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El ICEI no comparte necesariamente las opiniones expresadas en este trabajo, que son de exclusiva responsabilidad de sus autores. The aim of this paper is to use the theoretical distinction between wage-led and profit-led economies to consider the impact of internal devaluation policy on GDP growth for the case of Spain. We assess to what extent wage devaluation in Spain has proven useful vis-à-vis triggering an exportled strategy, boosting aggregate demand and overcoming the crisis. For said purpose, we estimate a Bhaduri-Marglin model drawing on quarterly data from Eurostat, and we expand the traditional model to take into account the effect of private debt on consumption and investment. Our main conclusion is that the Spanish economy can be characterized as a wage-led economy, and that therefore a wage share decrease proves counterproductive to growth. According to our calculations, internal devaluation policy detracted an average of 0.3 percentage points of annual economic growth during the period 2010-2016.

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Since 2014 the Spanish economy has recovered positive GDP growth, and the country has been growing well above the eurozone average. This recovery has sparked an academic and political debate concerning the role that structural reforms, prescribed by the ‘Troika,’ have played in peripheral Europe. For certain scholars and institutions, these structural reforms have allowed the market, through greater wage flexibility, to make the necessary adjustments to restore economic growth, resulting in a ‘healthy’ economic recovery. But to what extent is this mainstream narrative solidly backed up by the empirical evidence? Can Spain be held up as an international example of the ‘success’ of these reforms? The aim of this paper is to shed light on this debate. We consider that labor market reforms and wage devaluation policy are not the drivers of economic recovery. Instead, we offer an alternative explanation for recovery based on the theory of demand-led growth.