The sectoral structure of the Spanish economy, skewed more towards services such as wholesale and retail trade and the hospitality sector, only partially explains our country’s poor level of productivity, as measured in terms of output per hour worked. This output stands 14% below that of the euro area. If Spain had the sectoral structure of the euro area, this negative gap would still be 10%.2 1  Endogenous growth models show that knowledge is the only factor of production that generates positive externalities and economies of scale. Romer (1986), Lucas (1988) and Aghion and Howitt (1992). 2  This figure is a 2020 update on the figures set out in Cuadrado, Moral-Benito and Solera (2020). 2  Nor can lower productivity be attributed simply to the smaller size of Spain's business sector. When the registry data on firms from Spain, Germany, France and Italy are grouped together by size, Spanish firms are between 10% and 20% less productive than their European peers, regardless of size.3 In reality, this lacklustre productivity is symptomatic of an array of interconnected shortcomings. Today I will focus on five factors behind these shortcomings. The first factor concerns the very minor role played by innovation in our economy. To give one example: between 2020 and 2021 the ratio of research and development and innovation (R&D&I) expenditure to GDP stood on average at 1.2% in Spain, 0.8 pp below the euro area average.4 The private sector’s failings in this area are particularly striking.
19  Article 26 of the Law on Market Unity provides a specific administrative appeal proceeding for defence of the rights and interests of economic operators by competent authorities. It also provides a procedure for agents to request the National Commission on Markets and Competition to file an appeal for judicial review before the National High Court by means of a streamlined process. Finally, Article 28 allows consumers to inform the Market Unity Secretariat about obstacles and barriers and request a report. 20  Ferraz, Finan and Szerman (2021) and Hebous and Zimmermann (2021). 21  Ilzetzki (2023). 22  García et al. (2022). 6  Against this background, the long-term macroeconomic impact of the Next Generation EU (NGEU) programme will largely depend on how tenders are allocated among different firms. Moreover, this will provide an opportunity to assess the extent to which Spain has improved the level of competition in this area. The fourth factor relates to labour market regulations. The Spanish labour market has traditionally had a high incidence of temporary contracts (a cause of low labour productivity in themselves),23 a wage determination process that takes little account of each firms’ productivity and ineffective passive and active employment policies. Since the pandemic, regulatory changes such as the 2021 labour market reform have been introduced which have reduced the temporary employment ratio. However, a full assessment of these changes will need to consider many different aspects and a broader time frame.