When I say the phrase “Spanish economy” what do you think of? I’d wager that for most people, “high unemployment”, “great for tourists” or “in the same boat as Greece” may be thoughts that come to mind. It’s true that following the financial crisis of 2007, the Spanish economy has recovered more slowly compared to other European economies. And looking at commonly used economic indicators, such as wages, per capita GDP and unemployment rates, the standard of living in the United States appears much better. But to compare the U.S and Spain in the economic terms that people often cite gives a misleading idea of life in Spain. This is the first post in a series I hope to write highlighting the differences and similarities between the U.S and Spanish economies. Today’s post will focus on wages and the standard of living.
One often cited figure is the difference in wages. In Spain, the average nominal monthly wage is around $2,541 compared to $4,893 in the U.S. Taxes are higher in Spain than in the U.S, so to accurately compare household’s available monthly income, a better measurement is average household net-adjusted disposable income: the amount families take home after taxes and transfers. This figure differs more dramatically, $22,000 and $41,000 respectively. These figures paint a picture of two different nations, with citizens living completely different lives. It would appear that those in the U.S are twice as rich as those in Spain. This is not entirely true.
The above figures ignore an important difference between the countries, what economists call purchasing power parity (PPP). PPP refers to the difference in the cost of goods and services in different countries. For instance, in the U.S, my haircut costs me $15 plus tip, whereas here in Spain it costs me $8. Food is much cheaper as well. From my personal experience, I can tell you that if you like avocadoes, move to Spain. I buy five each week for a bit more than $1. Housing costs are lower too. Renting an apartment in Madrid, for example, is far cheaper than in many similarly sized U.S cities. If housing accounts for one third of my salary, in the U.S I will spend far more than if I were in Spain. Put simply, people in Spain don’t need as much income because it costs less to live. Wages are relative.
And then there is healthcare. Spanish people don’t have to pay for separate health insurance! While about 60% of Americans receive total or partial healthcare through their employers, Americans must still pay thousands of dollars annually in deductibles, premiums, and uncovered expenses. This cost amounts to roughly 10% of disposable income. The Spanish people are for the most part absolved of this financial burden. So while the average Spaniard has a much lower disposable income than the average American, the Spaniard has fewer additional expenses.
The case I am trying to make is not that the Spanish people are wealthier than us in the U.S. They are not. Rather, I want to emphasise than when one hears raw economic data about an economy, it is important to interpret it in context. Wages in Spain are low by American standards, but one can certainly get by, and even thrive, in the current Spanish economy.