In this chapter we shed light on the debate on whether Spain constitutes an example of the ‘success’ of austerity policies, internal devaluation and structural reforms as the pro-flexibility narrative holds. Analyzing the institutional foundations of demand drivers of economic growth, we tackle the main characteristics of the Spanish growth model and changes during the last years. Mainly, the 2012 labor market reform changed the employment and industrial relations system, through a significant job protection reduction and decentralization of the wage setting mechanism, prioritizing company-level agreements over sectoral and provincial agreements. The reform deeply facilitated unilateral decisions by employers in collective bargaining, the application of opt-out clauses by firms, as well as restricted the automatic extension of collective agreements.

Offering an alternative explanation of the current recovery, our results support the hypothesis that labor market reforms and wage devaluation are not at the root of the current economic recovery (we found no evidence in favour of an export-led model). Additionally, the strong influence of private consumption on aggregate demand is due to a rapid job creation, even though this concentrated in low paid jobs. Hence, the provided evidence shows that in a wage-led economy like Spain, wage devaluation has contractionary effects on aggregate demand growth.