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Report No. 2285-PO
Unemployment in Portugal:Causes, Prospects and Policy Options
May 10, 1979
Country Programs Department 1Europe, Middle East and North Africa Region
FOR OFFICIAL USE ONLY
Document of the World Bank
This documtnt has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may nototherwise be disclosed without World Bank authorization.
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CURRENCY AND EQUIVALENTS
Calendar 1978
Currency Unit = Portuguese Escudo (Esc)
$1 = Esc 43.9
Esc = $0.023
FOR OFFICIAL USE ONLY
PORTUGAL
UNEMPLOYMENT IN PORTUGAL
CAUSES, PROSPECTS AND
POLICY OPTIONS
Table of Contents
Page No.
COUNTRY DATA
SUMMARY ........-.................................................. i vi
I. THE ADJUSTMENT TO THE INCREASED ABUNDANCE OF
LABOR, 1974-78 .............................................. 1
A. From Labor Market Balance to Imbalance ....... .. 1........
B. The Policy Response ................................... 3
1. Wage Increases .................................... 5
2. Investment Subsidies .............................. 9
3. Increases in Public Sector Employment .......... ... 10
4. Changes in the Employment Contract ................ 11
5. Increased Government Subsidies and Credit ...... ... 12
C. Policy Effects: Reduced Imbalance or Disguised
Unemployment ........................................... 13
II. PROSPECTS FOR FUTURE ADJUSTMENTS TO LABOR
ABUNDANCE ....................................................... 18
A. Labor Force Growth: 1978-83 ........................... 18
B. Employment Growth ........ *........ .................... ........ 22
1. Agriculture Sector Employment ........ .. ........... 23
2. Manufacturing Sector Employment ................... 28
3. Employment in Other Non-AgriculturalSectors ....................... ..................... 30
III. POLICY OPTIONS .............................................. 33
A. Labor Market Policies, 1974-78: An Assessment ........ . 33
B. The Case for Policy Changes ............................ 35
This report was prepared by Mr. Richard H. Sabot and is based on the findings
of a mission which visited Portugal in April 1978. A companion volume, "An
Updating Report on the Portuguese Economy" by Basil G. Kavalsky (Chief of
Mission) and Surendra K. Agarwal was distributed on September 7, 1978.
This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
COUNTRY DATA - PORTUIGAL Page 1 of 2
AREA POPULATION DENSITY (1977)92.072 sq km 9.73 million (mid-1977) 105.0 per square km
Rate of Growth: 1.2% (from 1970 to 1977)
POPULATION CHARACTERISTICS (1976) HEALTH (1974)Crude Birth Rate (per 1,000) 19.3 Population per physician 900Crude Death Rate (per 1,000) 10.5 Population per hospital bed 170
IN.OMF DISTRIBUTION (1973/74) DISTRIBUTION OF LAND OWNERSHIP (1968)1 of natioial income, highest 25% 56.3 (Z of total)
lowest 251 7.3 Owners Land HoldingUp to 4 ha. 78 154-50 ha. 21 34Over 50 ha. 1 51
ACCESS TO PIPED WATER (1970) ACCESS TO ELECTRICITY (1970)Occupied dwellings with % of Population 64.2
piped water (X) 65.5
NUTRITION (1969-71 average) EDUCATION (1975)Calorie intake as Z of requirements 118.0 Adult literacy rate X 70.0Per capita protein intake (grams/day) 85.0 Primary school enrollment % 116.0
GNP PER CAPITA IN 1977 / US$1850
GROSS DOMESTIC PRODUCT IN 1977 ANNUAL RATE OF GROWTH (1, Constant Prices)
US SMln. Z - 7970-7" 1973-77 1977
GDP at Market Prices 16,563 100.0 8.4 11.7 5.6Total Consumption 14,891 89.9 8.7 18.3 0.8Gross Domestic Investment 4,180 25.2 5.9 -14.3 28.8Gross Domestic Savings 1,672 10.1 6.7 -22.3 60.4Exports of Coods, NFS 2,874 17.4 10.7 -18.1 6.8Imports of Goods, NFS 5,382 32.5 13.1 2.1 13.1
OUTPUT, EMPLOYMENT ANDPRODUCTIVITY IN 1977
Value Added Labor ForcebW V. A. Per WorkerUS $Mln. % Thous. Z US $ Z
Agriculture 2,044 13.6 1,219 32.2 1,676 42.3Industry 6,667 44.5 1,276 33.7 5,225 131.9Services 6,287 41.9 1,291 34.1 4,870 122.9
Total/Average 14,998 100.0 3,786 100.0 3,961 100.0
GOVERNMENT FINANCE (1977)
Mln. Escudos 1 of GDP
Current Receipts 94.0 14.8Current Expenditures 111.3 17.6Current Surplus/Deficit (-)
of the State -17.3 2.8Balance of Autonomous Funds and
Services 12.4 1.9Current Deficit of the Central
Government -4.9 0.8Balance of Local Government 0.7 0.1Balance of Social Security System -4.3 0.7Current Deficit of Public Sector -8.5 1.3Capital Expenditures 39.8 6.3Overall Deficit -43.0 7.0
a/ The Per Capita GNP estimate calculated by the same conversion technique as the World Bank Atlas.All other conversions to dollars in this table are at the average exchange rate prevailing duringthe period covered.
b/ Excluding unemployed workers.
COUNTRY DATA - PORTUGAL Page 2 of 2
MONEY, CREDIT AND PRICES 1974 1975 1976 1977(Billions of escudos)
Money Supply (M2) 343 385 460 566
Bank Creditcto Public Sector 37 67 78 130
Bank Credit to Private Sector 293 326 412 512
(including nationalized enterprises)
(Percentage or Index Numbers)
Money as I of GDP 101.5 102.0 96.2 89.3
General Price Index (1973 - 100) 127.7 153.8 181.9 231.0
Annual percentage changes in:
General Price index 27.7 20.4 18.3 27.0
Bank credit to Public Sector 48.o 81.0 16.4 66.7
Bank credit to Private Sector 17.6 10.1 26.3 24.2
BALANCE OF PAYMENTS MERCHANDISE EXPORTS (1977)
1974 1975 1976 1977 US Mln. X
(Million US $)Exports of Goods, (FOB) 2,278 1,935 1,823 2,031 Fish (preserved) 59 2.9
Imports of Goods, (FOB) 4,277 3.605 3,932 4,562 Wines 132 6.5
Trade Gap -1,989 -1,670 -2,109 -2,531 Wood and Wood Products 71 3.5
Cork and Cork Products 149 7.4
Net Non-Factor Services -74 -169 26 77 Wood Pulp 95 4.7
Of Which: Textiles and Clothing 534 26.3
(Tourism Receipts/Gross) (513) (360) (332) (405) Footwear and Leather Articles 68 3.4
Resource Balance -2,063 -1,839 -2,083 -2,454 Metal Products 53 2.6
Net Investment Income /a 129 -14 -133 -177 Machinery (Non-Electric) 90 4.4
Net Transfers /b 1.111 1,037 972 1,136 Machinery (Electric) 139 6.9
Balance on Current Account -823 -817 -1,244 -1,495 Transport Equipment 72 3.5
All Other Commodities 569 27.9
Direct Foreign Investment 109 122 75 60 Total 2,031 100.0
Net MLT Public Borrowing
Disbursements 153 231 250 359
Amortization 67 77 68 93 EXTERNAL DEBT, DECE213ER 31, 1977
Subtotal 86 154 182 266US $ Mln
Other Capital (net)
and capital n.e.i. 74 -147 846 1,343 Public MLT Debt, Incl. guaranteed 1,304
Non-guaranteed Private MLT Debt 926
Changes in Official Liquid Total MLT outstanding 6 Disbursed 2,230
Foreign Exchange Reserves 554 688 141 -174
( - = Increase) DEBT SERVICE R&TTO FOR 1977 /c
Official Reserves, X
Gross End of Year 2,292 1,535 1,385 1,455
of Which: Gold 1,181 1,137 1,125 1,026 Public Debt incl. Guaranteed 4.2
Foreign Total outstanding & Disbursed 13.5
Exchange 1,079 391 250 424
Petroleum Imports 575 621 696 743
Petroleum Exports 67 39 35 34
RATE OF EXCHANGE IBRD LENDING, (June 30. 1978) (Million US $):
1974 1975 1976 1977 July 127 Outstanding & Disbursed 32.2
US $ 1.00 - Escudos 25.408 25.553 30.223 38.277 45.548 Undisbursed 169.0
Escudos 1.00 - US $ .039 .039 .033 .026 .022 Outstanding incl. Und4sbursed 201.2
Ia Mostly interest payments.
Mb nostly iWorkers' remittances
/c Debt service as a percentage of exports of goods, tourism and workers' remittances.
ENENA CPIB
August 22, 1978
SUMMARY
Labor Market Imbalance: Causes and Policy Response
i. Unemployment rates were low throughout the late 1960s and early1970s in Portugal; the demand for labor in industry and other non-agriculturalsectors expanded relatively rapidly, while agricultural employment declined.The occupational composition of the labor force was marked by a decline in theproportion of unskilled workers. The growth of employment opportunities forPortuguese workers in other European countries also made a significant contri-bution to the maintenance of full employment and rising real wages. Duringthe early 1970s, all of the annual increment to the working age populationemigrated, and in 1973, the number of Portuguese workers abroad was equiva-lent to one fourth of the labor force remaining in Portugal. This dependenceon external demand for labor made the Portuguese labor market vulnerable tochanges in external conditions.
ii. Acute problems began to develop in 1974, which saw the beginning ofan unprecedented increase in the domestic labor force coupled with a declinein the demand for labor. Though Portugal's natural population growth rate isamong the lowest in Europe, in 1974-1975 the population expanded by threepercent, with the return of some 600,000 residents of former African coloniesand a sharp reduction of Portuguese labor migration to other European countries.The declines in production and employment were largely due to the impact of theworld recession on the demand for exports compounded by the effects of politi-cal and economic uncertainties on investment. The increase in open unemploymentfrom 2.2% in 1973 to 7.7% in 1978 is only a crude measure of the imbalancethat developed in the labor market.
iii. Real wages outside agriculture nonetheless continued to rise, until1976. In the manufacturing sector, real wages increased by 22% between 1973and 1976. Increases in union power were the dominant reason; other contribu-ting factors were the introduction of minimum wage legislation and a rise ingovernment pay scales. Through their influence on the structure of earnings,these institutional factors may have kept unemployment higher than it other-wise would have been.
iv. The main remedial policies adopted by the government in 1974-75were designed to sustain aggregate demand. Increases in consumption wereinduced by higher government spending and higher wages, and as a consequencethe balance of payments deficit and foreign borrowing also increased. Sub-sidies on investment were the only counter-cyclical measure with a narrowly-defined target group: the entrepreneurs among the one fourth of the returneeswho are labor force participants. By 1978, the Commission to assist returneesto meet their pressing needs for housing and employment had provided over7 million contos of loans, at highly concessionary rates of interest, for upto 60% of the initial costs of commercial ventures, for which banks providedthe remainder at market rates.
ii
v. Measures to sustain aggregate demand were accompanied by legislation
that constrained the ability of private employers to release labor. Subsidies
and credit to the private sector were increased, to maintain the financial
viability of enterprises whose profits were squeezed by the decline in demand,
higher wages and the change of labor from a variable to a fixed cost. Since
the downturn in demand was for a short period the financial cost of maintaining
surplus workers in jobs where complementary factors are already in place may
actually have been no higher than that of supporting them in unemployment.
vi. Despite these measures, some firms have been able to release labor;
others have gone bankrupt. For workers made redundant, there is an unemploy-
ment compensation system. The ameliorative policies do not, however, affect
first-time job seekers or returnee wage and salary earners. The government
provided jobs for returning civil servants, fulfilling a legal obligation to
provide job security. First-time job seekers are mainly young secondary earners
with no economic dependents, and do not appear to have suffered serious depriva-
tion in recent years. More than 60% of the unemployed have at least an upper
primary level education, indicating that they are from families on whom the
burden of supporting a job seeker for a short period will not weigh heavily.
Prospects
vii. Over the next five years the annual increments to the Portuguese
labor force will be considerably larger than those of the 1960s and early 1970s,
even though the labor force growth rate is likely to be well below the 2.6%
a year of 1974-77. Decolonization is unlikely to have a continuing influence
on the size of the labor force; indeed, in 1978 the number of workers departing
from Portugal to former colonies equalled the number arriving from Africa.
Opportunities for Portuguese workers in other European countries promise to be
more limited than in the 1960s and early 1970s.
viii. In projecting the future growth of the Portuguese labor force, the
source of greatest uncertainty is the female participation rate. 1/ Assuming
that this rate rises slowly, the labor force is projected to grow at 0.9% a year
between 1978 and 1985. Assuming that the female participation rate rises
more rapidly, the projected labor force growth rate is 1.3% a year. These
projections imply that to avert an increase in unemployment over this period,
annual employment creation would need to be 1.5% to 2% higher than in 1970-73.
1/ A linear projection was made of the recent trend in female participation.
