Impact of legislation on labour market flexibility and job security

A high degree of protection of permanent employment contracts and strong disincentives to move from unemployment into active employment are the two main factors negatively influencing labour market flexibility in Portugal.

Flexibility and security

A study published by the General Directorate of Studies, Statistics and Planning (Direcção-Geral de Estudos, Estatística e Planeamento, DGEEP), within the Ministry for Labour and Social Solidarity (Ministério do Trabalho e da Solidariedade Social, MTSS), analyses the current issues affecting job flexibility and job security. The research looks at workers’ transitions in the labour market (between unemployment and employment and vice versa) and their impact on employment and unemployment levels, productivity and wages.

The results of this study confirm the theory that a lower labour market ‘liquidity’, expressed by a lower incidence of transition between employment and unemployment, but also between unemployment and employment, is a consequence of the rigidity of labour legislation. However, the findings also show that this rigidity is asymmetric since certain groups of workers are affected by high levels of job turnover, such as those workers with precarious employment contracts, while others have relatively stable jobs.

Rigidity of labour legislation

According to the Organisation for Economic Cooperation and Development (OECD), Portugal ranks first (alongside Turkey) in the list of countries with the most rigid employment protection legislation. Recent national reforms aimed at providing greater flexibility in the provision of temporary jobs had no effect on other formal employment contracts, namely permanent employment relationships.

The current difference between the rigour of the legislation regarding permanent employment contracts and temporary jobs may explain the increase in temporary employment and in the level of job insecurity among an increasing part of the active population. Therefore, this study recommends that more security should be provided in the case of temporary jobs and more flexibility should be permitted for workers on permanent contracts in the Portuguese labour market.

Mobility in labour market

A stronger trend of stability of permanent employment contracts contrasts with a higher mobility of non-permanent employment contracts, principally of fixed-term contracts. From 1998 to 2004, on average, 94% of employees with permanent contracts remained in that situation. At the same time, the proportion of fixed-term contract workers who were made permanent in their jobs declined from 19.5% in 1999 to 8.8% in 2004.

On the other hand, the unemployment protection level is high for those employees who have access to the social benefit system. According to the OECD, the Portuguese situation is one of those providing higher protection for unemployed workers in terms of the replacement income ratio. Statistics from the Institute of Employment and Vocational Training (Instituto do Emprego e Formação Profissional, IEFP) show that, in December 2006, about 452,700 individuals were registered as unemployed, while the social security statistics reveal that about 400,000 individuals received unemployment benefit (65% of monthly gross earnings up to a maximum of three national minimum wages) during 2006.

Meanwhile, the employment survey carried out by the National Statistics Institute (Instituto Nacional de Estatística, INE) confirms that, in the fourth quarter of 2006, a total of 458,600 persons were on the unemployment register. The DGEEP study estimates that the probability of an unemployed individual finding employment while receiving unemployment benefit is only 20% of the probability of an unemployed individual who does not receive unemployment benefit. This issue has been included in the debate on employment policies and social protection, from which the main outcome is to reduce the possibilities for unemployed people to refuse a job.

The Portuguese labour market has therefore two elements which undermine flexibility, namely:

  • a high degree of protection of permanent contracts, contrasting with a much lower level of protection of non-permanent contracts;
  • strong incentives undermining the mobility of people from unemployment into active employment.

According to INE employment statistics, the high proportion of non-permanent workers – which has remained around 20% of the total employed population between 2000 and 2005 – acts as a ‘flexibility buffer’ absorbing part of the impact of labour market adjustments to the fluctuations of economic cycles. This sustains the hypothesis that Portugal has a dual-sided labour market composed of a group of permanent workers and a significant group of non-permanent workers providing the required flexibility.

Impact of childcare on worker mobility

One of the most important results from the DGEEP study refers to the high impact of childcare on show a much higher propensity to fall into inactivity and to unemployment and show lower probabilities of returning to the labour market due to childcare responsibilities. These findings therefore also support the need to reinforce the policies promoting the reconciliation of work and family life.

Reference

Centeno, L.G. (coord.), Flexibilidade e segurança no mercado de trabalho português [Flexibility and security in the Portuguese labour market], Cogitum Collection, No. 25, DGEEP, Lisbon, 2006.

Heloísa Perista and Jorge Cabrita, CESIS

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