Pilar Cuadrado

Omitted Variables in the Measure of a Labour Quality Index: The Case of Spain

Traditional measures of labour quality might have the shortcoming of missing some features of the very important increase in labour utilization within European countries. In particular, we explore the case of Spain. Despite showing one of the most important increases in labour quality in the EU according to standard methods, it also offers a negative increase in TFP growth. This paper computes an index of labour quality in Spain between 1988 and 2006 using microdata from the Labour Force Survey and the Structural Earnings Survey-2002 that allows the introduction of all possible interactions in a semi-parametric fashion between gender, age, education, experience in the current job and nationality. Considering those observable characteristics, the index still shows a notable growth at an average annual rate of 0.42 pp. After a period of slight decline (between 1988 and 1992) the index grows continuously until 2006 when it fell again. This is the case because education is, even by considering all possible interactions with other demographic variables, the highest contributor to the quality index’s growth. However, the paper shows the importance of considering changes in average productivities of different socio-demographic groups over time. We include in the analysis two usually omitted variables that help explaining the recent productivity slowdown in Spain: type of occupation held by the individual and unobserved heterogeneity of workers. Both the inclusion of occupation and especially the entry of individuals with below-average productivity levels compared to precedent periods decrease the labour quality growth to an average annual rate of 0.20 pp. Indeed with the addition of these two factors labour quality slightly decreases from 1997 onwards.

Potential Growth of the Spanish Economy

This paper presents an estimate of the Spanish economy’s potential growth. This estimate is based on a production function methodology that includes certain refi nements on previous versions and generates less procyclical potential output growth estimates than those traditionally considered in the literature. As a result, the (positive) output gap estimated in expansions is higher and that estimated in recessions is lower. According to these results, given the available population projections and under the assumption that total factor productivity (TFP) and structural unemployment will behave in line with historical patterns, the Spanish economy’s potential growth is expected to recover gradually over the coming years but, in line with projections by international organisations, to lower rates than those in the expansion period. However, per capita growth rates fully recover to the pre-crisis levels, which highlights the importance of population projections in shaping the Spanish potential growth.