It yielded estimates for 1990 that appear unreasonably high when compared
with rates in European countries where per capita income and women's
educational attainment are greater.
iii
ix. It is highly unlikely that the demand for labor will expand suffi-ciently to absorb the entire pool of workers who are currently unemployed.The prospects for avoiding an increase in unemployment are not bright. Theyessentially depend upon whether the economy can be shifted to a growth paththat is more demanding of labor. Accelerating the rate of growth of outputdoes not appear to be a viable alternative: GNP growth rates in 1979-83 areunlikely to equal the rates achieved in the decade before 1974.
x. The size and dynamism of the manufacturing sector make it an impor-tant element in any consideration of Portugal's labor market prospects. By1977 the sector accounted for roughly 28% of employment and 36% of GNP. Ineach year of the early 1970s, twice as many new jobs were created in thissector as in any other sector. But while manufacturing output was growingat a rapid 13% a year (1970-73), employment in the sector was growing at only1.6% a year-- an output elasticity of demand for labor of only 0.12. Thisimplies that even if manufacturing output were to grow at 15% a year in thenext five years, other things being equal, the sector would provide new jobsfor only one third to one half of the projected net additions to the laborforce outside agriculture. In fact, manufacturing output appears likely togrow more slowly, rather than more rapidly, over the next five years than atthe beginning of the 1970s.
xi. It would be rash on the basis of these numbers to conclude thatPortugal's largest non-agricultural sector can have only a limited role in theadjustment of the economy to more rapid labor force growth. But as regardsthe next five years, the prospects for a substantial change in the laborintensity of production appear very limited. As much as half the resourcesavailable for investment in manufacturing in those five years may be absorbedby highly capital-intensive projects to which commitments were made before1974. The entrepreneurial ability to identify and exploit profitable oppor-tunities for investment in medium-scale, relatively labor-intensive enterprisesremains concentrated in Portugal's private sector, where investment has con-tinued to be limited by lack of confidence. Moreover, though real wages inmanufacturing have declined since 1976, wage distortions continue to dampenincentives to increase the labor intensity of production.
xii. Capital and labor are more easily substituted for one another inconstruction and services than in manufacturing, but these sectors would needto grow at least twice as fast as in 1970-73 if an increase in unemploymentis to be avoided. Such growth rates appear unlikely: these two sectors areforecast to grow more slowly than in 1970-73; even if the 1970-73 rates aresustained these sectors would absorb only 40-60% of the additions to the laborforce who do not find employment in manufacturing or agriculture.
xiii. Whether unemployment in Portugal will increase further, and if soby how much, will depend to a significant extent on employment and incomes inagriculture, which provides just under one third of total employment (1977).The foregoing observations are based on the rather optimistic assumption that
iv
agricultural employment will remain constant in the five years ahead. In
1970-73, agricultural employment declined by 3.9% a year; labor productivity
in the sector as a whole rose by 3.8% annually, largely due to heavy out-
migration from the agricultural regions of lowest productivity and a consequent
increase in land left fallow. In the same three years, average real wages in
manufacturing rose more than four times as much as those in agriculture. The
wage gap between non-agricultural workers and agricultural employees widened
by 10% between 1973 and 1975; that between non-agricultural workers and small-
holders widened by 20%. The widening productivity gap between agriculture and
the other sectors of the economy has been due in large part to the low level
of investment in agriculture. For more than a decade, annual agricultural
investment has declined from 13% of total investment in the mid 1950s to an
average of 5 - 6% since 1970.
xiv. Though agricultural employment opportunities were available, workers
appear to have been attracted out of agriculture by the prospect of more lucra-
tive jobs in other sectors and abroad. The large differentials in wages within
Portugal provided an incentive for workers to remain unemployed while searching
for higher-paid urban jobs.
xv. The growth of urban unemployment and the reduction of labor demand
in Central Europe have noticeably reduced the rate of decline in agricultural
employment. Though not enough is known about labor migration in Portugal to
predict how the reduction in foreign employment opportunities will affect the
rate of rural outmigration in the next five years, such outmigration is likely
to continue unless the income gap between agricultural and other employment
becomes considerably narrower.
The Case for Policy Changes
xvi. The government's countercyclical policies have successfully avoided
precipitous declines in output and employment, and its ameliorative policies
have avoided the serious deprivation sometimes associated with growing labor
market imbalance. Nevertheless, a strong case can now be made for policy
changes. The principal threat of increased unemployment no longer lies in the
deficiency of aggregate demand but in the increased rate of growth of the
domestic labor force. The primary emphasis of remedial policies should thus
shift away from countercyclical measures toward efforts to raise the long-
term rate of growth of labor demand.
xvii. There is no way to decrease the rate of growth of the labor force.
Policies to reduce fertility, already very low, to lower participation rates
by increasing educational opportunities, or to encourage emigration are,
respectively, pointless (it is already very low and the impact of further
changes will not be felt for decades), too costly and unpredictable in their
outcome. The main elements of the appropriate strategy--increasing the rates
of growth of investment and output and shifting toward a more labor-demanding
growth path--are clear. Several policy issues, however, deserve further
attention.
v
xviii. The first of these concerns wages. The 1974-75 rise in real wagesstimulated aggregate demand and employment. In the longer run, however,rising wages are likely to dampen the demand for labor, not only becausethere is a higher propensity to save out of profits than out of wages, butalso because high wages will delay the adjustment of the factor price ratio,and hence of factor proportions, to the increasing abundance of labor. Thereis limited scope for interventions to adjust real wages downward. Nevertheless,one aim of government policy should be to contain institutional pressures forwage increases, which are likely to increase over time. A second aim shouldbe to narrow the gap between agricultural and non-agricultural earnings. Thenarrower this gap, the lower will be the rate of outmigration from agricultureand the smaller the number of workers unsuccessfully seeking non-agriculturaljobs.
xi-x. Ameliorative, as well as remedial policies, should change theirfocus to cope with the changed character of unemployment. Unemployment ratesamong older Portuguese workers have closely mirrored the cyclical movement ofaggregate demand, rising in 1974-75 as demand declined, making reduncant someexperienced workers, and falling again in 1976-77 as demand recovered. Bycontrast, unemployment has steadily increased among workers under twenty-five,a high proportion of whom are first-time job seekers. If labor market imbalanceis due principally to an increase in the supply of labor, rather than a con-traction of the demand for it, policies that discourage the release of surpluslabor will provide protection to those who do not need it, and will not safe-guard from unemployment the first-time job seekers who are most prone to thiscondition. Indeed, such measures as prohibitions on the dismissal of workerscan be counterproductive, if they effectively increase the expected costsof labor and hence delay corrective responses by employers to the greaterabundance of labor.
XX. Since first-time job seekers are not eligible for unemployment com-pensation, the existing policy regime is of relatively little benefit to themajority of unemployed. In the years to come, the duration of unemploymentfor the average job seeker is likely to be longer than it was in 1974-78.Families' ability to support their unemployed children will be strained, andtheir resentment at being asked to bear a disproportionate share of the costsof maladjustment in the economy is likely to increase. Moreover, whether pro-longed periods of unemployment will erode people's capacity for work is arelevant question.
xxi. Making unemployment compensation available to first-time job seekers
would greatly increase the proportion of unemployed workers benefitting fromameliorative policies. Such a change would not, however, resolve the problemof human capital erosion. Creating employment in the public sector canreduce the resource as well as the welfare costs of unemployment. Butexperience elsewhere suggests that the social efficiency of providing regularpublic-sector employment on a large scale is rather low: the costs of pro-
vi
viding it are high, the output of workers in such positions is often low, andthe mobility of surplus workers is reduced. Temporary public employment foryoung unemployed workers is a more attractive alternative. A government"youth corps", financed by the Unemployment Fund, could avoid the problemsassociated with the expansion of regular public-sector employment by payingwages below regular government scales, minimizing expenditures on costs otherthan labor, and by emphasizing that the employment offered was temporary anddid not provide security of tenure.
CHAPTER I
THE ADJUSTMENT TO THE INCREASED ABUNDANCE OF LABOR 1974-78
A. From Labor Market Balance to Imbalance
1.1 In the late 1960s and early 1970s, the demand for labor in in-dustry and other non-agricultural sectors increased at a rate sufficient tomaintain full or near full employment in Portugal despite a steady declinein employment in agriculture. Overmanning and low marginal productivity oflabor may have been a problem in some sectors, but measures of open unem-ployment, 2.2% in 1973, 1/ indicate that supply and demand were roughly inbalance. Indeed, the rise of wages throughout this period is an indicationof the tightness of the labor market, as government or other institutionalinterventions to raise wages were minimal before 1974. The achievement ofrapid growth and structural change in Portugal was reflected in a decline inthe proportion of unskilled and uneducated workers, and this upgrading ofthe labor force explains, in part, the trend in average wages.
1.2 In this picture of robust good health in the labor market priorto 1974, there is only one obvious symptom of the acute problems to developsubsequently. Rapidly increasing employment of Portuguese workers outsidePortugal contributed significantly to the maintenance of full employment,the rise in wages, and the shifts in the occupational and industrial com-position of the labor force. Between 1970 and 1973 total employment inPortugal actually suffered a marginal decline, despite an average aggregaterate of investment in this period of 17.3% and an average rate of growth ofGNP at constant prices of roughly 10% a year. The 7% a year of grossinvestment allocated to agriculture and mining was associated with a declinein the labor force in those sectors; while in manufacturing, which receivedan average of 30% of total gross investment, the output elasticity of demandfor labor of 0.12 reflected in part the high average marginal capital-laborratio of roughly $30,000, a figure on a par with France, whose per capitaincome is more than three times that of Portugal. During the early 1970s,all of the annual increment to the working age population emigrated; theresident working age population actually declined between 1970 and 1973. In1973, Portuguese workers abroad numbered some 800,000, roughly a quarter ofthe labor force remaining in Portugal. This dependence on external demandfor Portuguese labor made the continued health of the domestic labor marketvulnerable to adverse changes in conditions elsewhere.
1.3 There has been a shift in the relative scarcities of factorsof production in Portugal since 1973. The return to Portugal of some600,000-colonial administrators, settlers, soldiers and their dependentsmade a once-for-all contribution to the increase in the abundance of labor.There are few precedents for the 6% addition to the population that resultedfrom decolonization. (The repatriation of the French from Algeria addedonly 2% to the population of France). The reduction to near zero of thegrowth rate of employment opportunities in Central Europe for Portuguese
1/ National Institute of Statistics.
- 2 -
workers during 1973-78, however, had an equally great effect on the domestic
supply of labor. The increase in the numer of migrants returning to Portugal
does not appear to be large in absolute terms; the impact on domestic suply
is primarily in the reduction of outmigration. 1/ Emigration declined from
180,000 in 1970 to 33,000 in 1976. By 1977, emigrants had been reduced from
more than 100% to less than 20% of the increment to the working age popula-
tion. This meant a sharp increase in the rate of growth of the domestic
labor force, despite a natural rate of population growth which continued to
be among the lowest in Europe. Rising participation rates for women, partly
explained by their greater access to educational opportunities, also contri-
buted to the increase in labor force growth.
1.4 This increase in labor supply coincided with a decline in labor
demand. The world recession not only reduced foreign demand for Portuguese
labor, it reduced demand for commodity exports as well. Industrial produc-
tion declined by 10% between mid-1973 and early 1975, and employment in
manufacturing followed suit with 2% declines in 1974 and 1975. In response
to the emergence of excess capacity in industry and the uncertainty regard-
ing economic conditions at home and abroad, fixed capital formation declined
by 6% in 1974 and by another 14% in 1975.
1.5 For reasons just given, a sudden marked increase in the supply of
labor and a cyclical decline in the demand for labor, it should come as no
surprise that unemployment markedly increased in Portugal during 1974-75.
There are three measures of unemployment: one based on registration by
workers with the Ministry of Social Security for welfare payments to the
unemployed, one on labor force surveys designed and administered by the
National Institute of Statistics, and one on information on increses in
labor supply and employment compiled and interpreted by the Ministry of
Labor. All indicate that both the number of unemployed workers and the
aggregate rate of open unemployment have increased since 1974. The measures
diverge widely as to the rate of increase and the current rate of unemploy-
ment. While the low estimate of the current rate of open unemployment, 7.9%
is too low and the high estimate, 14% is too high, the former appears to be
the more accurate. Indeed, given the apparent magnitude of the shifts on
both the supply and demand sides of the labor market, it is not the presence
of open unemployment, but its low rate that is surprising.
1/ A qualifiction is in order. Unlike outmigrants who must register
with the authorities so as to receive travel documents, and whose
numbers are therefore easy to estimate, return migrants are not re-
quired to register. Thus the magnitude of return migration is likely
to be underestimated by the Office of the Secretary of State for
Emigration. However, other evidence suggests that there have not been
large scale dismissals of Portuguese workers in France or Germany.
