[ 1 ] Sweden and Spain: two contrasting growth experiences Matilde Mas University of Valencia and Ivie Productivity Conference at Saltsjöbaden Stockholm October 5-6, 2011

[ 2 ] Sweden and Spain: two contrasting growth experiences Objectives of the paper: Contrast the growth experiences of the two countries along the period Questions: Why is Sweden per capita income higher? Which are the sources of growth in the two countries? What are the characteristics of the industrial specialization? Index: OVERVIEW GROWTH EXPERIENCES INDUSTRY SPECIALIZATION CONCLUSIONES

[ 3 ] OVERVIEW

[ 4 ] Overview Spain and Sweden per capita income gap: how has it evolved? A useful decomposition: GVA/P: Per capita income GVA/H: Labour Productivity H/L: number of hour worked per employed person L/LF: employment rate LF/P: activity rate (in terms of total population) GVA: Gross Value Added P: total Population H: Total hours worked L: total employment (persons) LF: Labour Force

[ 5 ] Overview Source: AMECO (2011), TCB (2011), EU KLEMS (2009) and own calculations. GVA per capita and its components

[ 6 ] Overview Sweden’s per capita income has always been higher than the EU average with this difference increasing in the last years of expansion. On the contrary, per capita income was lower in Spain and this difference has maintained along the period. The gap between Sweden and Spain originated in Sweden’s higher labor productivity, as well as its higher rate of employment and rate of activity. Spain only overtakes Sweden in the number of hours worked. Thus, Spanish workers work more hours, are less productive and support a higher percentage of dependent population.

[ 7 ] Overview Real GVA per capita decomposition. Sweden minus Spain (GVA per capita differences = 100) Source: AMECO (2011), TCB (2011), EU KLEMS (2009) and own calculations. Labour productivity has been one of the main determinants of per capita income differences. The other key factor is the activity rate. The Spanish unemployment rate had a negative effect on its relative per capita income during the whole period. Thus, Spain has a serious problem in almost all relevant variables that affect per capita GDP.

[ 8 ] Overview Real GVA, employment (hours worked) and labour productivity. Total economy (Annual rates of growth in %) Source: TCB (2011), EU KLEMS (2009) and own calculations. During , Spain showed a more dynamic behaviour. Both countries faced difficulties in creating jobs between In , Spain experienced a productivity slowdown while in Sweden productivity accelerated. Thus, Spain enjoyed its highest rate of labour productivity growth in and in , precisely when it was unable to create employment. For Sweden, the golden years of productivity growth were During the first two years of crisis while Sweden opted for labour hoarding, Spain took the alternative path of strong labour destruction mainly -though not exclusively- in the over dimensioned construction industry.

[ 9 ] TWO CONTRASTING GROWTH EXPERIENCES

[ 10 ] Two contrasting growth experiences Gross value added and (percentages) Note: TOT=Total industries; ELECOM=Electrical machinery, post and communication services; MaxElec=Total manufacturing, excluding electrical; OtherG=Other production; DIST=Distribution; FINBU=Finance and business, except real estate; PERS=Personal services; and NONMAR=Non-market services. Source: EU KLEMS (2009) and own calculations. Spain outperformed Sweden in terms of GVA growth at the aggregated level but with important differences among industries. Sweden showed a much more dynamic behaviour in the ICT production sectors (ELECOM).

[ 11 ] Two contrasting growth experiences Hours worked and (percentages) Note: TOT=Total industries; ELECOM=Electrical machinery, post and communication services; MaxElec=Total manufacturing, excluding electrical; OtherG=Other production; DIST=Distribution; FINBU=Finance and business, except real estate; PERS=Personal services; and NONMAR=Non-market services. Source: EU KLEMS (2009) and own calculations. The ability of the Spanish economy to create new jobs was astonishing after 25 years of almost null labour creation (its destruction since the beginning of the current crisis is also astonishing). While Sweden destroyed employment in ELECOM, Spain increased it. The most noticeable difference is the employment rate of growth in the construction industry.

[ 12 ] Two contrasting growth experiences Labour productivity and (percentages) Note: TOT=Total industries; ELECOM=Electrical machinery, post and communication services; MaxElec=Total manufacturing, excluding electrical; OtherG=Other production; DIST=Distribution; FINBU=Finance and business, except real estate; PERS=Personal services; and NONMAR=Non-market services. Source: EU KLEMS (2009) and own calculations. Whereas in Spain labour productivity growth decelerated in the expansion years, in Sweden it accelerated. In all industry aggregations labour productivity growth was higher in Sweden than in Spain. The most significant differences were found in ELECOM, Agriculture, MaxElec and Distribution.

