larger in Spain than in a median EU country.
  - Only firms 1 or 2 years old face significantly higher cost of capital compared to established firms with 10 or more years of experience.
  - Policy implication: focus on supporting startups to survive the first two years.

### Size-dependent regulations and labor-market frictions
- Spain has high prevalence of small and micro firms; SMEs have on average significantly lower TFP compared to large firms.
- More than 100 size-related regulations span accounting, financial, insurance, labor, and tax areas; these can reduce incentives to grow and create inefficiencies.
- Examples:
  - Firms with less than 10 employees and with 10–49 employees have fewer responsibilities in forming workplace representation.
  - Accounting, VAT, and simplified balance sheet rules apply based on thresholds in assets and sales (EUR thresholds provided in source).
- Growth accounting: firms with less than 10 employees and with 10–49 employees pay less for labor, suggesting size-related misallocations in the labor market.
- Labor-market rigidity affects young firms: young firms use larger shares of temporary contracts implying employment instability and higher labor search costs; startups (age < 2 years) and young firms (age 3–5 years) exhibit a higher labor wedge.
- Spain modified labor regulation to promote permanent contracts over temporary ones; since reform there has been a significant increase in share of permanent contracts; too early for full assessment. New legal framework strengthened short-time work schemes.

### Product-market competition, innovation, and TFP drivers
- Regulatory fragmentation across autonomous communities and municipalities constrains activity; Market Unity Law (2013) intended to align requirements but application remains slow after 2017 Constitutional Court rulings.
- Sub-national regulations contributed to increasing fragmentation since the GFC (Llano-Verduras et al., 2021).
- Empirical finding: more competitive local product market (lower local HHI) implies both higher investment and higher firm-level TFP; regression shows impact for HHI changing from 0 to 1.
- Business R&D and innovation:
  - Business R&D spending in Spain as share of GDP lags European and OECD peers and has not increased materially since 2008.
  - Number of firms conducting R&D activities and number receiving R&D tax reliefs have both been declining in recent years.
  - Spain lags in business-public collaborations, process innovations, and non-R&D innovative expenditures.

### Human capital and education
- Increasing educational attainment of workers and employers crucial for productivity.
- Early leavers from education and training (age 18–24) declined by 13-percentage points over the last decade but remain among the highest in Europe.
- Enrollment in vocational education and training (VET) remains low compared to the region.
- Structural transformation (digitalization and greening) raises demand for communication & creation and information skills.
- Reforms: recent vocational and training reforms and incentives for training; RTRP active labor market policy reforms create personalized itineraries for low employability groups focusing on market-demanded skills.

### Policy-relevant implications and recommendations
- Support startups, particularly to help firms survive the first two years (startups face largest capital-market frictions).
- Consider non-monetary startup supports: promote employee ownership and facilitate startup spin-offs from science and universities.
- Continue assessing and implementing labor-market reforms to reduce temporary-contract reliance and improve workforce allocation; monitor impacts of reforms promoting permanent contracts and strengthened short-time work schemes.
- Review size-dependent regulations (more than 100 rules) that may create a “small business trap” and reduce growth incentives.
- Improve product-market competition by reducing regulatory fragmentation across sub-national jurisdictions and advancing Market Unity Law objectives.
- Increase support for business R&D and broaden incentives and take-up for R&D tax reliefs; promote public-private collaboration and non-R&D innovation.
- Safeguard firm balance sheets and support large and systemic companies during downturns to limit investment declines following negative macroeconomic shocks.
- Maintain and build on firm support measures that preserved environment for resuming corporate investment (state-backed guarantee program; solvency support to strategic companies and businesses affected by COVID).
- Use public investment in large strategic projects (PERTEs) and effective implementation of structural reforms to crowd in private investment in tangible and intangible capital.
- Improve allocative efficiency by alleviating distortions faced by startups and SMEs (e.g., improving access to finance for firms with limited physical capital collateral), expanding non-monetary startup support (talent search, access to data, reducing regulatory costs), and aligning regional regulatory frameworks.