- 3-
B. The Policy Response
1.6 Maintaining full employment while adjusting to a sudden, un-
expected and marked increase in the supply of labor would strain the
strongest and most flexible of economies. Aggregate neo-classical models
of economic growth suggest that the prerequisites for a successful full
employment adjustment are increases in the rate of investment and/or in its
labor intensity, which would be forthcoming only if the structure of incen-
tives reflects the change in the relative scarcity of factors and if thereis a high degree of responsiveness by entrepreneurs to the changes in
incentives. 1/
1.7 The surprisingly low rate of open unemployment in Portugal is
clearly not to be explained by the aggregate rate of investment which
took until 1977 to regain the level of 1973. Labor markets in African
countries adjust to sudden significant declines in modern sector demand for
wage labor (presumably also to sharp increases in labor supply) without
equally dramatic increases in open unemployment. Large segments of the
agricultural and non-agricultural sectors in both rural and urban areas have
capital/labor and land/labor ratios which are downwardly flexible in the
face of excess supply and thus serve as employers of last resort. But the
structure of output and employment in Portugal differs markedly from Africaneconomies, where the agricultural sector often provides employment for more
than 70% of the labor force. In Portugal less than 30% of the labor force
is in agriculture. Moreover, though there is no quantitative evidence,
there is little doubt that the administrative efficiency of central and
local government is greater in Portugal than in Africa, and the unprotected,
or informal, segments of both agricultural and non-agricultural labor
1/ In a fixed proportions model of the Harrod-Domar type successful
adjustment depends solely on increases in the savings (investment)
rate. An increase in the rate of growth of the labor force, requires
an increase in the rate at which capital is accumulated. If theincrease is not sufficiently large then
U = L - E = n - - wherev
U L E
L is the labor force, E is employment, s is the savings rate, v is theratio of capital to full capacity output and U is unemployment. In neo-
classical models, as long as the ratio of wages to the cost of capital
declines a reduction of the capital/labor ratio will also contribute to
the maintenance of labor market equilibrium. Since in Portugal presumably
there are opportunities for altering the sectoral composition of investment
and the techniques adopted within sectors, it is the neoclassical rather
than the fixed proportions model that is more appropriate. Of course evenin such a model unemployment will grow if the combined impact of changes in
investment and capital intensity on employment growth is insufficient to
match the higher rate of growth of the labor force.
Table 1; POPULATION AND LABOR FORCE DATA
1969 1970 1971 1972 1973 1974-- 1975/1 1976
1. Total end-year population(thousands) 993.7 8,978.2 9,218.4 9,633.1 9,694.1
2. Population growth rate(percent) -0.67 0.05 2.68 4.50 0.63
3. To.tal net
emigration /2 153,536 180,065 150,197 140,976 120,019 70,442 44,918 33,207
4. Emigration of laborforce participation /2 110,615 110,466 80,281 44,187 64,180 23,866 11,626 -9,962
5. Total number of Portuguese
workers in France and Germany 243,800 342,200 412,200 448,500 497,800 513,000 518,300 502,392
6. Total employment inPortugal (thousands) 3,180.1 3,171.3 3,150.4 3,124.3 3,098.6 3,015.3 3,038.4
/1 The large increases in 1974 and 1975 are due to returnees from Angola and Mozambique.
/2 EAcluding returnees from Africa.
Sources: National Institute of Statistics, Secretary of State for Emigration, Ministry of Labor.
-5-
markets outside government regulation are consequently much smaller. To mopup a considerable pool of unemployed workers a large sponge is required.Though there is evidence, discussed below, of increases in employment innon-agricultural self-employment and in segments of non-agricultural sectorswhere wages remain flexible, of a decline in the rate of decrease of employ-ment in agriculture, and of declines in earnings from agricultural andnon-agricultural self-employment, these adjustments are likely to prove tobe only a small part of the explanation for the low rate of open unemploy-ment in Portugal.
1.8 The principle explanation of the low rate of open unemploymentis found in the nature of government policies influencing the labor market.There was continuity and consistency between these policies despite a rapidsuccession of governments during the period 1974-78. With the possibleexception of wage policy all key measures had the short-run effect ofmaintaining employment at a level higher than it otherwise would have been.Not all of the five policies we consider here, however, were designed andimplemented with the principal aim of affecting the level of employment. Insome cases the prevention of a decline in employment was an important sideeffect, though it is not always certain whether it was intended or not.
1. Wage Increases
1.9 The prerequisites for a full employment adjustment to the risein the rate of increase in the domestic labor force noted above have impli-cations for the wage rate. The high proportion of consumption expendituresfrom wage earnings makes their rate of growth a prime candidate for reduc-tion in order to increase resources available for investment. Likewise,only if the price of labor declines relative to the price of capital willentrepreneurs have an incentive to adopt more labor intensive techniquesof production. Whether or not a decline in the wage rate is desirable fromthe perspective of the level of investment and choice of technique, marketforces would in any case tend to depress wages if increases in the supplyof labor exceed increases in demand at the prevailing wage rate.
1.10 Not the least important economic consequence of the change inpolitical systems in Portugal in 1974 was that real average wages in non-agricultural employment actually increased by 21% over the next two years(see Table 2), a faster annual rate of increase than the average over theprevious three years. Minimum wage legislation was implemented for thefirst time, public sector wage scales for unskilled and semi-skilled workerswere raised and unions, freed of some of the constraints that had hamperedthem in the past, were successful in pressuring private employers for wageincreases. In effect, in the short run political and institutional forcesdominated market forces in the determination of wages. As a consequence,the share of total output allocated to earnings increased at the expense ofprofits; since a higher proportion of profits than of wages are saved, theaggregate rate of savings, hence domestic resources available for invest-ment, declined from 18.9% of GDP in 1973 to 3.8% in 1975. It is not clear,however, whether the rise in wages had a perverse effect on incentives, in
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that it encouraged employers to economize on labor rather than to find waysto substitute labor for machinery. 1, Though precise measures are unavail-able the devaluation of the escudo by some 40% between 1973 and 1978 andrises in the rate of interest indicate that the costs of capital have alsorisen. What is clear is that the ratio of the price of labor to that ofcapital remained higher than it would have in the absence of the wageincreases.
Table 2: INCREASES IN PRICES AND MANUFACTURING WAGES
Consumer Prices Annual Earnings Real WagesYear Prices A1 in Manufacturing (1973 = 100)
1974 28.0 41.0 110.21975 20.4 32.0 120.81976 18.0 19.0 121.81977 27.0 18.0 113.2
/1 Average of consumer prices (excluding rents) for Lisbon and Oporto.
1.11 It is important to note, that with respect to labor market ba-lance, the rise in wages did yield some benefits, if only short run. Thoughattenuated by significant leakages abroad, because of the consequent redis-tribution of output from profits to wages and the differences betweenrecipients of such in savings propensities, one effect of the increase inwages was to increase consumer demand, picking up some of the slack inaggregate demand brought about by the decline in exports and investment. Ofcourse it could be argued that as a counter cyclical measure it would havebeen preferable to increase investment rather than consumption. This wouldnot only have lessened the short-run decline in labor demand; it would also,by providing the basis for an increase in the rate of employment generation,have been a step towards the resolution of the potentially much longer-livedlabor absorption problem caused by the increase in supply. Indeed, raisingwages has exacerbated the difficulties of absorbing the larger annualincrements to the labor force. Unless there is a dramatic decline in thecapital intensity of production, a reduction in the share of output allo-cated to consumption is unavoidable if labor market balance is to be re-gained. Raising wages created false expectations about the standard ofliving Portugal can currently afford. As a result, a political limit towage declines may have been established well above the limit dictated byconsiderations of social welfare.
1/ To obtain a precise estimate of the increase in the cost of laborto manufacturers, nominal wage increases should be deflated by theprices of manufactured goods rather than by the C.P.I.
1.12 On the other side of this issue, the difficulty of increasing therate of investment in 1974-75 should not be underestimated. Other Europeancountries, without the complicating factor of political instability, experi-enced declines in investment similar to Portugal. Even to sustain the 1973level of private capital formation would have required the government togive investors economic inducements that would have been politically un-acceptable. There were also serious drawbacks to the alternative policy ofincreasing public investment, and not only because the government had hadlittle experience with direct productive investment. Dramatic shifts inrelative prices increase rates of return to some types of investment andlower returns to others. Perception of the new structure of economicopportunities, which is not yet entirely clear, was then quite obscure.Thus there was a rather high risk of making investments with low or evennegative rates of return. Continuing the petro-chemical investment projectsof Sines and other projects begun before the recession and the rise in theprice of oil, for instance, may not have been advisable. 1/
1.13 There is another dimension of the impact of wage changes onlabor market balance that should be considered. The short run positive
effect of the increase in average wages on aggregate demand, hence on thedemand for labor and on open unemployment may have been offset somewhat bythe adverse consequences for unemployment of alternations of the earningsstructure. Table 3 documents the changes between 1973 and 1975 in the realwages of agricultural workers by districts. In over one third of thedistricts wages remained constant or declined. For the agricultural sectoras a whole wages rose by only 8%. Since the wages of workers in non-agricultural employment rose by some 21% over this period, a widening of thedifference in wages between the two sectors of more than 10% is implied.Estimates by the 1976 ILO mission to Portugal indicate that gaps betweennon-agricultural wages and non-wage incomes in both the agricultural andnon-agricultural sectors widened even further. There is evidence of a 24%decline in real earnings among the self-employed in agriculture and a 16%decline in real earnings among the self-employed in non-agricultural acti-vities. 2/
1.14 The gap between wages in non-agricultural employment and earningsin other forms of employment may have been an incentive for some workersto remain unemployed while searching for a high wage job, despite theavailability of low-income employment opportunities. More formally, wherethe labor market is segmented 3/ for some job seekers the expected incomeassociated with waiting in the queue for high wage jobs (the product of thewage in the high wage sector and the probability of obtaining a job in thatsector) will exceed expected income in other sectors even if employmentprobability there is unity.
1/ See IBRD, "An Updating Report on the Portuguese Economy," Washington,September 1978.
2/ ILO, "Planning for Basic Needs in Portugal," Geneva, mimeo, 1978.
3/ By segmentation is meant the payment of higher wages to one workerthan another with the same skills simply on account of his sector,or segment of sector, of employment.
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Table 3: INDEX OF AGRICULTURAL REAL WAGES BY DISTRICT 1973-1975
Index of Agricultural RealDistricts Wages 1975 (1973 = 100)
Aveiro 107
Beja 127
Braga 110
Braganca 100
Castelo Branco 110
Coimbra 133
Evora 129
Faro 97
Guarda 81
Leiria 72
Lisboa 112
Portalegre 137
Porto 101
Santarem 130
Setubal 117
Viana do Castelo 76
Vila Real 90
Viseu 78
Total 108
Source: ILO, "Planning for Basic Needs in Portugal,"mimeo, Geneva, 1978.
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1.15 A prerequisite for workers to choose to remain unemployed is thereceipt of compensation from the government or access to some other means
of financing consumption, a condition easily fulfilled in Portugal forworkers released from employment and for a high proportion of first time
job seekers. 1/ Another prerequisite is that taking up employment in thelow income sector reduces the probability of a worker obtaining a high wage
job. This precondition is also fulfilled in the many instances in Portugal
where the only readily available employment is on farms geographicallyremoved from the urban centers where high wage employment opportunities are
concentrated.
1.16 The wider the gap between earnings in the high and low incomesectors the greater the number of workers likely to be in such "voluntary"unemployment. It is not possible to determine the extent to which the
growing difference between earnings in non-agricultural wage employment and
in agricultural wage and self-employment and non-agricultural self-employ-ment resulted in higher rates of open unemployment than would have been the
case in their absence. More detailed information on the labor supplyfunction in Portugal than is currently available would be necessary for such
a determination. Nevertheless, casual evidence, frequent stories of un-employed workers waiting for the right job to come along, or receiving more
in government transfer payments than they could earn in sectors where jobs
are readily available, suggest that with respect to open unemploymentincreased segmentation of Portugal's labor market offset some of the short
run impact of higher wages on aggregate demand.
2. Investment Subsidies
1.17 In contrast to the rise in wages, the impact of investment sub-
sidies to returnees is unambiguous. The Comisariado para os Desalojadoswas established by the government in 1974 to assist in meeting the ratherpressing needs of the returnees for housing, income and employment.Roughly one quarter, some 160,000, of the returnees are labor force par-ticipants, many of whom previously owned or managed enterprises in theAfrican colonies. On the assumption that lack of finance would be the onebinding constraint on their ability to use their skills in self-employment
and to generate employment for other workers from the colonies, a program to
provide them with seed capital for investment in commercially viable ven-tures was begun. If a proposal submitted by a returnee is successful in
meeting its criteria, the commission lends up to 60% of the necessaryfunds. It contributes less than the maximum if the entrepreneur has funds
1/ Redundant workers are entitled to government compensation for six
months. In many instances assistance is extended for another sixmonths. Open unemployment in Portugal is selective of educatedworkers who tend to come from high income families. The structureof unemployment rates, documented in Section III, may reflect thegreater ease with which the more educated can finance an extendedperiod of job search.
- 10 -
of his own; the remaining 40% is lent by commercial banks. While bank loans
to returnees are on prevailing market terms, the commission's 3% rate of
interest is less than one quarter the commercial rate. Moreover, repayment
only begins after an extended grace period. With inflation at annual rates
of 20% or more, these transactions are more grants than loans. This implies
that a high proportion of the 7,235,000 contos already lent under this
program, 1/ and of the 9,000,000 contos additional lending until the program
is concluded in 1979, will prove to be a government investment subsidy. The
Commission estimates that the funds disbursed have generated some 31,500
jobs, two-thirds or more of which have gone to returnees. 2/
3. Increases in Public Sector Employment
1.18 Approximately 30% of the economically active returnees were
civil servants for whom the metropolitan government considered itself
obliged to provide employment. There were other increases in government
employment as well, though there is no precise aggregate measure. The
budgetary cost of public sector employment growth is, however, reflected in
the sectoral growth rates of GDP. As Table 4 indicates, between 1974 and
1976 expenditure on public administration grew at an average annual rate
roughly two and a half times the average for the previous five years. The
21.6% annual growth rate of the Public Administration "sector" coincided
with an absolute decline between 1974 and 1976 in GDP in other sectors. 3/
1.19 Another indication of government employment expansion is the
growth of allocations from the Unemployment Fund to local authorities and
the Ministry of Public Works to finance expenditures on employment gene-
rating public works projects. The Fund, administered by the Ministry of
Labor, is the sole recipient of the proceeds of a special employment tax of
3%, the burden of which is divided between employers and employees. The
Fund bears the entire cost of benefits paid to unemployed workers. Because
1/ A substantial proportion of this program, perhaps as much as one
third, was funded with grants from the United States, the Council
of Europe and various other external sources.
