Internal devaluation in a wage-led economy: the case of Spain

The aim of this paper is to study the impact of wage devaluation policy on the recent recovery experienced by the Spanish economy. For this purpose, we use the theoretical distinction between wage-led and profit-led economies. We address, for the first time in the literature, an in-depth analysis of the Spanish economy using the Bhaduri-Marglin model. We find that the Spanish economy can be characterized as a wage-led economy: a fall in the wage share has a contractionary effect on GDP growth. Our results point to two important conclusions, when we use this model to assess the internal devaluation policy. First, we do not see an export-led recovery in Spain during past years, driven by recent supply-side reforms. And, second, a pro-labour distribution of income would reinforce economic growth: according to our calculations, internal devaluation policy detracted an average of 0.2 percentage points of annual economic growth during the period 2009-17.