### Key statistics and data notes (preserved exactly)
- MRPK dispersion normalization: 2005 = 1.
- R&D public funding target: 1.25 percent of GDP by 2030 (3 percent including private investment).
- Annex I: Sectoral ratios (2019 over 2003) — Eurostat and Orbis BvD comparisons (excerpt):
  - Manufacturing — Orbis BvD observations: 1,240,793; Eurostat Value Added 1.12; Eurostat Wage Bills 1.01; Orbis Value Added 0.94; Orbis Wage Bills 0.93
  - Construction — Orbis BvD observations: 1,654,263; Eurostat Value Added 0.81; Eurostat Wage Bills 0.74; Orbis Value Added 0.58; Orbis Wage Bills 0.72
  - Wholesale and retail trade; repair of motor vehicles and motorcycles — Orbis BvD observations: 2,514,824; Eurostat Value Added 1.56; Eurostat Wage Bills 1.49; Orbis Value Added 1.11; Orbis Wage Bills 1.18
  - Transporting and storage — Orbis BvD observations: 398,805; Eurostat Value Added 1.44; Eurostat Wage Bills 1.49; Orbis Value Added 1.60; Orbis Wage Bills 1.40
  - Accommodation and food service activities — Orbis BvD observations: 614,057; Eurostat Value Added 1.37; Eurostat Wage Bills 1.65; Orbis Value Added 1.53; Orbis Wage Bills 1.51
  - Information and communication — Orbis BvD observations: 278,940; Eurostat Value Added 1.22; Eurostat Wage Bills 1.53; Orbis Value Added 1.09; Orbis Wage Bills 1.30
  - Professional, scientific and technical activities — Orbis BvD observations: 978,172; Eurostat Value Added 1.94; Eurostat Wage Bills 2.22; Orbis Value Added 1.47; Orbis Wage Bills 1.47
  - Education — Orbis BvD observations: 137,630; Eurostat Value Added 1.51; Eurostat Wage Bills 1.56; Orbis Value Added 1.90; Orbis Wage Bills 1.91
  - Human health and social work activities — Orbis BvD observations: 216,716; Eurostat Value Added 1.86; Eurostat Wage Bills 1.93; Orbis Value Added 2.01; Orbis Wage Bills 1.96
  - Arts, entertainment and recreation — Orbis BvD observations: 164,213; Eurostat Value Added 1.82; Eurostat Wage Bills 1.66; Orbis Value Added 1.78; Orbis Wage Bills 1.97
  - Other services activities — Orbis BvD observations: 156,871; Eurostat Value Added 2.06; Eurostat Wage Bills 1.87; Orbis Value Added 1.77; Orbis Wage Bills 1.49
- Annex II: Descriptive statistics, Full Sample (variables winsorized; observations with effective interest rate > 100 percent excluded)
  - Net Investment Rate — No. of Observations 6,542,441; Mean 0.32; Std. dev. 1.75; 1st Percentile -1.01; 99th Percentile 3.6
  - Leverage Ratio — No. of Observations 5,177,887; Mean 0.30; Std. dev. 0.30; 1st Percentile 0.01; 99th Percentile 1.7
  - Log(Fixed Assets) — No. of Observations 7,719,755; Mean 11.5; Std. dev. 2.1; 1st Percentile 6.0; 99th Percentile 16.6
  - Debt Service Ratio — No. of Observations 5,846,711; Mean 0.31; Std. dev. 1.1; 1st Percentile -4.8; 99th Percentile 6.6
  - ROA — No. of Observations 8,055,687; Mean 0.0; Std. dev. 0.2; 1st Percentile -1.4; 99th Percentile 0.7
  - Age — No. of Observations 8,062,505; Mean 13.5; Std. dev. 9.2; 1st Percentile 2; 99th Percentile 45
  - EMPL — No. of Observations 6,694,141; Mean 9.6; Std. dev. 18.1; 1st Percentile 1; 99th Percentile 131
  - Market Share (percent) — No. of Observations 7,850,550; Mean 0.2; Std. dev. 2.2; 1st Percentile 0; 99th Percentile 100
  - Effective Interest Rate (percent) — No. of Observations 4,022,777; Mean 8.6; Std. dev. 12.4; 1st Percentile 0.0; 99th Percentile 100
  - TFP Growth (percent) — No. of Observations 4,066,854; Mean -0.3; Std. dev. 14.1; 1st Percentile -51.6; 99th Percentile 51.8
  - Sales Growth (percent) — No. of Observations 7,024,140; Mean 24.4; Std. dev. 125.3; 1st Percentile -90.7; 99th Percentile 935.5
  - HHI (0-1) — No. of Observations 8,065,049; Mean 0.05; Std. dev. 0.11; 1st Percentile 0; 99th Percentile 1