2/ Whether any of the projects funded have had negative backwash effects
on profitability and employment in existing enterprises has not been
determined. Also note that because the investment subsidy effectively
raised the ratio of wages to the cost of capital, employment generation
per unit of investment was likely to be less than for comparable
non-subsidized projects.
3/ Of course not all of the increase in the rate of growth of expenditure
on public administration is accounted for by more rapid growth of
government employment. Public sector salary scales also increased
and because of the seniority of many returnees public servants, a
higher than normal proportion of new employees entered quite high
on the pay scale.
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of the increases in wages and in the employment tax rate during 1974-78,
receipts have exceeded expenditure on these benefits by a wide margin,
despite the rise in open unemployment. 1/ The part of the surplus allocated
to public works projects rose dramatically, from 8.6% in 1975 to 65% in 1977,
which in absolute terms is an increase from 163,421 contos to 5,993,140
contos. Moreover, there were marked increases in employment in such govern-
ment-controlled enterprises as the railroads, where, following a decline in
1970-73, employment rose by over 3,000 from 1974 to 1977.
Table 4: GROWTH RATES OF GDP AND SELECTED SECTORS(Percent)
1968-73 1974 1975 1976 1977 1973-77
Agriculture - 0.8 - 1.9 - 2.7 1.5 -10.0 - 3.5
Industry /a 10.0 4.0 - 8.5 3.3 10.3 2.0
Construction 12.5 3.5 -15.8 5.0 11.0 0.8
Public Administration /b 8.8 14.6 19.7 30.4 0.0 15.7
Other Services 5.9 - 4.7 - 4.6 12.9 8.0 2.6
GDP at Factor Cost 6.9 1.8 - 4.0 8.6 5.7 2.9
GDP at Factor Costwithout publicadministration 6.6 0.4 - 7.0 6.2 6.8 1.4
/a Includes manufacturing, mining and electricity, gas and water.
/b Also includes defense, health and education.
Source: IBRD, "An Updating Report on the Portuguese Economy,"September 1978.
4. Changes in the Employment Contract
1.20 The rapid expansion of public sector employment coincided with
the imposition by the government of constraints on the ability of private
1/ First time job seekers are not eligible for unemployment benefits.
Much of the aggregate increase in unemployment is accounted for by
rising unempoyment among this category of workers.
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employers to reduce the number of their employees. The law passed in
1974 prohibits employers from releasing labor without first obtaining
the permission of the Secretary of State of Employment who, after consulting
with both employers and trade unions and hearing arguments on both sides
of the issue, decides whether the cutbacks are economically justified.
Small enterprises must give 60 days notice to employees; enterprises with
more than 50 employees, or which intend to release more than ten workers,
must give 90 days notice. This law introduces to Portugal government
regulation of employers' decisions on the size of their labor force.
1.21 It is not possible, however, to determine with precision the
degree to which this regulation constrains employers in adjusting to
changed economic circumstances. While one motive for the new law was
to reduce the impact on workers of the decline in economic activity, a
perhaps stronger motive was to prevent employers from taking the oppor-
tunity, when reductions in the labor force were required for financial
viability, of purging dissident employees. It is not clear how the law has
been applied; whether it is used primarily as a safeguard against political
discrimination or as a means of slowing declines in employment. Of course,
even if the intention is to apply it in the former way, the demands on the
time and other resources of employers made by the bureaucratic process of
screening applications are bound to slow the rate of dismissals. Employers
assert that labor has been transformed from a variable to a fixed cost and
that they are burdened with excess labor. For example, the management of
Lisnave indicated that, even after taking account of the need to keep
skilled workers on the payroll during a slump to guarantee their avail-
ability when economic activity increases, profit maximization would dictate
the release of 1,000-2,000 workers from the ship building side of their
business. This and other similar examples suggest that the law has main-
tained employment at a level considerably above what it would be in its
absence.
5. Increased Government Subsidies and Credit
1.22 Inability to reduce the number of employees at a time of slack
demand and consequent underutilization of both capital and labor, was perhaps
as important as the rise in wages in explaining the squeeze on profits in
1974-75. The scope for cutting variable non-labor costs was limited. Nor
could many enterprises pass on their increases in costs of production.
Competition in export markets was the limiting factor in some cases, price
controls in others. To avoid a rash of bankruptcies and the accompanying
sharp decline in employment, the government increased subsidies to some
enterprises in both the public and private sectors, guaranteed the credit of
others and for some enterprises, did both. Once again the railroads provide
an example. Though prices rose at an average rate of approximately 10% a year
between 1974 and 1976, relative to the consumer price index they suffered a
cumulative decline of more than 30%. Over the same period, government sub-
sidies tripled from 1 million to 3 million contos annually. Between 1974 and
1978 the debt of the railroads increased from 14 to 20 million contos.
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1.23 In total the central government budget shows an increase insubsidies from 7.6 billion escudos in 1974 to 19.3 billion in 1976. Anotherindication of the rise in government expenditures on subsidies is providedby the accounts of the Unemployment Fund. Loans are made from this fundto enterprises, particularly small and medium sized ones, that can demon-strate that in the absence of such funds they would have to release labor orclose down. Interest is charged at concessionary rates, making the grant orsubsidy component of this type of loan quite high in the current infla-tionary period. In 1975 loans totalling 60,200 contos were made; by 1977this total had increased to 1,450,000 contos.
1.24 The agricultural sector provides other examples of credit expan-sion serving as an indirect means of government subsidization of currentoperations. The agricultural cooperatives established in 1974 on landconfiscated from large scale farmers and their tenants in the south havebeen the principal beneficiaries of these subsidies. One cooperativevisited provides an illustration of the phenomenon. The number of full timeworkers on this farm had increased during the 1974-78 period from 20 to 220and the number of tractors from 4 to 16, yet neither the number of hectarescultivated nor output had increased. The workers did not suffer a declinein income from this decline in efficiency, however, because with extensivecredit available at concessionary rates of interest and with long graceperiods, a substantial number were effectively on the government payroll.
1.25 The aggregation of credit to firms and individuals in the dataprovided by the Central Bank does not permit estimation of the total in-crease in enterprise borrowings. Though total domestic credit to firmsand individuals more than doubled between 1973 and 1977, prices rose atroughly the same rate. Credit did not have to increase in real terms,however, for there to be a large increase in lending to cover the currentexpenditures of enterprises. This is because of the decline in demand forfunds for investment purposes and a consequent rise in the proportion ofbank funds available for other purposes. Moreover, there is little doubtthat, with credit to individuals growing at less than the rate of increaseof prices, loans to enterprises increased faster than the increase inprices.
C. Policy Effects: Reduced Imbalance or Disguised Unemployment?
1.26 That government policies adopted during 1974-78 have been success-ful in limiting open unemployment to only 7.9% of the labor force doesnot imply that the remaining 92.1% is fully utilized. Productive employmentin Portugal may be higher and the underlying labor market imbalance lessthan in the absence of the above mentioned remedial policies. At the sametime there is reason to believe some of these measures did more to disguisethe problem of unemployment than to resolve it.
1.27 The concept of disguised unemployment is straightforward; itconcerns only the production and not the income or recognition aspects ofemployment. A worker may be paid for a forty or more hour work week and
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may be perceived to be fully employed and yet the value of his outputmay be negligible or even zero, because he is actually idle on the job,
or because his production does not increase total output but simply permitsothers to produce less, or because there is little or no demand for theincremental output. More formally, there is disguised unemployment if atthe margin the cost of labor exceeds the value of its contribution tooutput.
1.28 The relative costs of alternative forms of unemployment andthe costs and benefits of alternative remedial policies are consideredbelow. Here the analysis is not normative but positive. We examineagain the policy measures that clearly sustained employment at a high level,and assess whether they actually reduced the underlying labor market im-balance or simply prevented the imbalance from manifesting itself as openunemployment. 1/ Since this assessment must be based on indirect evidenceand a priori analysis, no attempt is made to estimate the proportion of thelabor force in disguised unemployment. To do that would involve eitherlocating surplus labor by comparing enterprises assumed to have a surpluswith others which appear not to, or estimating a production function forsub-sectors in which it is thought there is surplus labor. Both exercisesare beyond the scope of this inquiry and, in any case, would require newdata. The more casual approach adopted here, however, is sufficient toresolve the issue of whether the excess supply of labor in Portugal is
currently much greater than indicated by available unemployment statistics.
1.29 In several respects the program subsidizing investments ofreturnees is a model of how, without attempting to preempt the role of themarket in allocating investment resources to maximize prospective profits,governments can increase the aggregate level of investment. It may be ofparticular importance to the Portuguese government if it is decided that asignificant increase in investment is needed to generate sufficient produc-tive employment opportunities for the expected rapid increases in thedomestic labor force; and, further, that such an increase in investment willonly occur with the initial provision of public funds.
1.30 Judging by the rate of disbursement of funds and the rate at whichemployment was generated, the returnees program is well designed and welladministered. A word of caution is in order, however. Whether the gains inemployment from increased investment are sustained depends on the rates ofreturns of return the investments yield. If investments prove unprofitable,to maintain the increase in employment will require subsidization by thegovernment of operating costs. If subsidies are not forthcoming, theemployment gains will have been only temporary. In either case, the em-ployment generating effects of the misalocated investment resources areequivalent to other economically unviable make-work schemes by which un-employment is disguised, in that the cost to the economy exceeds the bene-fits derived from the additional output generated.
1/ Wage policy is excluded from consideration because much of its impacton labor supply and demand is indirect and the net effect of the riseof wages on employment is ambiguous.
- 15 -
1.31 This is not to claim that the investments made by the returnees
represent a misallocation of resources or that much of the employment
generated is unproductive. It will be some time yet before it will be
feasible to rigorously assess the results of the investment subsidy program.
Nevertheless there are two reasons why this qualification is appropriate.
There was no pre-existing government apparatus for screening investment
proposals, nor were the banks adequately prepared to analyze the large
number of submissions. Some economically unsound projects are bound to slip
through such a loose net. The question is, how many? The effectiveness of
the screening mechanism is an issue of particular importance because most
returnees borrowed 100% of the necessary funds and thus did not share in the
risk of loss of capital. Thus, it is likely that the risk associated with
the projects proposed was rather higher than normally acceptable to entre-
preneurs.
1.32 These qualifications notwithstanding, the limited evidence avail-
able suggests that the investment subsidy program constrained the growth of
open unemployment principally by increasing the number of productive employ-
ment opportunities, thereby reducing the underlying labor market imbalance.
By contrast, the presumption is that much of the expansion of the civil
service and of employment in public corporations during 1974-78 left the
imbalance between labor supply and demand largely untouched and constrained
the growth of open unemployment principally by providing workers with
unproductive jobs.
1.33 What are the reasons for assuming either that increased inputs
have resulted in little or no increased public sector output or that incre-
mental output is of negligible value? It is not only the general point that
much of the output of the public sector is non-marketed. This of course
means that labor productivity is notoriously difficult to measure (in
national accounts statistics the output of public sector service activities
is simply the sum of the value of inputs). It also means that such acti-
vities are not subject to the competitive discipline of the market; there-
fore the only threat to the survivial of activities grossly inefficient intheir utilization of inputs comes from parliamentary and bureaucratic
controls which are slow working if not inefficient.
1.34 Of course some new programs were well designed; the level of
labor productivity in such programs is not in doubt. The G.A.T.s are one
example, 1/ the returnees program another. The particular cause for concern
about the marginal productivity of labor in the public sector, however, is
that these examples were the exception, not the rule. Much of the expansion
of employment since 1974 appears to have been determined by the availabilityof labor rather than by effective demand. Frequently, the problem of using
unemployed workers productively was only faced after they had been hired.
Labor was not hired to implement a plan that assessed the social profit-
ability of expansion in various areas and identified those projects deserv-
ing highest priority. Indeed, given the high rate of turnover at the senior
1/ See IBRD, ibid, for an assessment of the usefulness of the G.A.T.s.
- 16 -
level of most ministries, the lack of a preexisting plan establishing
spending priorities and the complexity of many types of government programs,
it would be surprising if, at short notice, a large increase in available
resources could be utilized at a high level of efficiency. The ill-fated
railroads provide an illustration of rapidly rising inputs and constant or
declining output. In 1975, when employment expanded by some 5,000, freight
traffic as measured in ton kilometers declined 17%, while passenger traffic
as measured in passenger kilometers increased by only 6%. There is little
doubt that the railroads were burdened with an increase in disguised un-
employment.
1.35 The nature of the impact on the labor market of the legislated
changes in the employment contract introduced in 1974 is quite clear.
