Spain’s labour market: Recent evolution and key challenges
Fecha: marzo 2024
SEFO, Spanish and International Economic & Financial Outlook, V. 13 N.º 2 (March 2024)
Index
Although the global economy has demonstrated significant resilience in recent quarters, key risks related to geopolitical tensions, financial stability and policy mismatches remain, clouding the economic outlook for the medium-term. In the transition to the new normal, the hope is that the global economy will outperform currently lackluster previsions.
The performance of Spain’s labour market has improved, approaching European standards, supported by a mix of reforms and demographic changes. Jobs are now much more resilient to recessionary pressures; yet, two key weaknesses remain, namely the relatively low chances for re-employment for jobseekers, making unemployment relatively persistent, and difficult school-to-work transitions which contribute to nurturing high youth under-employment.
Labour demand in Spain appears to have weathered the effects of the pandemic, as evidenced by sustained growth in job postings, despite a more significant initial drop in hiring compared to other countries in 2020. This, together with other trends, appears to support part of the recent acceleration in Spanish wage growth, underpinning a solid forecast for employment and GDP growth in 2024 relative to other advanced economies.
The fragility of the Spanish job market, characterised by a high incidence of temporary contracts and high structural unemployment, particularly impacting the Spanish youth, has led to an increased concentration of young people in major urban areas due to migration in search of work opportunities. However, less affordable housing in the cities is not only reducing the wealth of this age cohort but is accompanied by negative repercussions for society as a whole, which need to be addressed by public policies aimed to foster quality job creation, as well as affordable housing.
Residential rents have increased sharply over the past decade, with average household expenditure on rent increasing by 27.7% between 2015 and 2022- well above the growth in average household income – yet with notable differences across the Spanish regions. The rent control policies introduced in 2022 have kept growth in average spending on rent at 2.1% (compared to 11.2% in 2019), however, although there are no rigorous studies, some real estate portal reports suggest these policies have also led to an estimated reduction of 30% in the supply of rental housing.
The Spanish banks reported sharp earnings growth in 2023, with the six largest banks recording over €26 billion in profits on aggregate, up 27% from 2022. This situation has prompted a deep dive into the issue in an attempt to understand the role these earnings play not only in the stability and growth of the financial institutions themselves but also in creating general economic wellbeing.
Positive earnings performance and lower cost of equity have led the European banks to outperform the general stock indices for the last two years; nevertheless, they have yet to close the gap between their market value and book value, despite the fact that their return on equity (ROE) is back above 10%, the threshold traditionally deemed necessary to close the valuation gap. While the inability to close this gap appears to lie with the fact that the cost of equity (CoE) required of the banks has increased above the conventionally assumed threshold of 10%, the discount at which the European and Spanish banks are currently trading seems excessive.
While at first glance Spain’s 2023 fiscal performance appears favorable, lack of adjustment on the structural deficit paints a less optimistic picture going forward. Continued structural fiscal adjustment will be needed to improve the probability of compliance with the new EU fiscal deficit targets.