[ 13 ] Two contrasting growth experiences Contributions to labour productivity growth (percentages) Note: MARKT=Market economy; ELECOM=Electrical machinery, post and communication services; MaxElec=Total manufacturing, excluding electrical; OtherG=Other production; DIST=Distribution; FINBU=Finance and business, except real estate and PERS=Personal services. Source: EU KLEMS (2009) and own calculations.

[ 14 ] Two contrasting growth experiences In labour productivity growth was very high in Sweden (3.3%) and very low in Spain (0.63%). TFP contributions were the most divergent drivers of growth. In Spain, the highest contribution came from non-ICT capital deepening while in Sweden was TFP. ICT capital deepening also made a positive contribution in both countries but with less intensity in Spain than in Sweden. Followed closely by the contribution of labour composition changes, especially in the Spanish case.

[ 15 ] INDUSTRY SPECIALIZATION

[ 16 ] INDUSTRY SPECIALIZATION Four questions: 1.In which country is production more diversified? 2.In which country is the sectoral composition of output more different from the EU-15 average? 3.Are the differences in productivity growth due to a redistribution of factors towards industries with higher productivity levels or/and higher productivity growth (structural change effect) or is it a consequence of an overall pattern of productivity growth at industrial level (within-industry effect)? 4.Are the differences between pairs of countries due to a country effect (the differences occurred even without any difference in the industrial specialization) or to a total specialization effect (which captures the impact of the different specialization)?

[ 17 ] INDUSTRY SPECIALIZATION GVA sectoral dispersion (coefficient of variation of GVA sectoral share in total) Source: EU KLEMS (2009) and own calculations. The dispersion of output among the different industries used to be less pronounced in Spain than in Sweden and the EU-15 aggregate. However, by the end of the period the three converged.

[ 18 ] INDUSTRY SPECIALIZATION 2. In which country is the sectoral composition of output more different from the EU-15 average? SPAIN Index of differences in sectoral composition (GVA percentages) Source: EU KLEMS (2009) and own calculations.

[ 19 ] INDUSTRY SPECIALIZATION Four questions: 1.In which country is production more diversified? 2.In which country is the sectoral composition of output more different from the EU-15? 3.Are the differences in productivity growth due to a redistribution of factors towards industries with higher productivity levels or/and higher productivity growth (structural change effect) or is it a consequence of an overall pattern of productivity growth at industrial level (within-industry effect)? 4.Are the differences between pairs of countries due to a country effect (the differences occurred even without any difference in the industrial specialization) or to a total specialization effect (which captures the impact of the different specialization)?

[ 20 ] INDUSTRY SPECIALIZATION Decomposition of productivity growth. Shift-share analysis (annual average growth rates, in %) Source: EU KLEMS (2009) and own calculations. The main source of productivity growth is always the “within-industry effect”. That is, the one obtained because of the internal productivity improvements in each industry

[ 21 ] INDUSTRY SPECIALIZATION Four questions: 1.In which country is production more diversified? 2.In which country is the sectoral composition of output more different from the EU-15? 3.Are the differences in productivity growth due to a redistribution of factors towards industries with higher productivity levels or/and higher productivity growth (structural change effect) or is it a consequence of an overall pattern of productivity growth at industrial level (within-industry effect)? 4.Are the differences between pairs of countries due to a country effect (the differences occurred even without any difference in the industrial specialization) or to a total specialization effect (which captures the impact of the different specialization)?

[ 22 ] INDUSTRY SPECIALIZATION Decomposition of productivity growth. Shift-share analysis (percentages) Source: EU KLEMS (2009) and own calculations. Sweden’s productivity has been always higher than Spain and EU-15 average, while Spain’s has been lower. The impact of the country effect and the specialization effect has been changing along the period.

[ 23 ] FINAL REMARKS The overall picture is that Spain lags behind Sweden in almost all variables. Spain´s per capita income is lower than Sweden as a consequence of its lower productivity growth, in adition to its lower employment and activity rates. Spain only outperforms Sweden in the number of hours worked by employed person. Concerning productivity, the problem of the Spanish economy is not, or is not only, the result of its specialization in sectors with low productivity gains but it is a more general problem that affects all industries. This, together with the negative MFP contributions, indicates a problem in the fuctioning of the Spanish economy. Its comparison with Sweden highlights the distance between the two countries and the importance of the problems faced. But it also indicates that a better functioning of the Spanish economy is feasible.