The Service Sector: Composition, Development, and Trends in Spain

Posted on Nov 2, 2024 in Economy

The Service Sector Composition

Services encompass diverse activities such as transport, telecommunications, commerce, hospitality, health, education, financial services, business services, and public administration. Several classifications of services exist, grouped by key features:

Classifications of Services

  1. Market services and services not intended for sale: Provided by the market or the public sector, free or unrelated to production costs.
  2. Intermediate and final services: Used as intermediate consumption in other economic activities or intended for final consumption.
  3. Stagnant and progressive services: Stagnant services struggle to reduce labor needs per output unit without affecting quantity or quality. Progressive services can achieve significant productivity gains through capitalization and technological improvements.

Developments in the Spanish Service Sector

  1. Expansion of services’ share in domestic production: Increased from 59% to 67% between 1985 and 2008, reflecting a trend observed in all developed countries.
  2. Moderate increase in services’ real share of aggregate output: Rose from 66% to 70% over the same period, as the service sector tends to maintain or reduce production during economic expansion and increase during crises.
  3. Steady growth in service employment: Increased from 59% to 69% of total employment between 1985 and 2008, with Spain experiencing a significant shift towards services.

Historically, most tertiary activities have been shielded from international competition. While Spain’s service production and employment are substantial, this is not reflected in foreign trade. Spanish service exports exceed foreign purchases.

Specialization, Production, and Trade

Key Aspects of Spanish Service Production

  1. Real estate and business services: Dominate with a 25.1% share in aggregate output and 14.5% in employment in 2007. High labor productivity is driven by construction and the housing market. The 2008 crisis significantly impacted this sector. Business services benefit from outsourcing activities like accounting and tax advice.
  2. Commercial distribution: Historically significant, employing ΒΌ of service sector workers in 2007. Contributes just over 15% to production due to relatively low productivity.
  3. Hospitality: Prominent due to Spain’s tourism industry, making it a leading global tourism power.
  4. Transport and communications and government services: Have a relatively minor presence.

Spanish Service Trade

Spain specializes in tourism exports (44.9% in 2007), driven by competitive tourism companies. The coverage rate in international service trade is high due to IT companies’ growth in international markets. Spain has a trade deficit in other tertiary activities (except financial services), indicating competitive weaknesses, particularly in business services, which are crucial for the economy’s development.

Production Efficiency (1985-2008)

Labor productivity in services stagnated, with production growth (3.5% annually) relying on employment growth. Differences exist between tertiary activities:

  • Commercial distribution: Productivity improved by over 1% annually due to large stores and new information and communication technologies. However, modernization potential remains untapped.
  • Hospitality: Output per hour worked fell by 1.5% annually due to labor intensity and small company size.
  • Real estate and business services: Experienced a productivity decline.
  • Transport and communications: Productivity gains were low, with output per hour worked falling in transport.
  • Public administration and financial intermediation: Showed significant productivity advances.
  • Other tertiary activities (excluding education): Experienced productivity declines.

Factors Explaining Weak Productivity Growth

  1. Sectoral specialization in low physical and human capital intensity activities: Hindered capitalization, modernization, and productivity gains.
  2. Limited competition: Slowed technological and organizational modernization.
  3. Small company size: Particularly in retail and hospitality, hindered economies of scale and productivity gains.

Sectoral Policy

Historically, the tertiary sector was heavily regulated to correct market failures and due to interest group pressure. Since 1980, liberalization aimed to address inefficiencies, eliminate distortions, and promote competition. This involved privatization and competition policy, leading to increased productivity, lower prices, improved quality, and income redistribution from interest groups to consumers.

However, liberalization has been uneven:

  1. Telecommunications: Prices declined, and service range and quality improved. Progress was hampered by the dominant operator and some new entrants.
  2. Air transport: Consumers benefited greatly, particularly from low-price airlines. Postal services saw improved quality in delivery and network expansion.
  3. Commercial distribution: Restrictions on competition include limits on large store openings, requirements for discount outlets, and restrictions on shopping hours.

The shift away from interventionist practices and increased competition have transformed Spain’s service markets. The Draft Law on Free Access and Performance of Service Activities aims to eliminate barriers and simplify procedures, fostering administrative simplification and reducing business creation costs.