It is difficult to conceive how prohibitions on firing could have had a
positive influence ota the number of workers private employers wanted on
their payrolls, quite the contrary. To the extent that such prohibitions
were successful in slowing the decline in employment in response to the
cyclical downturn in aggregate demand they saddled employers with workers
for whom there was no productive employment.
1.36 With the recovery of export demand and investment and consequent
reduction of the short run problem of deficiency of aggregate demand,
private employers have reduced the underutilization of plant, equipment and
labor. Thus the disguised unemployment resulting from the changes in the
labor contract has undoubtedly declined though the magnitude of the decline,
like the magnitude of this phenomenon at its peak, is difficult to judge.
With demand in such sectors as ship-building still depressed this form of
disguised unemployment may, however, still be significant. Moreover,
enterprises may have surplus labor as a consequence of changes in the
structure of prices of factors and intermediate goods which have decreased
the profitability of some product lines and increased the profitability of
others.
1.37 The growth of subsidies by the government does not necessarily
indicate an increase in disguised unemployment. As noted in the discussion
of investment subsidies for returnees, they can increase productive employ-
ment opportunities. This is true as well, of course, for increases in
borrowing by enterprises. The growth of subsidies and credit to finance the
costs of operation (as distinct from investment) is nevertheless a troubling
symptom. Though such growth does not necessarily cause disguised unemploy-
ment, it is an enabling factor, perhaps a crucial one, for enterprises
operating in export or other highly competitive markets.
1.38 When the market, distorted perhaps by prior institutional inter-
ventions, places too high a value on inputs or too low a value on outputs in
an enterprise, the government may, if it considers the social returns
worthwhile, give that enterprise an operating subsidy. A wage subsidy may
be used to correct a factor price distortion which has resulted in the
adoption of excessively capital intensive techniques. Though in a situation
of surplus labor employment will increase, the principal aim of such a
- 17 -
subsidy may simply be to increase aggregate output. Alternatively, a
general subsidy of operating costs, rather than of a particular factor, may
be intended, as appears to be the case in Portugal, simply to sustain or
increase employment, because employment is valued independently of output.
This begs the question, yet to be adequately addressed in Portugal, of the
social profitability, (returns net of costs), of this means of supporting
workers who otherwise would be unemployed.
1.37 The rate of open unemployment in Portugal is currently lower
than expected given the adverse shifts in labor demand and supply. The
resilience of the labor markets as manifested in the sharp decline of
migration from rural areas is part of the explanation. More important,
government policies, in addition to checking the decline in aggregated
demand, have succeeded in maintaining employment at an artificially high
level by directly intervening in the labor market to prohibit private
sector firms from releasing labor and by expanding public sector employment.
There is little doubt of the existence of substantial pockets of disguised
unemployment in private industry, in agricultural cooperatives, in state
enterprises and elsewhere in the public sector. Twelve percent is probably
a conservative estimate of the proportion of Portuguese workers willing and
able to work who are either openly unemployed or whose consumption exceeds
their contribution to production.
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CHAPTER II
PROSPECTS FOR FUTURE ADJUSTMENTS TO LABOR ABUNDANCE
2.1 If agregate demand in Portugal is maintained at a level suf-
ficiently high for near full utilization of existing plant and equipment,
whether labor market imbalance increases or decreases in the medium term,
i.e. the next 3-5 years, will depend on the economy's ability to generate
new productive employment opportunities at a faster rate than the growth of
the domestic labor force. Our focus here is on the medium-term prospects
for labor supply and demand. There is little the government can do to
influence labor supply. It is thus sufficient to project its growth, which
is done in section 3.1. This is not so for the demand for labor. Govern-
ment policy is a key determinant of its growth, of which forecasts should be
made.
2.2 The uncertainties associated with exercises in crystal ball
gazing are always greater following a period of economic dislocation as
serious as that Portugal has just experienced. Indeed they are great enough
on the demand side that, in the interests of avoiding a spurious impression
of precision, no quantitative assessment of trends over the next five years
is made. The more limited exercise undertaken, and consideration of its
implications for labor market imbalance, in Section II B is justified
because they identify factors for further investigation on which the future
trend of unemployment depends.
2.3 Our concern with this trend is based on the presumption that
remedial and ameliorative policies require careful planning. If hurriedly
implemented on an ad hoc basis they may not accomplish the goals set for
them, or may be wasteful of resources in doing so. By remedial policies we
mean those with the aim of reducing the imbalance between labor supply and
demand. The aim of ameliorative policies such as unemployment compensation
or make-work schemes is to reduce the deprivation associated with unemploy-
ment by redistributing the resource and subjective costs of unemployment
from the unemployed to the rest of society. The more thorough the assess-
ment of future labor market trends the sounder the basis for decisions
regarding whether to implement remedial and ameliorative policies and the
extent of intervention necessary.
A. Labor Force Growth: 1978-83
2.4 Between 1970 and 1973 Portugal's labor force declined at an
annual rate of roughly 0.6%. For the period 1974-77, the average rate of
growth was roughly 2.6%. The problems with projecting the growth of labor
supply are not as great as this sudden break in past trends would suggest.
The results of the exercise carried out by the National Institute of Sta-
tistics appear to be no less meaningful than supply projections for other
countries derived independently of wage levels and labor demand conditions.
This is because the future impact on labor supply of the two factors accoun-
ting for the break are quite clear.
- 19 -
2.5 Migration from Africa is best viewed as causing a deviation for a
short period in the trend of growth of the labor force. It is a once and
for all phenomenon, the principal impact of which on the size of the labor
force has already been felt. In 1978 the number of departures from Portugal
to the former colonies equals the number of arrivals from Africa. Thus when
making projections by applying age and sex specific participation rates to
estimates of the future size of population subgroups, the impact of migra-
tion from Africa can simply be ignored.
2.6 The future trend of emigration of Portuguese workers to Central
Europe is also predictable, though with somewhat less confidence than trends
in African migration. Low rates of population growth in Central Europe-
France, the Federal Republic of Germany, the Benelux countries, Austria and
Switzerland, the destination of more than 90% of Portuguese migrants 1/ --
together with increases in the average number of years of education, earlier
retirement, reduction of days worked per year and hours worked per day,
suggest a low rate of growth of the labor force over the next five years in
these countries. Moreover, there is unlikely to be any diminution of the
aversion by citizens of Central European countries to certain categories of
manual labor.
2.7 Dominating these supply side factors favorable to a recovery of
migration to the levels of the early 1970s, however, are the rather poor
prospects for labor demand. Indications are that capital scarcity (labor
abundance) is more the order of the day than the capital abundance (labor
scarcity) of the earlier period. One projection is for the absolute number
of migrant workers in the industrial sectors of these countries, which
previously accounted for more than half the jobs held by non-citizens, to
remain roughly constant, well below peak demand. 2/ This projection is
based on the strong assumption that productivity will continue to increase
at rapid rates, 4-5% per annum, while output growth rates remain at roughly
half those prevailing in the 1960s and early 1970s. A constant level of
stocks of migrants is also projected in the agricultural and public services
sectors of these countries. Even if the forecasts of labor demand prove toopessimistic, there may be no increase in the stock of migrants if legisla-
tion limiting the number of migrant workers, currently under consideration
in several central European countries, is passed.
2.8 Thus for projecting the growth of the labor force resident in
Portugal it can be safely assumed that the reduced rates of emigration
for the period 1973-78 will continue for the next five years. There is
one potentially important qualification. While total demand for migrant
1/ See I. Hume "Some Economic Aspects of Labor Migration in Europe Since
The Second World War" in International Economic Association. Some
Economic Factors in Population Growth, Halsted Press, New York, 1976.
2/ See R. Bohning "The Demand for Migrant Labor in Middle Europe:
1975-2000", mimeo, ILO, 1977.
- 20 -
labor in Central Europe may remain constant, Portuguese workers could
increase their share of employment opportunities. Entry to the Common
Market, and the consequent lowering of barriers to mobility between Portugal
and other member countries, would result in such an increase, but the
prospects for the full economic integration of Portugal into the EEC within
the next three or four years are slim and later entry will have little
impact on medium-term projections for the growth of the domestic labor
force.
2.9 Projecting changes in female participation rates does pose a
difficult problem. Two trends emerge from Table 5 which presents labor
force participation rates for various years disaggregated by age and sex.
The proportion of both males and females, ages 10-19, either employed or
actively seeking work has declined sharply since 1960, a consequence in
large part of urbanization, the growth of educational opportunities and
rising family incomes. More notable, for its implications for the aggregate
rate of participation, is the increase in the proportion of women in the
central age groups, 20-49, who are members of the labor force. The sharpest
increase, 81% in fifteen years, is among 20-24 year old women, but even
among women 45-49 the increase has been 46%.
2.10 The expansion of educational opportunities for women revealed
particularly at the post primary level, is likely to have been an important
contributing factor. Most of the 50% increase in the total number of students
between 1961-62 and 1972-73 is accounted for by the near doubling of secondary
and university places. The sharp reduction of the proportion of males in the
student body at these higher levels has meant that the rate of growth of
education opportunities for women has grown considerably faster than the
total. The proportion of females, ages 11 - 18 in school has more than
doubled since 1961. Schooling both changes traditional attitudes regarding
the role of women and increases the monetary returns to labor force parti-
cipation.
2.11 The future rate of change of female labor force participation
is highly uncertain. A linear projection of the recent trend yields esti-
mates for 1990 that appear unreasonably high when compared with rates in
other European countries where educational attainment of women and per
capita incomes are greater than in Portugal. In the absence of detailed
analysis of the determinants of the rate of participation and firm predic-
tions of the trends in educational attainment, wages, and the probability of
finding a job, the best procedure is to make projections of the labor force
under alternative assumptions regarding the change in participation of
women. The results of such an exercise are presented in Table 6.
2.12 It is estimated that the average annual rate of growth of the
male labor force between 1975 and 1985 will be 0.8%. The rate of growth
of the entire labor force is 0.9% under the assumption of slow increases
in the participation rate of women and 1.3% when a faster rate of increase
is assumed. Two further aspects of the underlying assumptions should
be noted: the more rapid rate of increase of female participation is still
- 21 -
Table 5: PORTUGAL AGE GROUP PARTICIPATION RATE BY SEX
1960 1970 1975Age Groups Male Female Male Female Male Female
10 - 14 34.7 9.0 16.7 10.6 1.2 0.815 - 19 86.2 28.5 78.5 45.7 66.7 45.720 - 24 94.9 27.5 92.9 46.3 90.0 49.825 - 29 97.9 20.6 96.7 33.6 96.7 43.430 - 34 98.5 17.2 97.7 25.9 97.8 32.035 - 39 98.1 15.8 97.4 23.3 97.5 27.040 - 44 97.2 15.3 96.5 21.6 96.7 24.845 - 49 96.1 14.8 94.9 19.9 94.9 21.650 - 54 93.4 14.1 92.3 17.9 92.2 19.355 - 59 89.3 13.7 87.3 15.5 86.9 16.360 - 64 81.8 12.5 78.9 13.6 78.3 14.265+ 62.5 8.1 57.9 8.1 49.1 8.1
Source: National Institute of Statistics.
Table 6: PROJECTED LABOR FORCE: 1975-85
000's Annual % Rate of Change1975 1980 1985 1975-80 1980-85 1975-85
Low rate ofincrease of Males 2,535.2 2,671.7 2,731.1 1.1 0.4 0.8female par-ticipation Females 992.7 1,060.4 1,099.5 1.4 0.7 1.1rates forage 15+ Total 3,528.1 3,732.1 3,830.6 1.2 0.6 0.9
High rate ofincrese offemale par- Females 1,000.1 1,139.0 1,255.9 2.8 2.1 2.6ticipationrates for Total 3,535.3 3,810.7 3,987.0 1.6 0.9 1.3ages 15+
Source: National Institute of Statistics.
- 22 -
less than the actual trend of the past ten years; rates of increase in the
number of years of schooling and rates of decrease in the age of retirement
are linear projections of past trends, with the consequence that the par-
ticipation rates of the youngest and oldest groups, hence labor force growth
rates, decline sharply in the 1980s. In other words, it is assumed that
unfavorable trends, those that yield high rates of growth of the labor
force, slow while favorable trends continue as before. Since these opti-
mistic assumptions are based on what appears "reasonable" rather than on
detailed analysis of the underlying determining factors, the suggestion of
downward bias in the projections is unavoidable. 1/
2.13 Even so the implications of this exercise are striking. The
low projection of labor force growth implies that Portugal must generate a
net increase of some 30,250 jobs a year simply to avoid an increase in
unemployment. The higher projection implies an annual increment to the
labor force of more than 45,000 workers. While for some economies the rates
of employment generation necessary to avoid unemployment are not high, for
Portugal they mean a reversal of recent trends and a net shift of roughly 2%
- 2.3% per annum in the aggregate employment trend.
B. Employment Growth
2.14 Is it feasible for the Portuguese economy to shift to a growth
path sufficiently labor-demanding to absorb annual increments to the labor
force considerably larger than those of the 1960s and early 1970s? Is
provision of productive employment for the current stock of unemployed
workers, requiring minimum net increase of 90-105,000 jobs annually, a
realistic medium-term goal? The rate of growth of labor demand in Portugal
is more difftcult to predict than supply. The rate of domestic savings, the
availability of external capital, the sectoral allocation of investment and,
within sectors, the relationship between output and employment growth are
some of the factors, having a potentially significant influence on labor
demand. Nevertheless, even a brief examination of the agriculture and
manufacturing sectors, the two sectors with the largest absolute changes in
employment in the period prior to 1974, provides some basis for the assess-
ment of aggregate employment prospects.