*Source: sipea2023002 — LABOR PRODUCTIVITY DYNAMICS IN SPAIN: A FIRM-LEVEL PERSPECTIVE (Orbis BvD database and IMF staff calculations; Eurostat; OECD; INE).*

### References ________________________________________________________________________________18

### LABOR PRODUCTIVITY DYNAMICS IN SPAIN: A FIRM-LEVEL PERSPECTIVE (References section content)

### A. Introduction — productivity patterns and challenges
- Labor productivity in Spain has been a long-standing structural challenge: levels are significantly lower than in some peer economies, growth rate has been low, and differences in output per hour worked across Spanish regions is considerable (IMF, 2018).
- After the Global Financial Crisis (GFC):
  - Labor productivity exhibited a counter-cyclical pattern driven by the large reduction in employment.
  - Strong productivity growth from 2009 to 2013 was mainly driven by labor market developments: rapid decline in working hours increased the capital-labor ratio.
  - Employment destruction had a bias towards less productive occupations, raising average productivity of those remaining employed.
  - Capital deepening settled at a lower contribution level (negative in 2014–19) to labor productivity, reflecting lower capital accumulation since the GFC.
  - Pandemic measures, particularly the strengthened furlough scheme (ERTE), resulted in better labor market dynamics than in past crises, but labor productivity performed worse in Spain than in other countries.
- Total factor productivity (TFP) has been consistently low and lagging peers for decades. Identified contributing factors include:
  - Structural labor market weaknesses (high share of temporary workers; wide use of sector-level collective bargaining agreements).
  - Capital misallocation linked to financial frictions from size-dependent borrowing constraints.
  - Product market regulation and size-related regulations and policies.
  - Weak business innovation.
- Reforms and policy changes noted:
  - Substantial changes in regulation of temporary contracts introduced in December 2021; early results show decline in the share of temporary workers.
  - Reforms established incentives for provision of training and revamped the vocational and training system.
  - Spain’s Recovery, Transformation and Resilience Plan (RTRP) contemplates improvements to active labor market policies.
- Purpose of the chapter:
  - Provide updated assessment of drivers of labor productivity focusing on TFP and firm investment using firm financial statements to analyze differences by firm size and age.
  - Analysis period excludes pandemic productivity developments due to data lag.
  - Concludes with recommendations for further action.

### B. Data and Empirical Strategy
- Data:
  - Firm-level data covers over 1.2 million Spanish firms during the period of 2003–2019.
  - Microdata source: Orbis Bureau Van Dijk (BvD) database, compiled by the IMF’s Research Department (Díez et al., 2018).
  - Selected 10 economic sectors for which database matches sectoral employment and value-added growth from National Statistical Office since early 2000s; these sectors cover about 80 percent of total value added and 70 percent of total employment in the Spanish economy.
- Empirical model for firm investment:
  - Specification regresses firm net investment (change in fixed assets normalized by one-year lagged fixed assets) on firm-level variables and macro variables:
    - Explanatory variables include debt-to-asset ratio, debt service ratio, profits, sales growth, firm size, age, and local product market concentration.
    - 휅휅푠푠푠푠푖푖 denotes sector-region-year fixed effects.
  - Normalized investment rate interpretable as percent change of firm capital stock.
- Misallocation and TFP measures:
  - Misallocation measured as dispersion of firm-level return to capital (log MRPK) and return to labor (log MRPL), derived from firm profit-maximization/growth accounting framework.
  - Firm-level TFP estimated using methods of De Loecker and Warzynski (2012) and Ackerberg, Caves, and Frazer (2015) with value-added on the left-hand-side; estimation conducted by IMF’s Research Department.
- Common explanatory variables:
  - Local Market Concentration:
    - Local product market defined by NACE 2-digit sector × autonomous community.
    - Total of [209] local product markets.
    - Concentration measured using Herfindahl–Hirschman index (HHI).
  - Firm Size:
    - Two approaches: (1) employee-based categories: 0–9 (micro), 10–49 (small), 50–249 (medium-sized), 250+ (large); (2) book value of fixed assets quartiles (micro to large).
  - Firm Age:
    - Calculated as number of years since establishment; at establishment firm is considered one year old.

