Spain's labour market and its structural gap with major EU economies

This report analyzes why Spain combines robust post‑pandemic job creation and record employment with persistently high unemployment, especially among young people and the long‑term unemployed, as well as widespread job instability, in‑work poverty and strong regional and social disparities, compared with major EU economies such as France, Germany, Italy, Portugal and Ireland. The central question is whether Spain’s specific fiscal and administrative regime for the self‑employed and micro‑enterprises (high fixed social contributions, no general VAT registration threshold, burdensome start‑up procedures) acts as a structural barrier that worsens labour‑market outcomes, or whether deeper structural features of the productive system and labour institutions are more decisive. The first part of the report documents the empirical “anomaly”: Spain has the highest unemployment rate in the EU and OECD, one of the highest youth and long‑term unemployment rates, and elevated levels of in‑work poverty, despite strong job creation and only average labour tax wedges and labour costs by European standards. Spain’s employment rate remains several percentage points below the EU average, and regional disparities in unemployment are among the largest in Europe. This section also establishes that Spain’s labour‑market performance diverges not only cyclically but structurally from that of its main peers. The second part reviews the conventional structural explanations: a production model biased towards low‑productivity services, construction and tourism; a firm size distribution dominated by micro‑enterprises and a deficit of medium‑sized firms; a polarised skills structure with many low‑educated adults and significant skill mismatches; and a dual labour‑market regime that has historically relied on temporary contracts as the main adjustment margin. Territorial fragmentation and high levels of social exclusion, as documented by FOESSA and Cáritas, further undermine the capacity of employment to act as a reliable route out of poverty. The literature consistently finds that these “four structural pillars” explain most of the gap between Spain and the best‑performing EU labour markets. The third part formulates and tests a specific hypothesis: that Spain’s high fixed social contributions for the self‑employed, the absence of a general VAT registration or exemption threshold and comparatively burdensome administrative procedures for very small businesses constitute a distinctive institutional barrier that depresses self‑employment and SME creation, thereby worsening labour‑market outcomes. We compare Spain’s institutional design with that of EU peers and derive clear empirical implications: if the hypothesis in its strong form were correct, Spain should exhibit significantly lower self‑employment rates, lower enterprise birth rates and a thinner micro‑firm sector than comparable countries. The empirical test does not support this strong version of the hypothesis. Spain’s self‑employment share is slightly above the EU average and higher than in France, Germany, Portugal or Ireland, and Spain has the third‑largest number of active enterprises in the EU, with firm‑birth rates around or slightly above the EU average. The evidence points instead to a different mechanism: fiscal and administrative barriers act as filters and amplifiers rather than primary causes. They shape who can afford to become formally self‑employed, push a segment of activity into informality or dependent self‑employment, and limit the ability of very small projects to experiment and scale up into more productive SMEs, especially for young people, women and migrants. The report therefore concludes that Spain’s labour‑market under‑performance is best understood as the outcome of deep structural characteristics of its productive system, skills base, labour‑market institutions and territorial and social fragmentation, with fiscal and administrative barriers at the bottom of the system playing a non‑negligible but second‑order role. Policy recommendations must reflect this dual reality. On the one hand, a core structural agenda is needed to upgrade productivity and the production model, close skills gaps, consolidate labour‑market reforms and strengthen active labour‑market policies and social protection. On the other hand, a targeted fiscal and administrative agenda should reduce fixed entry and compliance costs for low‑income self‑employed workers and micro‑enterprises—through truly income‑related contributions, an effective VAT threshold and simplified regimes, and streamlined registration procedures—thus supporting more inclusive and sustainable entrepreneurship in line with SDG 8 and Spain’s 2030 Sustainable Development Strategy.