1/ This conclusion is justified despite the projection by the Ministry
of Labor (ML) that the labor force will grow at a rate below the
low end of the range of the Institute of National Statistics projec-
tions. The difference is due to the ML assumption that female parti-
cipation will decline in the face of growing unemployment. The INE
projections appear sounder for two reasons. There is no evidence of a
discouraged worker phenomenon during 1973-75, a period of rapidly
growing unemployment. Of course, this could be due to the rise in real
wages of workers, a trend which is not expected to continue. There is
a more fundamental objection to the ML assumption. Though workers
cease active job search during a period of high unemployment, if they
continue to be willing and able to work, and plan to resume search when
conditions improve, they should still be included among the "full
employment" labor force, hence among the currently unemployed.
- 23 -
1. Agriculture Sector Employment
2.15 Employment in agriculture declined by 115,000 between 1970 and
1973 continuing, as Table 8 indicates, a long term trend. Employmentin agriculture as a share of total employment declined from 47% in 1950 to
30% in 1970 and 27% in 1973. Were the decline in agricultural employmentover the next five years to resume the 3.9% annual rate that characterizedthe 1970-73 period the net annual increase in the number of workers in
non-agricultural employment necessary simply to avoid an increase in unemp-
loyment would be roughly twice the increase necessary with constant employ-
ment in agriculture. Whether unemployment in Portugal increases in the
medium term and, if so, by how much, clearly depends to a significant extent
on trends in agricultural employment.
2.16 Shifts in the supply of labor, rather than in demand, appear to
be principally responsible for the recent decline in agricultural employ-
ment. Workers were not, in other words, "pushed out" of agriculture by the
adoption of labor-saving technology. Investment in agriculture simply was
not large enough to make this explanation plausible. As a proportion of
total gross fixed capital formation, agricultural investment declined from
13% in the mid 1950s to 8% in the 1960s, and further declined to 5-6% after
1970. As a proportion of sectoral GDP investment in agriculture averaged
only 8% from 1961-76. In their survey of the agriculture sector a World
Bank Mission concluded that the level of investment "is only adequate to
cover depreciation on non-land assets and, of course, in part explains thesector's poor performance." 1/ Between 1960 and 1975 the share of agri-
cultural output in GDP declined at a faster rate than the share of agri-
cultural employment in total employment, implying a widening gap between
productivity in agricultural and non-agricultural sectors. 2/
2.17 Nevertheless the increase of labor productivity in agriculture
at 3.8% a year may be puzzling, given the low rate of investment in the
sector. The regional structure of migration rates provides an importantclue to the explanation. Among the regions there is a negative relation-ship between the level of average agricultural income and the rate of
out-migration. Heavy out-migration resulted in increased fallow land in low
productivity regions. The withdrawal from production of low productivityfarms will raise average productivity without any increase in productivity
on relatively high productivity farms. Given the virtual stagnation of
agricultural output in the 1970s this compositional effect may explain muchof the increase in labor productivity.
2.18 Workers appear to have been "pulled out" of agriculture by theprospect of more lucrative employment opportunities in non-agriculturalsectors and abroad. The contraction of the supply of labor to agriculture
1/ IBRD, "Portugal: Agricultural Sector Survey," March 1978.
2/ Agriculture's share of GDP declined from 24% to 12% while agricultural
employment as a share of the total declined from 41.5% to 26.8%.
Table 7: THE OUTPUT ELASTICITY OF THE DEMAND FOR LABOR IN PRINCIPAL SECTORS, 1970-73
(1) (2) (3) (4) (5) (6) (7)Output Output
Employment (1970 Prices) Employment (1970 Prices) Employment Output Growth Output Elasticity of
Sector (000s) (Millions of (000s) (Millions of Growth Rate Rate Demand for Labor (5/6)Escudos) Escudos) % %
Agriculture, 988.0 28,784 873.0 29,631 -3.9 0.9 -4.33
Forestry &Hunting
Manufacturing 828.9 53,882 868.4 74,725 1.6 12.9 0.12
Construction 264.2 8,104 276.1 13,188 1.5 20.9 0.07
Public Utilities 19.7 4,319 20.8 5,798 1.86 11.4 0.16
Commerce, Banking,Real Estate, 341.5 24,105 362.0 30,142 2.00 8.3 0.24
Insurance
Transport & 155.3 10,487 166.2 13,717 2.3 10.2 0.23Communictions
Miscellaneous 276.9 7,581 267.0 9,162 -1.2 7.0 -0.17
Sources: Ministry of Labor, Institute of National Statistics and Central Planning Scretariat.
Table 8: AGRICULTURAL SECTOR SURVEY - EMPLOYMENT IN AGRICULTURE, 1950-1976
Item 1950 1960 1970 1973 1974 1975--------------------Thousands------------------------
Total employment 3,055 3,126 3,251 3,190 3,151 3,134Employment in agriculture /a 1,413 1,297 988 873 851 841
of which: farmers employing workers 137 76 19)/bself-employed 269 275 362) 465 471 463unpaid family labor 163 175 116)permanent workers 70 55)/ctemporary workers 774 716) 491 408 380 378
1950 1960 1970 1973 1974 1975---------------------Percent---------------------------
Share of total employment in agriculture 47.0 41.5 30.4 27.4 27.0 26.8Structure of employment in agriculture
- farmers employing workers 9.7 5.9 1.9- self-employed 19.0 21.2 36.7 53.3 55.3 55.1- unpaid family labor 11.5 13.5 11.7- permanent workers 5.0 4.2)- temporary workers 54.8 55.2) 49.7 46.7 44.7 44.9
/a Includes forestry and hunting./b Calculated as a residual. No breakdown available./c Calculated from Ministry of Labor data.
Sources: Bureau of Planning, MAP; Estatisticas Agricolas (various issues), Instituto Nacionalde Estatistica, Lisbon; mission estiamtes.
- 26 -
put upward pressure on agricultural wages, which rose but not fast enough
to keep pace with wage increases in non-agricultural sectors. The widening
in 1974-75 of income differences between workers in manufacturing enter-
prises and in agriculture, noted above, is a continuation of past trends.
Table 9 indicates that during 1970-73 average real wages and salaries in
manufacturing rose at more than four times the rate of increase of agri-
cultural wages.
2.19 The rapid decline in the rural labor force was paralleled by
an equally rapid increase in the domestic and foreign demand for labor.
Workers who left family farms or agricultural wage employment were assured
of finding a job in other sectors, either in the urban areas or abroad. 1/
The growth of urban unemployment and the closing of the borders of central
European countries to migrant workers has dramatically changed this. How
much will the reduction in the probability of employment reduce the assess-
ment by rural residents of expected returns to search for a non-agricultural
job, hence the rate of rural out-migration? Unfortunately very little is
known about the characteristics of the migration function in Portugal.
There are no estimates of the elasticity of supply of agricultural workers
to the non-agricultural sector, with respect to the probability of employ-
ment in that sector. The decline in the probability of employment appears,
however, to have already had some impact on labor supply. Employment in
agriculture declined by only 32,000 between 1973 and 1975, as compared to a
decline of roughly 76,000 over the previous two years, despite the widening
of the earnings differential between agricultural and non-agricultural
employment. Note, however, that should this low rate of reduction of
agricultural employment of 1.8% annually continue for the next five years,
the net annual increase in the number of workers in non-agricultural
employment necessary to avoid an increase in unemployment would still be
roughly 40% greater than the increase necessary with constant employment in
agriculture.
2.20 While additional decreases in the rate of rural-outmigration can
be expected, it is doubtful that it will stop unless the gap between agri-
cultural and non-agricultural incomes narrows considerably. If because of a
perpetuation of this gap the expected returns to labor remain significantly
higher in non-agricultural employment, workers will continue to seek such
employment despite the risk of a possibly lengthy spell in unemployment. It
is difficult to assess the impact of an increase in agricultural investment,
easy to achieve given the current small share of agricultural investment in
the total, on the rate of out-migration. No detailed assessment has been
made of the potential for increasing productivity in agriculture without
displacing labor. The World Bank agriculture sector mission was rather
pessimistic in this regard, concluding that "further labor transfer from
agriculture is inevitable, if not desirable, over the long term." 2/
1/ Hiring for jobs in central Europe was done in Portugal; only those
with a promise of a job were granted entry visas.
2/ IBRD, ibid, p.8.
Table 9: AGRICULTURAL SECTOR SURVEY - ANNUAL WAGES AND SALARIES, /a 1965-1975
Item 1965 1970 1971 1972 1973 1974 /b
Agriculture and Forestry 11,460 18,390 21,700 22,980 26,430 35,120Manufacturing industries 15,410 25,880 30,450 34,500 42,020 58,180Total (excluding public sector) 15,280 26,170 29,990 34,240 40,710 55,820
Annual Growth Rates in RemunerationNominal Real
1973/70 1974/73 1973/70 1974/73
Agriculture and Forestry 12.9 32.9 1.4 5.3Manufacturing Industries 15.4 38.5 6.2 10.5Total 16.0 37.1 4.1 9.0
/a Based on salaries in Lisbon, Porto, Evora, Coimbra, Faro, Viseu, expressed inEscudos/person/year, and excluding social security, any other fringe benefits.
/b Estimates.
Source: Ministry of Labor; Instituto Nacional de Estatistica: Industrial, Business and Constructionstatistics; Central Planning Secretariat.
- 28 -
2. Manufacturing Sector Employment
2.21 Consider now potential employment generation in manufacturing,
whose size and dynamism make it a particularly important sector. The
absolute increase of employment in the manufacturing sector during 1970-73
was twice that of any other sector. Consequently it increased its share of
total employment, continuing the sectoral trends of the 1960s. By 1977 the
manufacturing sector accounted for 36% of GNP and roughly 28% of employment.
2.22 The larger annual increase of the labor force in manufacturing
than in other sectors where employment has grown is due to the size of the
sector rather than to its rate of growth. Only 1.6% annually during 1970-
73, the employment growth rate in manufacturing is exceeded in three of the
four other sectors where employment has increased. The slow growth of
employment in manufacturing is not explained by output growth. Manufac-
turing sector GDP grew at an annual rate of 12.9% during this period. The
net output elasticity of labor demand is a purely descriptive measure of the
proportionate change in employment associated with a change in output.
Table 7 documents the sobering fact that in Portugal's manufacturing sector
during 1970-73 this elasticity was 0.12. In other words a doubling of
output is associated with only a 12% increase in employment.
2.23 Given the output elasticity of demand for labor prevailing prior
to the economic dislocations beginning in 1974, a 15% annual rate of growth
of output would generate some 16,000 new manufacturing jobs per annum over
the next five years. This is sufficient to provide employment for roughly
one third to one half of the projected net additions to the labor force in
the non-agricultural sector, assuming optimistically a constant level of
employment in agriculture. If agricultural employment continues to decline
at the low rates for 1974 and 1975 then the manufacturing sector could
absorb only roughly one quarter to one third the increment to the non-
agricultural labor force.
2.24 Moreover, it appears more realistic to assume a rate of growth
of manufacturing output over the next five years lower, rather than higher,
than the rates prevailing at the beginning of the decade. The estimate by
the World Bank economic mission is that industrial sector GDP will grow at
only a 3% annual rate between 1977 and 1980 and then accelerate to a 7.3%
annual rate. 1/ With an output elasticity of 0.12 this implies barely 5,000
new manufacturing jobs a year over the next five years, sufficient to
provide employment for one ninth to one sixth of the increments to the
non-agricultural labor force, assuming agricultural employment constant or,
with a modest decline in employment in agriculture, only one ninth to one
twelfth of the increment.
2.25 It would be rash, however, on the basis of these numbers, to
reach pessimistic conclusions regarding the contribution of Portugal's
1/ IBRD: "An Updating Report on the Portuguese Economy" September 1978.
- 29 -
largest non-agricultural sector to the economy's adjustment to anincreased rate of growth of the domestic labor force. First, it is neces-sary to consider the implications of relaxing the highly restrictive assump-
tion of a constant output elasticity of demand for labor. This elasticitywill increase if the marginal capital-labor ratio in manufacturing declines.Changes in the allocation of new investment among sub-sectors that vary in
their capital intensity and in techniques within sub-sectors can result insuch a decline. Furthermore, by the addition of second shifts and adoptionof other measures the utilization of existing capital can be increased,thereby also increasing the proportional change in employment associatedwith an increase in output.
2.26 The technological scope for decreasing the capital-labor ratioin manufacturing is illustrated by a comparison of Korea and Portugal.Employment in manufacturing in Portugal in 1970 roughly equalled Koreanemployment in that sector in 1965. Over the subsequent three years, manu-facturing employment increased by 39,500 in Portugal and by 433,000 inKorea. While a significant proportion of this more than tenfold difference
in employment growth is the consequence of a faster rate of growth ofinvestment, over half is directly accounted for by the difference between
Korea 1/ and Portugal in their marginal capital labor ratios. This is not
to suggest that Portugal can instantaneously switch to a production functionresembling Korea's, only that no purely technological barriers stand in the
way of a reduction of the marginal capital-labor ratio in manufacturing.There are, however, economic and political constraints on the speed andultimate size of such an adjustment. Indeed, while rapid increases are
quite common, I am not aware of a single example of a country dramaticallyreducing the marginal capital-labor ratio in its manufacturing sector.Several factors suggest that Portugal will not prove to be an exception.