### C. Results — firm-level investment, balance-sheet effects, and misallocation
- Firm-Level Investment:
  - Pre-GFC: firm net investment rate averaged about 20 to 30 percent.
  - Post-GFC: investment dropped to negative territory and only recently started to increase again.
  - Investment rate positively correlated with firm size (by fixed asset value):
    - Before GFC, a 10-percent increase in firm asset value could raise investment rate by about 0.6 percentage points.
    - By 2015, difference between investment rates of large and small firms had largely disappeared.
  - Change in size-dependency of investment mainly driven by three macro/financial/policy variables:
    - Real interest rate.
    - Total deposits growth.
    - Economic policy uncertainty.
  - Large firms disproportionately lower investment when:
    - Real interest rate increases.
    - Total deposit growth declines.
    - Economic policy uncertainty rises.
  - Implication: supporting systemic firms during downturns could help sustain business-sector investment potential.
- Balance-sheet health and investment:
  - Firms with healthier balance sheets (lower leverage ratios and debt service ratios) invest more regardless of business cycle.
  - Relevance of balance-sheet stress increases when financial conditions are tighter.
  - Tangible capital investment responds more strongly to changes in financial conditions.
  - Higher firm-level investment positively correlated with stronger future sales growth and return on asset.
- Resource Misallocation:
  - Focus on distortions in allocation of capital and labor across heterogeneous producers by examining dispersion of MRPK and MRPL.
  - In frictionless markets, marginal products of labor and capital should be equalized across producers with same costs; dispersion indicates misallocation.
  - Significant and positive correlations found between MRPK and observed indicators of financial constraints:
    - Firms with higher MRPK pay higher effective interest rates and hold on average a larger share of intangible assets.
  - Analysis examines misallocation within sectors (sector-specific factor prices assumed), not across sectors.
- Additional empirical notes:
  - Data sample is an unbalanced panel with about 8 million total observations.
  - Variable construction details in Annex II (not part of this content unit).
  - The wedge parameter 휏휏 models reduced-form measures of labor and capital market frictions in line with Hsieh and Song (2015).

*Source: Extracted content from sipea2023002 - References (SPAIN: Labor Productivity Dynamics in Spain: A Firm-Level Perspective).*

### 12.      The within-sector a llocative efficiency in Spain’s capital market has stabilized in recent

### 12.      The within-sector allocative efficiency in Spain’s capital market has stabilized in recent years, consistent with rising TFP

### Allocative efficiency: overview and international comparison
- Stabilization of capital misallocation in recent years (Moral-Benito and Fu, 2015; García-Santana et al., 2020) could partly be associated with the “cleansing effect” of credit contractions (Osotimehin and Pappadà, 2017) as bank lending declines.
- Accommodative monetary policy has been found to positively affect allocative efficiency (Albrizio et al., 2021).
- Common drivers of misallocation include tax and labor regulations, discretionary governance or credit provision, imperfect competition in the capital, labor, and product markets (Restuccia and Rogerson, 2017).
- Spain remains more inefficient relative to early 2000s compared to more productive countries in the region such as France and Germany.
- Exercise specifics: sectoral share of gross value added fixed at its initial level and MRPK dispersion normalized in 2005 as 1 for all countries; comparison chart starts 2005 to avoid big jumps in sample coverage.

### Marginal revenue product of capital (MRPK) and financing costs
- An elevated level of misallocation implies a large variation in firms’ marginal productivity of capital.
- Firms with a higher marginal product of capital are facing larger financing costs and are thus more financially constrained.
- Data sources and calculations: Orbis BvD database and IMF staff calculations; charts divide sample into 50 equal bins by estimated effective interest rate or share of intangible assets and plot median values.

### Firm size and capital-market frictions
- Firms with lower fixed assets (capital stock measured as total value of fixed assets) pay a higher cost of capital.
- Micro, small, and medium-sized firms defined based on fixed asset value pay a higher cost of capital compared to large firms, both before the euro area crisis and in recent years.
- Firm size measured by employment does not show a robust correlation with the cost of external financing.
- Robustness check: firms with less capital stock on average pay higher effective interest rates (proxy for average borrowing cost).
- Notes on controls: findings hold after controlling for aggregate financial market conditions and industry specifics.

