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The Problems Behind the Recovery: Portuguese Labor Market Reforms in the Aftermath of the Eurozone Crisis

0 Comments 🕔08.Aug 2016

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This article is part of our feature Policy-Making Under the Troika.

by Alexandre Afonso and Jasper Simons

If one were to believe the assessments of European institutions, Portugal is on the path to recover from the severe economic crisis it suffered from 2010 onwards, and the drastic reforms implemented in employment protection, unemployment benefits, and collective bargaining are starting to yield results. Portugal swiftly implemented most of the measures contained in the Memorandum of Understanding (MoU) agreed with the Troika. Since then, exports have gone up, debt accumulation slowed down, and unemployment decreased as well.

However, labor market restructuring came with a high price tag, and the apparently promising numbers hide somewhat less encouraging developments for the long-term recovery of the country. The imposed changes to its political economy have not only led to a considerable deterioration of social protection, but they also coincided with high levels of emigration. The labor force has shrunk, and an impending demographic problem will be very difficult to reverse.

Portugal’s pre-crisis performance within the euro area, in contrast to Greece and Spain, was rather sluggish. In the aftermath of the financial crisis, José Sócrates’ socialist government (2005-June 2011) responded with a stimulus program to push consumption and increase investment in the real economy. Active labor market and welfare policies improving access and levels of unemployment benefits were adopted in order to maintain demand and contain rising poverty. The coverage of unemployment insurance (the share of unemployed people actually receiving benefits) had steadily improved since 2000 from just over 50 percent to almost 80 percent in 2009.

With Portugal’s fiscal position worsening, the government quickly turned to spending cuts and deregulation reforms, geared towards reassuring markets. These programs could not prevent bankruptcy, however, and Portugal was forced to request a 79-billion-euro bailout with even more severe austerity and flexibilization policies attached. The MoU included, inter alia, the revision of the labor code and severe reductions in severance and overtime payments, measures increasing the scope for the individualization of contracts and dismissals, and lowering and restricting access to unemployment benefits, which the centre-right Passos Coelho government (June 2011-November 2015) implemented.

Firstly, employment protection and severance payments (of fixed-term contract workers) have been severely affected. Although Portugal still has relatively high protection levels in the European context (and had one of the highest levels in the run-up to the crisis), no other European country has witnessed such a strong liberalization trajectory since the crisis (see Figure 1). Alongside the flexibilization of dismissals, minimum severance payment requirements for employers were lowered. For instance, severance pay in case of a redundancy dismissal for a worker with five years of tenure dropped from 21.7 to 14.3 weeks between 2010 and 2013. The minimum wage was frozen at 485 euros/month from 2011 onwards (565 with Christmas bonuses), until the new left-wing coalition that came to power in 2016 increased it again.

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Source: OECD

Secondly, unemployment benefits were cut and eligibility requirements tightened, reducing overall benefit. If unemployment did not decrease until recently, the share of people receiving benefits did decrease right when the government needed to cut expenditure. Coverage for both social and the ordinary unemployment benefits decreased: if high unemployment levels in Southern Europe often make the headlines, it is seldom mentioned that the actual number of unemployed people who receive benefits is much lower, and Southern Europe has had a rather poor record in this respect. Interestingly, if unemployment levels have decreased, this may have as much to do with the shrinking of the labor force as with the creation of jobs: between 2008 and 2014, the labor force (people in employment or seeking work) has shrunk by 303.000 people. If the number of jobs remains stable but the labor force decreases, unemployment goes down. This partly results from discouragement of workers, but also to a large extent from emigration. In fact, emigration may have had a greater impact because, as the government admitted, the number might be twice as high as official figures display. The Portuguese population has been shrinking since the crisis. In 2013, the population declined by 60,000 people, and emigration added to an impending demographic problem, with the lowest fertility rates in the EU (1.23 children per woman).

Thirdly, collective bargaining has been decentralized in favor of firm level and individual agreements. Reforms of, erga omnes, extension have led to sweepingly decreasing coverage levels for ordinary workers, which declined from over 1.8 million in 2008 to around 200,000 in 2014. Remarkably, both the socialist and centre-right governments largely implemented these policies with the support, albeit lukewarm, of the social partners. Although the larger communist CGTP-IN remained absent, the socialist UGT worked together with employer organisations and both governments on many of the reforms including most of the MoU. This came, however, at the cost of internal division, loss of membership and various general strikes of both the CGTP-IN and the UGT.


Alexandre Afonso is an Assistant Professor at the University of Leiden, Netherlands. Jasper Simons is a political economy and international relations graduate from the University of Amsterdam. He currently works as a research collaborator for an advisory company concerned with public institutions and policy in The Hague, The Netherlands.

This article is part of our feature Policy-Making Under the Troika.

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