2.27 Commitments made prior to 1974 and the subsequent changes inrelative prices, to several large, highly capital intensive investment
projects in the industrial sector have not been reversed. The Sines
Industrial complex, on which only $2 billion of a scheduled $5 billion hasbeen spent, is the most notable example. If completed within the next fiveyears this set of projects alone would absorb investment resources equal to
roughly half the projected total available to the manufacturing sectorduring this period. The higher the share of investment allocated to pro-jects such as these with capital labor ratios above the sector average, the
worse the prospects for a significant decline in the marginal capital laborratio. Moreover, the entrepreneurial ability to identify and exploit new
profitable opportunities for investment in medium scale relatively labor
intensive export oriented industrial enterprises remains concentrated inPortugal's private sector. The current lack of confidence of privateinvestors is thus a second important constraint on the downward adjustmentof the marginal capital labor ratio. A third factor concerns factor prices.The 1974-76 dominance of non-market over market forces in the determination
1/ Estimated from data presented in Bank of Korea, Economic StatisticsYearbook, 1976.
- 30 -
of wages slowed the adjustments to the increased abundance of labor by
reducing incentives to increase the labor intensity of production. Real
wages have since declined; but the duration of factor price distortions
remains uncertain.
2.28 Twenty percent is an optimistic prediction for the decline from
1970-73 levels in the marginal capital labor ratio in manufacturing for
the period 1978-83. A proportionate increase in employment generated
implies an annual increase of 6,000 jobs, assuming World Bank estimates of
investment and output growth prove correct. Allowing for the possibility of
underestimates of these rates by one third still yields an average annual
increase of manufacturing employment of roughly 8,000. This would be
sufficient to provide jobs for one sixth to one quarter of the net addi-
tions to the non-agricultural labor force assuming agricultural employment
constant, or, with a modest decline in agricultural employment for only one
eighth to one sixth of the increment. In the medium term the manufacturing
sector, despite its size, appears capable of making only a very limited
contribution to the solution of the employment problem that has resulted
from the marked increase in the rate of growth of Portugal's domestic labor
force.
3. Employment in Other Non-Agricultural Sectors
2.29 The scope for increasing job opportunities in the agricultural
and manufacturing sectors, the two sectors of the economy currently with
the largest output and employment, is limited in the medium term. The
burden of absorbing 70% or more of the increment to the labor force thus
passes to the other non-agricultural sectors which currently employ less
than half of Portugal's labor force. Between 1970 and 1973 there was an
increase of roughly 12,000 jobs per year in construction and non-government
services. Increases of this magnitude would be sufficient to provide
employment for only 40-60% of that portion of the increment to the labor
force not absorbed by the manufacturing sector, assuming optimistically
no decline in agricultural employment. Annual increases of employment
in these sectors would thus have to increase by 100% or more to avoid an
increase in unemployment.
2.30 Even to sustain employment increases of the modest magnitude
of 1970-73 in the construction and non-government services sectors would
require marked increases in their output elasticities of demand. This
is because, according to World Bank forecasts, between 1978 and 1983 the
output of these sectors will grow at less than half the rates prevailing in
the early 1970s. Undoubtedly there is greater ease of substitution between
capital and labor in construction and services than in manufacturing;
moreover, the proportionate increase in employment associated with increases
in output was very low between 1970 and 1973. Indeed in miscellaneous
services productivity growth was such that despite an output growth rate of
7%, employment actually declined. Likewise the output elasticity of demand
in construction was lower than in manufacturing. It is not clear whether
these increases in productivity resulted from capital deepening or from
- 31 -
learning by doing. In either case they are unlikely to be sustained. These
factors suggest considerable scope for increasing the output elasticity of
demand. It is doubtful, however, that the change could be so great that anoutput growth rate less than half that prevailing in the early 1970s would
be associated with an employment growth rate more than twice that of theearlier period. Yet just such a change appears to be the minimum required
for the construction and non-government service sectors to provide produc-
tive employment to 70% of the increment to the labor force.
2.31 Portugal's non-agricultural sectors bear the burden of absorbing
increments to the national labor force which, because of the decline inemigration to central Europe, are considerably larger than in the 1960s,and early 1970s. Employment prospects in agriculture are not bright.
Indeed, it may be too much to expect a complete halt to the rapid decline in
employment in that sector, in which case the number of seekers of non-agri-cultural jobs would be greater still. Unfortunately, the evidence does not
justify sanguine conclusions regarding the growth of labor demand in non-agricultural sectors. They have not demonstrated the potential to generate
markedly higher rates of growth of employment than in the past at the same
time rates of growth of output are markedly lower. While the implied shiftin the production functions in these sectors is technically feasible,various rigidities and adjustment lags in the Portuguese economy indicate
that the high rates of non agricultural employment growth hoped for are
unlikely to be achieved in the medium term.
2.32 The questions raised at the beginning of this section thus must
be answered in the negative. It is not realistic to plan on the absorptionover the next five years of the current pool of unemployed workers in
Portugal. A significant excess supply of labor is likely to remain a
feature of the Portuguese labor market well into the 1980s. Indeed the
likelihood that in the medium term the degree of labor market imbalance
will increase is greater than the likelihood of it decreasing.
2.33 Recent unpublished unemployment forecasts by the Ministry ofFinance and Planning agree that unemployment promises to be a chronicproblem. They also agree that-if output growth is between 3.5% and 4.5%,
unemployment will increase between now and 1983. The Ministry estimates a20% increase. If GDP grows at an annual rate of 6.5%, which in their view
is feasible only with an annual balance of payments deficit of $1.5 billion,
the forecast is for a 40 percent plus reduction of unemployment.
2.34 These forecasts require some qualification. The resilience ofthe labor market and the resourcefulness of unemployed workers when faced
with the prospect of privation may have been under-estimated. In particularthe trends of three important variables may differ from those forecast,reducing the actual below the predicted rate of increase of unemployment.The rate of growth of the labor force may be somewhat slower than antici-
pated because of an increased flow of illegal emigrants to central Europe
and Latin America. The growth of fallow land associated with the large flow
of emigrants from rural areas in the early 1970s suggests the possibility of
- 32 -
a short term reversal of the long term decline of agricultural employment.Also self-employment in a variety of non-agricultural activities and casual
employment at wages below the minimum may expand more rapidly than antici-pated. Taking account of these possibilities does not, however, alter the
prognosis of chronic labor market imbalance in Portugal in the medium
term.
- 33 -
CHAPTER III
POLICY OPTIONS
3.1 Our evaluation of the labor market policies of 1974-78 and of the
policy options for the period 1977-84 maintains the distinction between
remedial policies, those with the aim of reducing the imbalance between
labor supply and demand, and ameliorative policies, those with the aim
of reducing the welfare costs of unemployment. The criteria for evaluating
the effectiveness of remedial policies is straightforward. Does a parti-
cular measure or policy package reduce labor market imbalance; if so, by how
much and at what cost? The concept of the social efficiency of ameliorative
policies does, however, require clarification. While the questions asked
similarly attempt to specify costs and benefits, by definition the costs of
ameliorative policies outweigh the production benefits which may be negli-
gible or nil. Such policies are justified on the basis of the consumption
benefits they yield to a particular population-subgroup. Nevertheless, when
allocating resources among various ameliorative programs with different cost
and benefit functions the relevant decision rule is still to equalize
economic returns, negative though they are. Maximum efficiency in this case
means cost minimization, not profit maximization. Furthermore, it is
important to emphasize that saying costs of ameliorative measures are
excessive does not necessarily mean that the level of benefits enjoyed by
the unemployed and would-be unemployed are too high. Rather it may mean
that without any reduction of consumption benefits (at least in the aggre-
gate), the cost of these policies and programs can be reduced.
3.2 These two policy categories should not be considered in isola-
tion. In part this is because, the dividing line between the two is not
always distinct. For example it is sometimes difficult to determine when
government employment creation is a remedial policy, in the sense that it
can be justified in production terms, rather than just an ameliorative
policy that must be justified solely in consumption or distributional terms.
Also there can be competition between the two categories of policies for
limited resources. Increasing the resources allocated to amelioration may
decrease resources available for the generation of productive employment and
vice versa.
A. Labor Market Policies, 1974-78: An Assessment
3.3 The principal remedial policies adopted by the Portuguese govern-
ment in 1974-75 were counter cyclical. Their aim was to maintain full
capacity output and employment, despite the decline in demand for exports
resulting from the world recession, and the decline in domestic investment
associated with the political and economic uncertainties of the period.
Increases in government spending, in wages, in the balance of payments
deficit and in foreign borrowing can all be interpreted as various dimen-
sions of a coherent short-run policy strategy to avoid a decline in aggre-
gate demand, and the consequent rise in unemployment. These measures caused
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serious fiscal management problems, and the rise in wages both exacerbated
difficulties in adjusting to the longer term problem of an increased abun-
dance of labor and increased the degree of segmentation between the rural
and urban labor markets. Moreover aggregate demand did decline somewhat as
did employment, though less so. Nevertheless this strategy successfully
avoided a precipitous decline in employment.
3.4 The investment subsidy program should also be viewed as a dimen-
sion of the counter cyclical strategy though, in the returnees, the program
had at leastin the first round of effects, a narrowly defined target group.
This program, too, must be judged a success not only in its contribution to
the maintenance of aggregate demand but when its performance is measured
against the goal of absorbing into productive employment a significant
proportion of entrepreneurs and workers recenty returned from the former
African colonies.
3.5 The decline in aggregate demand that occurred despite the effort
made to sustain it, raised the issue of how best to ensure that workers who
as a consequence became surplus did not bear all the welfare costs of a
downturn for which they were in no way responsible. This issue was resolved
by the decision to ameliorate the effects of labor-market imbalance by
attempting to keep surplus labor in employment. In the public sector this
posed no problem because demand for public sector output is relatively
insensitive to fluctuations in aggregate demand and because the need to be
concerned about the effects of a pool of employed surplus labor on financial
viability is, by comparison with the private sector, not urgent. In the
private sector this was accomplished, on the one hand, by introducing
government regulation of employer's decisions to fire workers and, on the
other, by increases in credit and government subsidies. These increases
were necessitated by the squeeze on profits that resulted from the combina-
tion of a decline in the demand for output, higher wages and the transforma-
tion of labor from a variable to a fixed cost. The decline in average labor
productivity, after years of 10% or higher increases, is also an indication
of the success of the government in the attempt to slow the increase in open
unemployment by limiting the release of surplus labor.
3.6 The attempts to maintain aggregate demand and, when some decline
proved unavoidable, to keep employment from falling, though effective,
did not protect all of the wage employed. Some firms succumbed to the
profit squeeze, others persuaded the Secretary of State for Labor of the
economic necessity of reducing surplus labor. For workers released by
their employers there was a compensation system to ameliorate the ill-
effects of unemployment. While this predated 1974, benefits were increased
and the financial base of the system was made more secure.
3.7 Since these measures were ad hoc and hurriedly adopted with a
view to preventing an unemployment crisis in the short run, it would be
surprising if the social efficiency of this mix of ameliorative policies
could not have been improved upon. This said, the policy package may well
have been the best that could have been achieved in the prevailing cir-
cumstances. The financial cost of maintaining surplus workers in jobs where
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complementary factors are already in place for the expected short perioduntil aggregate demand recovers may not have been any more than the cost of
supporting them in open unemployment. Moreover, the dislocations associatedwith the release and rehiring of large numbers of workers, the politicalcosts of a still larger pool of openly unemployed workers, and for workers,the loss of the recognition aspect of employment, were avoided.
3.8 Neither the policies to sustain employment nor the unemploymentcompensation scheme, however, benefitted workers not in employment inPortugal at the time these policies were enacted. Returnees and first time
job seekers were the two principal groups not caught by this net of amelio-rative policies. The expansion of public sector employment is perhaps bestviewed as a corrective ameliorative measure aimed primarily at returneecivil servants. Though we emphasize below the potentially excessive cost ofpublic sector employment expansion as an ameliorative measure, the 1974-78expansion of direct civil service employment should not be faulted toostrongly on these grounds as, in the main, it represented the fulfillment ofa legal obligation of job security offered all Portuguese civil servants.The expansion of employment on the railroads and other public undertakingscannot, however, be excused on these grounds.
3.9 Likewise it is difficult to fault the government for not adoptingameliorative measures for that half of the pool of unemployed workerscomprising first time job seekers. The threat of severe deprivation in theabsence of such measures was generally much lower for them than for workersalready established in employment. Their relative youth meant that they hadfewer dependents and other financial commitments. Roughly two-thirds of theunemployed seeking work for the first time were women and thus even if theywere married and had children, they were likely to be secondary earners in
their households. Indeed a high proportion of both male and female workersin this category are likely to have had access to transfer payments fromtheir parents, suggesting that even an extended waiting period for theirfirst job would not impose severe deprivation. The educational compositionof the unemployed reinforces this impression. More than 60% of the unem-ployed have an upper primary or higher education Since the distributionof education opportnities in Portugal is still highly skewed with respect to
family income, this suggests that most unemployed workers are from familieswith relatively high incomes, for whom the burden of support of a job seekerwill not be unbearable.