### Firm age, entry, and survival
- Start-ups with age less than two years face significantly higher frictions in the capital market.
- Spain’s business sector tends to have lower entry rates and lower post-entry survival rates compared to EU peers.
- Gaps in entry rates and survival within the first two years declined before 2015 but widened again in recent years.
- Conditional on surviving after 2 years, the probability of surviving within 3 to 5 years is larger in Spain than in a median EU country.
- Only firms that are 1 or 2 years old face significantly higher cost of capital compared to established firms with 10 or more years of experience.
- Policy implication: policies should focus on supporting startups to help them survive through the first two years.
- Data sources: Eurostat Business Demography Database and IMF staff calculations; charts report Survival Rates Within the First Two Years (in percent of total entrants within the past 2 years) and New Entrants (in percent of active enterprises).

### Size-dependent regulations and labor-market frictions
- Spain has a high prevalence of small and micro firms relative to other European countries; SMEs have on average significantly lower TFP compared to large firms.
- More than 100 size-related regulations in Spain span accounting, financial, insurance, labor, and tax areas; these can create advantages for small business but reduce incentives to grow and create inefficiencies.
- Example regulatory differences:
  - Firms with less than 10 employees and with 10–49 employees have less responsibilities in forming a workplace representation.
  - Accounting, VAT, and simplified balance sheet rules apply based on thresholds in assets and sales (examples with EUR thresholds provided).
- Growth accounting results: firms with less than 10 employees and with 10–49 employees pay less for labor, suggesting size-related misallocations in the labor market.
- Labor-market rigidity affects young firms: young firms use larger shares of temporary contracts, implying employment instability and higher labor search costs; startups (age < 2 years) and young firms (age 3–5 years) exhibit a higher labor wedge.
- Spain modified labor regulation to promote permanent contracts over temporary ones; since reform implementation there has been a significant increase in the share of permanent contracts, but it is too early to make a full assessment. The new legal framework has strengthened short-time work schemes.

### Product-market competition, innovation, and TFP drivers
- Fragmentation of regulatory frameworks across autonomous communities and municipalities remains a constraint; Market Unity Law (2013) intended to align requirements but application remains slow after 2017 Constitutional Court rulings.
- Sub-national regulations have been significant contributors to increasing fragmentation since the GFC (Llano-Verduras et al., 2021).
- Empirical finding: a more competitive local product market (lower local HHI) implies both higher investment and higher firm-level TFP; the chart regresses firm-level log TFP and investment rate on local market HHI (impact shown for HHI changing from 0 to 1).
- Business R&D and innovation:
  - Business R&D spending in Spain as a share of GDP lags European and OECD peers and has not increased materially since 2008.
  - The number of firms conducting R&D activities and the number receiving R&D tax reliefs have both been declining in recent years.
  - Spain lags in other innovative activities: business and public-private collaborations, process innovations, and non-R&D innovative expenditures.
- Figures and indicators referenced: R&D and Other Innovations, 2021; OECD: R&D Intensity (in percent of GDP).

### Human capital and education
- Increasing educational attainment of workers and employers is crucial for productivity.
- Early leavers from education and training (age 18–24) declined by 13-percentage points over the last decade but remain among the highest in Europe.
- Enrollment in vocational education and training (VET) remains low compared to the region.
- Structural transformation (digitalization and greening) raises demand for communication & creation and information skills.
- Reforms: recent reforms to the vocational and training system and the introduction of incentives for training; RTRP active labor market policy reforms create personalized itineraries for low employability groups focusing on market-demanded skills.

### Key statistics and data notes
- MRPK dispersion normalization: 2005 = 1 (manufacturing sector and whole sample charts).
- Survival and entrant charts: Survival Rates Within the First Two Years and New Entrants use Eurostat Business Demography Database and IMF staff calculations.
- R&D intensity and innovation indicators sourced from OECD and European Commission - European Innovation Scoreboard.
- Early leavers: data point framed as a 13-percentage point decline over the last decade; Early Leavers From Education and Training (Percent of total 18-24 population; 2021).

### Policy-relevant implications and recommendations (as reflected in the analysis)
- Focus support on startups, particularly to help firms survive the first two years (startups face the largest capital-market frictions).
- Consider non-monetary startup supports: promoting employee ownership and facilitating startup spin-offs from science and universities (Comprehensive startup strategy, Germany).
- Continue assessing and implementing labor-market reforms to reduce temporary-contract reliance and improve workforce allocation; monitor impacts of recent reforms promoting permanent contracts and strengthened short-time work schemes.
- Address size-dependent regulations that create a potential “small business trap” by reviewing more than 100 size-related rules that may reduce growth incentives.
- Improve product-market competition by reducing regulatory fragmentation across sub-national jurisdictions and continuing implementation of Market Unity Law objectives.
- Increase support for business R&D and broaden incentives and take-up for R&D tax reliefs; promote other innovative activities, public-private collaboration, and non-R&D innovation.

