Posts Tagged ‘Portugal’

The Rigidity of Labour Markets and the Crisis

Matt Yglesias put up a post about whether Labor Market Institutions Explain The Crisis.

It’s an interesting subject that I’ve been working with quite closely for my thesis, his argument essentially is that until very recently Germany was seen as belonging to the ‘bad basket of overregulated European labor markets’ and that thus flexibility of the labor market is insufficient to explain performance in the crisis. I kind of agree but am a) not really convinced by a statistical measure that claims Germany has a less flexible labour market than France does and b) DO see a clear (if not exclusive) link between the unemployment rate and rigidity of employment protection during the crisis.

On what concerns a), the OECD has developed a EPL (employment protection legislation) index, which inspires more trust in me than the Fraser Institute (whom I am not familiar with though, maybe it is amazing). According to this index Germany’s labour market legislation is less rigid (if not massively) than France, Spain, and Portugal. Note that Spanish and Portuguese reforms in 2011-2012 are not yet contained in this graph.

Screenshot from 2013-04-11 17:20:43Source: EU Employment Observatory

More importantly though, and on b), it is the nature of flexibility that truly matters in the end. Thus, both Spain and Portugal showcase strong duality between permanent and fixed-term contracts coupled with a very low degree of wage and working-time flexibility due to the manner in which collective wage bargaining is handled (a more detailed discussion of which would go to far here). The combination of these two means that adjustment in the Spanish and Portuguese labour markets occurs almost exclusively on the employment and not on the wage and working-time side (as it did in Germany with its famed Kurzarbeitprogramm – short work programme). Additionally, the people who are being fired are those that can be fired at a less costly price, meaning the ones who are on “atypical”, fixed-term contracts with lower severance payment benefits.

Especially the Spanish labour market due to its dual nature, directly linked to the flexibility of its – differing – labour contracts, is extremely pro-cyclical then. During the boom years of the late 1990s / early 2000s, an astonishing number of people were integrated into the economy. The reverse has happened in response to the crisis with unemployment jumping up even while Spain’s loss in GDP has actually been – relatively – limited. Increased flexibility for permanent contracts or a reform of the collective wage bargaining mechanism (which initially has been done with results not yet clear as the reform dates from February 2012) would have had (and hopefully will) have an impact on unemployment then.

Having said all that it is clear that other factors including export performance, the drying up of the banking sector, domestic demand et al also play an important role in the determination of unemployment. Yglesis is thus right to point out that it is far from being a cure-for-all, wonder device.