The Greek labour market had traditionally been facing significant challenges in relation to some of its features such as low productivity, low participation rate, high unemployment, high tax wedge, low use of flexible employment forms and high share of self-employed.
In view of these stylized facts of Greece’s labour markets, at the onset of the sovereign debt crisis, the economic adjustment programmes pursued labour market reforms with at least two objectives. First, support the adjustment in the economy, through reforms targeting to ease labour market rigidities in order to cushion the negative impact on employment when domestic demand was severely hit by the crisis, as well as to facilitate a faster employment recovery as soon as the country returned to economic growth. Second, enhance gains in cost competitiveness in order to correct the large imbalances in Greece’s external accounts. In a recent study that we conducted with funding from the Hellenic Observatory , we find evidence that, in relation to their objectives, the implemented reforms largely fulfilled the second objective and partially the first objective, albeit left mostly unaddressed other long-standing weaknesses, such as low participation rate and high tax wedge.
Based on a micro-founded analysis, it appears that counterincentives for official-sector labour participation increased during the bailout programmes, as reflected through the estimated increase of the participation tax rate for the average household in Greece between 2010 and 2018. The deterioration of incentives for labour supply has been more pronounced among male and younger population. Nonetheless, simulation analysis on a specific labour market measure which reduced employees’ social security contributions in 2014 suggests that incentives for official labour participation improved, especially for groups such as youth and women, both of whom exhibit relatively low participation rates. A possible explanation for the weak record of labour participation in the longer-term is that the magnitude of the 2014 policy intervention was limited and its positive effects on labour participation were more than offset by other fiscal consolidation measures relying on labour income taxation.
From a top-down macroeconomic perspective, through the generalized synthetic control method which allows to construct counterfactual paths for each labour market indicator, empirical findings suggest that Greece’s 2012 labour market reforms had a sizable positive impact on reducing Unit Labour Costs, increasing the use of flexible forms of employment and slowing down unemployment rate dynamics. They also seem to had a slight positive impact on the employment growth trend. At the same time, it appears that the 2012 reforms did not improve labour participation rates, while increased average working hours and inequality. The 2014 reform lowering social security contributions is found to have had a positive impact on labour participation, confirming evidence from the microeconomic approach.
On a forward-looking perspective, there is evidence that further reducing the tax wedge can enhance labour market participation and narrow the respective gap between Greece and its peers. A continuous monitoring of Greek labour market trends is warranted in order for policy makers to implement informed evidence-based labour market measures in the direction of further increasing labour productivity, reducing unemployment and inequality, three additional areas where Greece needs to accelerate its convergence to other advanced economies.
An online research seminar on the topic took place on 13 October 2020, organised by the Hellenic Observatory. For more information please visit the event page.