*Source: sipea2023002 - Chapter 12 (Orbis BvD database and IMF staff calculations; Eurostat; OECD; INE; cited studies).*

### 20.      Spain has committed to

### 20.      Spain has committed to

### Overview
- Spain's recovery plan contains ambitious reforms covering key determinants of productivity.
- Success depends on design and implementation details.

### Human Capital
- Labor reform enacted in 2022 aimed to combat high prevalence of temporary employment that hinders accumulation of workers’ human capital.
- Initial data suggests that the proportion of permanent hires has increased significantly.
- Recovery plan education reforms include:
  - investments in digital skills,
  - expansion of vocational training,
  - modernization of the education system,
  - revamp of active labor market policies (important to limit the loss of human capital during unemployment).
- It will be important to evaluate the effectiveness of the new programs once they have been in place for some time.

### Innovation
- Law on Science, Technology and Innovation sets a goal for R&D public funding of 1.25 percent of GDP by 2030 (3 percent including private investment).
- The plan increases budgetary support for R&D and innovation but should be complemented with a review of the existing incentives framework.
- Further efforts needed to:
  - strengthen collaborations between the public and private sectors,
  - identify impediments to business innovation.
- Adoption of large strategic projects (PERTEs) provides an opportunity to foster synergies between public and private investment and to foster innovation.

### Business dynamics and regulatory environment
- Recent initiatives:
  - Law on Business Growth to eliminate financial and administrative barriers to firm growth and reduce delinquency rates.
  - New Start-up Law to provide incentives and facilitate creation of innovative companies.
  - Sectoral conference for Regulatory Improvement and the Business Climate (established in 2021) to enhance cooperation across government levels.
- Further policy focus recommended on:
  - reviewing size-dependent regulatory thresholds in the labor and tax spheres (which may be discouraging business growth),
  - better aligning the regulatory framework across regional and local authorities to promote market integration and business competition.
- Misallocation and firm dynamics:
  - Low labor productivity growth was mostly driven by lack of capital deepening because of weak firm investment amid a continued deleveraging process since the GFC.
  - Large firms lowered investment disproportionately more in response to the unfavorable macroeconomic shock.
  - Firm balance sheet health and growth potential significantly affect investment decisions.
  - Allocative inefficiency remains relatively high in Spain compared to neighboring countries.
  - Misallocation across firms’ size and age groups is identified in the capital market and in the labor market.
  - Size-dependent financial constraints and size-dependent labor regulations (and possibly other regulations, including tax and accounting) are significant determinants of TFP.
  - Startups with less than 2 years of experience are the most vulnerable age group, with a much lower survival rate compared to other European countries and significant disadvantages in both the capital and the labor market.
  - High market concentration is associated with both weak investment and weak TFP growth.

### Policy recommendations and supportive measures
- Safeguard firm balance sheets and support large and systemic companies during downturns to limit investment declines following negative macroeconomic shocks.
- Maintain and build on firm support measures that preserved the environment for resuming corporate investment (state-backed guarantee program; solvency support to strategic companies and businesses affected by COVID).
- Reduce economic policy uncertainty and pursue reforms in product market regulation to boost investment.
- Use public investment in large strategic projects (PERTEs) and effective implementation of structural reforms to crowd in private investment in tangible and intangible capital.
- Improve allocative efficiency by:
  - alleviating distortions faced by startups and SMEs (e.g., improving access to finance for disadvantaged firms such as startups with less than two years of experience or firms with limited physical capital for collateral),
  - reviewing the large number of size-related rules and regulations,
  - expanding non-monetary support to startups (facilitating talent search, providing easier access to data, reducing regulatory costs),
  - aligning the regional regulatory framework and improving product market competition.

