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Labour Market Reforms in Portugal 2011-15

A Preliminary Assessment

image of Labour Market Reforms in Portugal 2011-15

This report, commissioned by the XIX Government of Portugal, provides an evaluation of the comprehensive labour market reforms undertaken in Portugal over the period 2011-2015. It describes reforms in the areas of employment protection legislation, unemployment benefits, activation, collective bargaining, minimum wages and working time. The report reviews the reforms in detail and assesses the available evidence on the impact they have had on the labour market. The report concludes that the Portuguese labour market reforms were a move in the right direction. However, despite the progress made, many challenges remain and some of the reforms may not have gone far enough. Unemployment remains high and this situation has fuelled an increase in both poverty and long-term unemployment The labour market remains highly segmented and, in the context of very low inflation, the presence of downward nominal wage rigidity is likely to remain a barrier to the competitiveness of the Portuguese economy – unless productivity growth is strengthened.

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The impact of severance pay reforms in Portugal on on-the-job search and worker flows

As part of the labour market reforms, Portugal significantly reduced the severance pay entitlements of workers (and of new hires in particular – see Chapter 1 and Annex A for further detail). The primary objective of these reforms was to encourage a more efficient re-allocation of labour resources. With lower severance pay entitlements, workers might be less reluctant to switch jobs, resulting in increased on-the-job search and job-to-job flows. For employers, lower severance pay could increase both hiring and firing rates. However, as a result of grandfathering171, accumulated severance pay entitlements were preserved by the reform. One would therefore expect the largest (short-run) effects of the reform to be on hiring only (and possibly on the firing/job-to-job moves of new hires). In addition, because the reduction in severance pay was larger for permanent than for temporary contracts, one might expect to see an increase in the share of hiring that is on permanent contracts. At the same time, it is important to remember that severance pay was cut for both types of contract, and so the reform should have encouraged hiring on temporary as well as on permanent contracts.

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