OECD: Labor reforms from previous government “were a step in the right direction”

The Portuguese Labor minister Vieira da Silva hasn’t read the document, but ECO did. Last Wednesday, on ECOTalks, the minister disclosed that “when the study is concluded and handed in to the government, in OECD’s disclosable version, it will be publicly presented”. But the issue reached politics: the Social Democratic Party (PSD) used it as a weapon during the last fortnightly debate in Parliament and the Social Centre Party – People’s Party (CDS-PP) made a request to assure the current Government presents the report in Parliament. Why? Because the OECD commended the strategy used by the previous government (Social Democratic Party’s coalition with the Democratic and Social Centre Party – People’s Party in government between 2011 and 2015), and the main criticism made was that it should have gone even further in terms of labor flexibility.

Vieira da Silva had pointed out the document is still not public because there is no version authorized by the OECD (Organization for Economic Co-operation and Development), but he assures the “Ministry of Labor, Solidarity and Social Security and the OECD made the commitment to disclose and publicly discuss the study in the beginning of next year [2017]”.

“We now know that the government has the OECD report on the impact of the reforms in the labor market in a drawer, for about six months”, stated Luís Montenegro, PSD’s deputy, assuring the report points to the good results of the previous government’s measures.

That is, in fact, the message given in the ‘Labor market reforms in Portugal 2011-2015’ report: “The Portuguese labor market reforms were a step in the right direction. Ever since the [economic] growth was positive again in the beginning of 2013, Portugal has seen significant improvements both in employment and in the unemployment rate – better, in fact, than what would have been expected given the [economic] recovery rhythm”, is stated by the OECD. But the report also says: “However, in spite of the progress made, there are many challenges remaining and there is the feeling that some reforms did not go far enough” – since there were some problems remaining, such as the high youth unemployment and the increase in poverty and long-term unemployment.

The OECD report starts of by recalling that “Portugal was abruptly stuck by the worldwide financial crisis and suffered an unprecedented loss in jobs” and that “the recession exposed the existent weaknesses and unbalances” in the country. The report highlights that the labor market was much segmented and the long-term unemployment rate was one of the largest registered in the OECD, reinforcing the idea that the labor market was very strict, which made adjustments difficult for companies. Wages were also very strict, due to the collective bargaining and legal restrictions to make cuts on nominal wages – meaning that with little inflation and no ability to adjust wages, businesspeople were led to choose dismissals.

In order to solve these issues, between that time frame, Portugal was able to significantly reduce indemnities and softened the definition of justified dismissal, increasing job seeking and more employment; the country was able to broaden the unemployed benefits protection network; it implemented in practice stricter criteria in the eligibility for unemployment benefits. The Portuguese government also aimed to change the collective bargaining system in order to promote a closer alignment between salaries and productivity, as well as attempt to achieve wage restraint by freezing national minimum wage between 2011 and 2014; and, finally, “companies had additional flexibility in the middle of 2012 by adjusting working hours instead of employment to the changes in the market demand”.

“Although it was a long and sinuous road, Portugal has achieved a lot during this period. (…) Additional measures are undoubtedly needed, but it is important to evaluate what has been achieved so far”, is stated in the OECD’s report.