### Key statistics and metrics (preserved exactly from source)
- R&D public funding target: 1.25 percent of GDP by 2030 (3 percent including private investment).
- Annex I: Sectoral ratios (2019 over 2003) — Eurostat and Orbis BvD comparisons (excerpted sectors shown in source):
  - Manufacturing — Orbis BvD observations: 1,240,793; Eurostat Value Added 1.12; Eurostat Wage Bills 1.01; Orbis Value Added 0.94; Orbis Wage Bills 0.93
  - Construction — Orbis BvD observations: 1,654,263; Eurostat Value Added 0.81; Eurostat Wage Bills 0.74; Orbis Value Added 0.58; Orbis Wage Bills 0.72
  - Wholesale and retail trade; repair of motor vehicles and motorcycles — Orbis BvD observations: 2,514,824; Eurostat Value Added 1.56; Eurostat Wage Bills 1.49; Orbis Value Added 1.11; Orbis Wage Bills 1.18
  - Transporting and storage — Orbis BvD observations: 398,805; Eurostat Value Added 1.44; Eurostat Wage Bills 1.49; Orbis Value Added 1.60; Orbis Wage Bills 1.40
  - Accommodation and food service activities — Orbis BvD observations: 614,057; Eurostat Value Added 1.37; Eurostat Wage Bills 1.65; Orbis Value Added 1.53; Orbis Wage Bills 1.51
  - Information and communication — Orbis BvD observations: 278,940; Eurostat Value Added 1.22; Eurostat Wage Bills 1.53; Orbis Value Added 1.09; Orbis Wage Bills 1.30
  - Professional, scientific and technical activities — Orbis BvD observations: 978,172; Eurostat Value Added 1.94; Eurostat Wage Bills 2.22; Orbis Value Added 1.47; Orbis Wage Bills 1.47
  - Education — Orbis BvD observations: 137,630; Eurostat Value Added 1.51; Eurostat Wage Bills 1.56; Orbis Value Added 1.90; Orbis Wage Bills 1.91
  - Human health and social work activities — Orbis BvD observations: 216,716; Eurostat Value Added 1.86; Eurostat Wage Bills 1.93; Orbis Value Added 2.01; Orbis Wage Bills 1.96
  - Arts, entertainment and recreation — Orbis BvD observations: 164,213; Eurostat Value Added 1.82; Eurostat Wage Bills 1.66; Orbis Value Added 1.78; Orbis Wage Bills 1.97
  - Other services activities — Orbis BvD observations: 156,871; Eurostat Value Added 2.06; Eurostat Wage Bills 1.87; Orbis Value Added 1.77; Orbis Wage Bills 1.49
- Annex II: Descriptive statistics, Full Sample (variables winsorized; observations with effective interest rate > 100 percent excluded)
  - Net Investment Rate — No. of Observations 6,542,441; Mean 0.32; Std. dev. 1.75; 1st Percentile -1.01; 99th Percentile 3.6
  - Leverage Ratio — No. of Observations 5,177,887; Mean 0.30; Std. dev. 0.30; 1st Percentile 0.01; 99th Percentile 1.7
  - Log(Fixed Assets) — No. of Observations 7,719,755; Mean 11.5; Std. dev. 2.1; 1st Percentile 6.0; 99th Percentile 16.6
  - Debt Service Ratio — No. of Observations 5,846,711; Mean 0.31; Std. dev. 1.1; 1st Percentile -4.8; 99th Percentile 6.6
  - ROA — No. of Observations 8,055,687; Mean 0.0; Std. dev. 0.2; 1st Percentile -1.4; 99th Percentile 0.7
  - Age — No. of Observations 8,062,505; Mean 13.5; Std. dev. 9.2; 1st Percentile 2; 99th Percentile 45
  - EMPL — No. of Observations 6,694,141; Mean 9.6; Std. dev. 18.1; 1st Percentile 1; 99th Percentile 131
  - Market Share (percent) — No. of Observations 7,850,550; Mean 0.2; Std. dev. 2.2; 1st Percentile 0; 99th Percentile 100
  - Effective Interest Rate (percent) — No. of Observations 4,022,777; Mean 8.6; Std. dev. 12.4; 1st Percentile 0.0; 99th Percentile 100
  - TFP Growth (percent) — No. of Observations 4,066,854; Mean -0.3; Std. dev. 14.1; 1st Percentile -51.6; 99th Percentile 51.8
  - Sales Growth (percent) — No. of Observations 7,024,140; Mean 24.4; Std. dev. 125.3; 1st Percentile -90.7; 99th Percentile 935.5
  - HHI (0-1) — No. of Observations 8,065,049; Mean 0.05; Std. dev. 0.11; 1st Percentile 0; 99th Percentile 1

*Source: sipea2023002 - 20.      Spain has committed to*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2023/english/sipea2023002.pdf_