Saturday 22 January 2011

Labour law and firm performance

A previous post asks: "Has labour market rigidity been hindering the performance of Portuguese firms?" So let me take this opportunity to mention one of my papers that addresses specifically this issue - here's the link.

The analysis compares the changes in the performance of firms that were able to dismiss workers for cause in a slightly less burdensome way following the 1989 labour law reform (probably the most important labour reform since 1975) with similar firms but that did not benefit from such streamlined approach.

The results indicate that the performance levels of the former group increased significantly compared to the latter. One possible explanation is that workers behaved differently once they realised that the burocracy of the law did not protect them in the same way as before, especially the one or two "rotten apples" that can be so detrimental to the overall performance of their firms - and therefore the wages of their colleagues.

Although this evidence is relatively old (unfortunately there are not many labour reforms in Portugal for one to study!), this problem appears to remain relevant in 2011. For instance, the CEO's of Jerónimo Martins and BPI have recently emphasised the importance of streamlining individual dismissals. However, the constitutional court declared void the timid changes in that direction that resulted from the 2009 review of the Labour Code.


  1. Above all I think its a very dangerous premise saying unease increases labour productivity.

    Do you work harder if you know your job is on the line? Will you take risks? Which workers are you going to lay off, the ones who are less productive, or the ones who are more vocal? Labor market isn't efficient in the hiring process, so what makes you believe it works when firing people?

    Aren't some of the more productive countries the ones who are less flexible?

    Before starting with datamining, I would want to know what is the working hipothesis, why more labor flexibility makes such a difference.

    Also I would want to know, why all the stress in the labor resource flexibility, and why not on capital flexibility, bankruptcy laws, etc

    With such high unemployment rates, so high level of short term contracts in the Portuguese economy, such a difference between Portuguese wages and the other members of the union, why are we talking about labor flexibility.

    I have a novel idea, why not look at the EURO exchange rate, interest rates and tax bourdons in our quest for the holy grail of a competitive economy?

  2. Just to add a final remark.

    I agree that labour flexibility can increase productivity when we are operating close to full employment (the case for the data series that supports the study).

    With high unemployment rates, honestly I don't see what good can be achieved with more flexibility

  3. Thank you for your comments.

    The working hypothesis is moral hazard: if one is insured, one takes less care (exerts less effort).

    I agree introducing these reforms when unemployment is high is not the best. But the fact is that when the economy was (apparently) doing well, like in the late 1990's, very little or nothing was done.

    The tragedy is to have employers that want to expand and hire morer workers - but that don't do that because they had bad experiences in the past and fear getting stuck with casting mistakes. Very few people care about the unemployed that do not get hired because of the lack of realism of the current labour law.

  4. Pedro, IMHO, we have moved a lot since the times of Fayol and Ford, so to say moral hazard is a productivity enhancer isn’t, IMHO, a valid working hypothesis.

    Adds to that, that job security should be a goal on our society, and shouldn’t be used has an instrument to increase productivity.

    Portuguese laws are flexible enough to allow for adjustments in output via labor adjustments, just look at the number of people who are in short term contracts.

    I think the imposition of a fund for terminating contracts, along with a provision for firing in the new contracts, would allow more flexibility. Companies don't fire people, because they cannot afford it, it isn't because of the labor laws.

    I think new legislation should be passed, allowing civil servants to be fired, there is where the labor flexibility is inexistent.