In times of crisis, such as the current sovereign debt crisis, labour market ﬂexibility is frequently mentioned as a necessary requirement for exiting the crisis. For instance, in a paper on Greece’s adjustment program, produced by the European Commission’s ECFIN, it is written that “Employment Protection Legislation has been hampering the functioning of the labour market. [...] These initiatives will increase adjustment capacity of ﬁrms, ultimately boosting employment.” (ECFIN, 2010, pp.41-42). The same recipe has been applied to Portugal.
However, the EC was vocal on the need of labour markets reforms before the current sovereign debt crisis, mentioning it in many instances as a necessary condition for making the European Union the world’s most competitive economy. In fact, in the last decade there was a significant decrease in employment protection: the OECD Employment Protection Legislation (EPL) index shows an easing of the hiring and/or firing conditions in countries with traditionally very rigid labour markets, like Germany and Denmark. Portugal, which has been one of the countries with more stringent labour market regulations, has also shared that downward trend, mainly through a reduction of the components of the index related to individual dismissals and temporary contracts.
This recent trend has made many, namely trade unionists, argue that the Portuguese labour market is already ﬂexible enough. Moreover, there are also Portuguese corporate oﬃcials reported as saying that labour market regulations have not hindered their activities. For instance, in November 2010, Paulo Azevedo, CEO of Sonae SGPS, one of the biggest employers in Portugal, with over 30 thousand employees, mentioned on a TV interview that labour market legislation has not been a constraint on his company’s business (however he also mentioned that his colleagues complain about too much labour market rigidity).
These views suggest that actual labour market ﬂexibility should be explored by means of adequate indicators, others than the ones based on legislation such as EPL. This hypothesis has led me and my co-authors to investigate diﬀerences in sectoral labour market ﬂexibility, based on actual data from “Quadros de Pessoal”. We use that information to compute an index of sectoral labour market ﬂexibility. Our sectoral labour market flexibility index shows that all sectors display a trend towards increased flexibility, resulting from the reduction of the share of workers covered by collective agreements and working full time. It also shows that the increasing trend became more pronounced after 1999. Our index lags the EPL index, which may be explained by the fact that it takes time for legislation to affect firm behavior. Although high technology sectors tend to face more flexible labour markets, there are low technology sectors among the most flexible labour markets.
However, the real issue is still to be dissected: has labour market rigidity been hindering the performance of Portuguese firms? That is, is the labour market too rigid? We are looking at that.