When Labour Market Reforms actually Reduce Unemployment

Pierre Cahuc, Francis Kramarz and Pedro Martins 

Recently, “Les Echos” journalist Dominique Seuxobserved that, in contrast with the abundant commentary on Greek economic woes, there is little discussion about the case of Portugal. A recent conference of Pedro Martins, one of the authors of this article and former Secretary of State of Employment in Portugal, provides us with the perfect occasion to revisit the recent evolution of Portugal’s labour market. 
Between 2008 and 2011, the minimum wage there increased by 20%. This increase was also broadly reflected in salaries beyond the minimum wage, thanks to centralized negotiation mechanisms featuring unrepresentative trade unions, with a membership below 10% that mostly represent permanent workers’ interests. Thus, when the recession started, these developments on wages amplified its impact on employment. From April 2008 to January 2013, unemployment rose from 8.6% to 17.7%, affecting mostly young workers. Permanent workers enjoyed one of the most restrictive regulations of the OECD, with its redundancy payments (one month per year of compensation) amongst the highest. In this situation, Portuguese youth was confined to temporary contracts, destroyed in a very large scale once economic activity cooled off. Among those below 25 years, unemployment rate surged from 20 to 40%. 
In 2011 Portugal reached an agreement with the EU and the IMF, which led to an ambitious eighteen-month program of labour market reforms. It decentralized collective bargaining –giving more room to business negotiations-, reduced the gap between permanent and temporary contracts –providing equal conditions for equal work- and aligned redundancy payments with the European average. Jobcentres were deeply modernised by providing stronger incentives to hiring, through the coaching, support, and monitoring of the unemployed. 
In spite of severe austerity, unemployment plunged from its 17.5% peak to last quarter’s 13.1%. Over the same period, youth unemployment was brought down from 42.5% to 32.2%. Employment, especially permanent contracts, enjoys constant growth. The Portuguese experience is a reminder that labour markets reforms oriented to synch wages with productivity and limit the duality between permanent and temporary workers, will favour employment, especially youth employment, as was the case in Germany over ten years ago. 
Do we need to emphasize the similarities between French and Portuguese malaises? Although complacency and arrogance may blind us while helplessly witnessing the steady rise of unemployment, the Portuguese experience shows that there is another course: to take specific actions –based on clear and simple principles- that bring unemployment down, instead of waiting for a hypothetic recovery. 

Pierre Cahuc and Francis Kramarz are Professors of Economics at CREST-ENSAE and the Ecole Polytechnique. Pedro Martins is Professor of Applied Economics at Queen Mary University of London and former Secretary of State for Employment of Portugal. 
This article was originally published in French in “Les Echos” on 27th February 2014.

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