B. The Case for Policy Changes
3.10 The current labor market imbalance is undoubtedly less thatit would have been in the absence of counter cyclical measures. There isno evidence of serious deprivation resulting from the increase in theimbalance that has occurred. As much as half of the total number ofworkers in excess supply remained in employment. Others entered publicsector employment or received unemployment compensation. The remainder havecharacteristics that suggest they have access to private transfers for theirsubsistence.
- 36 -
3.11 This success of the remedial and ameliorative policies adopted
in 1974-75 notwithstanding, there are strong arguments for significant
changes in the government's labor market policies. The case for such change
is not based on the conclusion that the costs of the government's accomp-
lishments in the labor market were excessive, though that may be an addi-
tional factor. Rather, the principal justification for policy changes are
changes in the nature of the problem. The recovery of exports and invest-
ment has reduced the immediate threat of a precipitous decline in output and
employment, which the government's remedial policies were designed to
counter. At the same time adjustment to the increase in the rate of growth
of the domestic labor force, resulting principally from the reduction of
emigration to central Europe, has been slow.
3.12 Economic growth in Portugal has not increased enough or become
sufficiently labor demanding to provide productive employment to the larger
annual increments to the labor force. As a consequence the new labor
force members enter the unemployment pool at a faster pace than they leave.
Despite the recovery of aggregate demand and respectable rates of growth of
output, unemployment has continued to grow. The relative decline of the
short run problem of deficiency of aggregate demand and the increase in the
importance of the longer run problem of a gap between the rates of growth of
labor demand and supply is manifested in the changing age structure of the
unemployed. Table 10 indicates that the rates of unemployment of workers 35
and older are the mirror image of the cyclic movement of aggregate demand,
rising between 1974 and 1975 as demand declined and made redundant some
experienced workers, and showing signs of falling again in 1976 and 1977
with the recovery of demand. By contrast the rates of unemployment workers
under twenty-five, a high proportion of whom are first time job seekers,
reflect the problem of a too slow trend rate of growth of labor demand.
They have increased steadily since 1974.
3.13 To be effective the design and implementation of remedial policies
must change in response to this change in the nature of Portugal's problem
of labor market imbalance. Primary emphasis should shift from countercycli-
cal measures to measures aimed at increasing the longer term trend rate of
growth of labor demand. The emphasis should be on demand rather than supply
because there is no feasible way to decrease the rate of growth of the labor
force. The natural population growth determining the numbers of children
entering the labor force took place years ago and cannot be influenced by
current government policy. The participation rate of these children could be
lowered by increasing education opportunities but this can be a very costly
way of avoiding unemployment in the short term. External migration too is not
open to government control. The government has no influence on the rate
of growth of demand for immigrant labor in Central Europe. The use of
diplomatic measures to increase the quotas for Portuguese laborers both in
Central Europe and in various other countries in Latin and North America may
be worthwhile, but the results of such efforts are unpredictable.
3.14 We do not consider at length demand oriented remedial policies.
This is because, on the one hand, the main elements of the appropriate
policy strategy--increasing the rate of growth of output and shifting to
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Table 10: THE AGE STRUCTURE OF UNEMPLOYMENT
The AgeUnemployment Rates Composition of the Unemployed
Age Groups 1974 1975 1976 1977 1974 1975 1976 1977
10 - 14 11.8 19.0 18.2 23.4 16 9 7 7
15 - 19 4.3 10.9 15.3 19.9 29 25 28 31
20 - 24 5.3 10.4 13.9 17.0 31 27 31 30
25 - 29 2.8 7.0 7.9 8.5 14 13 13 13
30 - 34 1.0 4.0 4.5 6.1 4 6 6 7
35 - 39 0.6 3.3 4.1 2.9 3 6 6 3
40 - 44 0.5 3.0 2.1 2.7 3 5 3 3
45 - 49 0.3 2.2 1.9 2.3 1 4 3 3
50 - 54 - 1.5 2.1 1.2 - 2 3 1
55 - 59 - 2.0 1.1 1.1 - 2 1 1
60 - 64 - 0.5 0.5 0.9 - - -
65 & over - 0.5 - -
Source: Institute of National Statistics.
- 38 -
a more labor demanding growth path--are clear and have been discussed
above; while, on the other hand, specification of policy tactics would
require a detailed examination of sectoral issues beyond the scope of this
paper. We simply note here several potential policy issues deserving of
further attention.
3.15 The scope for increased investment and growth will depend in
part on increases in domestic saving, the flow of foreign investment and the
total size of foreign borrowing. Presumably the view that Portugal faces
a domestic capital constraint lies behind the negative relationship between,
on the one hand, the balance of payments deficit and the rate of growth
of aggregate output and, on the other hand, the rate of growth of unemploy-
ment in recent Ministry of Finance and Planning projections of unemployment.
Also, if growth is to accelerate, some of the increase in demand will
have to be external, suggesting the need for incentives to producers to
expand their exports.
3.16 The scope for decrease in the capital labor ratio in Portugal
will also depend, in part, on the strength of foreign demand for only if it
is strong will measures such as introducing double shifts be feasible on a
large scale. The ability to postpone completion of large capital intensive
projects already underway will also be an important factor, for it will
determine the scope for shifting investment resources from more to less
capital intensive sectors. The agricultural sector should benefit from
such a shift but its net effect on aggregate employment generation will
depend on the ability to identify projects that increase labor productivity
in the sector without decreasing the demand for labor.
3.17 A third dimension of the new remedial policy relating to both
of the above is deserving of additional comment. Despite faster growth
of labor supply and slower growth of labor demand than in previous years,
real wages increased markedly in 1974-75. Though political factors were
dominant in explaining this rise, it could also be justified on the grounds
of its positive impact on aggregate demand, hence on employment. In the
longer run the influence of rising wages on labor demand in Portugal pro-
mises to be the reverse of its short-run impact. The negative relationship
between the level of wages and the demand for labor in the medium term is
due to the higher propensity to save out of profits than wages and to the
reduction of the rate of adjustment of the factor price ratio, hence of
factor proportions, to increased labor abundance.
3.18 Recognizing this difference, government wage policy has already
shifted away from support for wage increases. In 1976 market forces,
with the assistance of government policy, reestablished dominance over
institutional factors in the process of wage determination and wages de-
clined in real terms, slowly at first, more dramatically in 1977. Legis-
lation was passed in April, 1978, limiting increases in contractual wages to
20% in that year and requiring a minimum contract period of 12 months,
though the annual inflation rate is expected to be 25%. The unions have
recognized the need for containment and have given their tacit approval.
- 39 -
Table 11 indicates that the number of man days lost due to strikes has
declined rapidly since 1975. The scope for further adjustments in real
wages in Portugal is, however, limited. The current union tolerance of
erosion by inflation of real wages, is not likely to extend to a reduction
to a level below that of 1974; yet just such a reduction might be required
for factor prices to accurately reflect relative scarcities. While wage
subsidies could be used to correct the distortion in factor prices, govern-
ment budgetary constraints are likely to limit the size, hence the effec-
tiveness, of such a program over the next five years. Nevertheless, one aim
of government incomes policy should be to counter balance to the extent
feasible the institutional and political pressures for wage increases, which
are likely to increase with time. 1/
3.19 The sensitivity of the level of imbalance in the non-agricultural
sector to the rate of emigration from agriculture is another reason for such
a policy and for attention to the structure as well as the level of wages.
Table 11: MAN DAYS LOST DUE TO STRIKES
Man Days AverageYear Lost Per Strike
1974 1,003,425 5,868
1975 2,174,067 15,986
1976 1,503,093 17,277
1977 524,654 2,964
Source: Ministry of Labor
3.20 Agricultural workers have not been "pushed" off the land by labor-
displacing technology. There has not been enough investment in modern tech-
niques in Portuguese agriculture to make that a plausible explanation for the
rapid decline in agricultural employment. Rather these emigrants have been
"pulled" out by the attraction of high wage non-agricultural employment
opportunities in Portugal's cities and in Central Europe. The recent decline
1/ As a corollary the government should also resist pressures to maintain,
through interest rate, foreign exchange and other policies, the price
of capital at an artificially low level. This suggests that financial
incentives for increased private investment be provided through the
tax system rather than through measures influencing the price of
capital.
- 40 -
of employment opportunities has reduced the pull because it has meant that job
seekers must run the risk of a lengthy period of unemployment. But the
strength of the pull also depends on the level of wages in non-agricultural
employment. The higher the non-agricultural wage relative to earnings, in
agriculture, the more workers willing to risk unemployment, hence the higher
the aggregate rate of unemployment. Conversely, the narrower the income
differential, the lower the rate of outmigration from agriculture and the
lower the excess of job-seekers over agricultural productive employment
opportunities. This implies that a successful incomes policy would not only
serve as a stimulus to labor demand but would influence, perhaps to an even
greater extent, the supply of non-agricultural sector job seekers. To do this
it is not sufficient for the policy to be concerned with the average wage, it
must also be used to regulate the structure of earnings, the gap between
agricultural and non-agricultural earnings being a particularly important
dimension of that structure.
3.21 Even if Portugal were to implement with vigor remedial policies
of the sort outlined here and to receive the level of financial support
from abroad consistent with them, unemployment would remain a serious
problem in the medium term. Given current prospects for remedial policies
and levels of external assistance, labor market imbalance is more likely to
increase than decrease over the next five years. How best to ameliorate the
adverse consequences of an excess supply of labor remains an issue. The set
of ameliorative policies that were reasonably successful during 1974-78 no
longer appear adequate for the task. The change in the nature of Portugal's
problem of labor market balance suggests a need for changes in ameliorative
as well as in remedial policies.
3.22 If labor market imbalance is due principally to an increase in the
supply of labor rather than to contraction in the demand for labor, amelio-
rative policies that aim to prevent the release of surplus labor will not
be effective. In a period of buoyant aggregate demand they provide protec-
tion to workers who do not need it, and do not protect from unemployment
those workers most prone to the condition, new entrants to the labor force.
Indeed, such measures can even be counterproductive by slowing corrective
responses by employers to the increased abundance of labor. The prospect of
the inability to release workers who may in the future become redundant,
effectively increases the expected costs of labor and induces entrepreneurs
to invest in more capital intensive (labor saving) techniques than they
would otherwise. The adoption of such techniques reduces the rate of growth
of demand for labor directly and, if it leads to a slower rate of growth of
output, indirectly as well.
3.23 The recovery of aggregate demand in Portugal may not be sufficient
to allow the productive employment again of all workers who had been made
surplus by the downturn in economic activity but who had nevertheless been
kept on the employment rolls. Even so, continued regulation of employers'
decisions to release labor will do little to maintain employment at a higher
level than it would be in the absence of such regulation. Often after a
quite short period employers can neutralize the impact of regulations on
- 41 -
firing by not replacing workers who retire or otherwise leave their jobs
and, with the resumption of growth, by reducing the rate of expansion of
employment relative to output.
3.24 Public sector employment expansion was a second means by which
the government during 1974-78 protected workers from unemployment. The
changed nature of Portugal's employment problem does not preclude adopting
such a measure in the years ahead. As an ameliorative measure the provision
of government jobs to workers who would otherwise be unemployed is as
effective when the target group is returnee civil servants as when it is
first-time job seekers. Nevertheless, when the social efficiency of alter-
native policies is assessed in detail, the expansion of the civil service or
other categories of regular wage and salary employment controlled by the
government is unlikely to be recommended for more than a very minor role in
Portugal's ameliorative program. Experience elsewhere suggests that the
social efficiency of large scale regular employment creation in the public
sector may be rather low because:
(1) The social productivity of public sector wokers
declines rapidly as the rate of employment genera-
tion increases. If so, given the high wages paid
to public sector employees, the difference between
the wage paid and the marginal social product oflabor may well exceed the cost of providing un-
employed workers directly with financial support.
The likelihood of this is increased when the cost
of providing the complementary factors, buildings,
tools and other equipment, necessary for theseworkers to perform their appointed tasks is takeninto account.
(2) A negative externality results from increases in the
number of public sector workers whose productivity is
markedly lower than their wage. Their presence is likelyto have an adverse influence on the motivation and outputof previously employed public sector workers whose
productivity has been much higher.
(3) By contrast to the unemployed, regular public sector
workers receiving high wages and with security of
tenure are relatively immobile. This could mean thecontinued existence of pockets of surplus labor even
after labor demand has adjusted sufficiently to
achieve full employment. Indeed this immobilitycould give rise to the coexistence of labor scarcity
and labor surplus, both of which would place a dragon the growth of output.
3.25 The likelihood that public sector employment creation on a large
scale will cause labor scarcity in the longer run is a second order concern.
- 42 -
The principal concern is that if the social efficiency of this ameliorative
measure is relatively low for the reasons noted, this implies a waste of
resources that could be allocated to productive investment, thereby placing
in jeopardy attempts to resolve the underlying problem of labor market
imbalance by increasing the rate of growth of productive employment oppor-
tunities.
3.26 The poor performance of the British economy--reduced growth of
productive investment, output and productive employment, increasing un-
employment, balance of payments difficulties and inflation--since 1965
is sometimes used to illustrate the negative consequences of too great a
diversion of resources (and workers) from productive to unproductive acti-
vities. Moreover the adoption of indiscriminate public sector employment
creation as a means of ameliorating the effects of labor market imbalance
has been identified in the British case as the initial cause of this cumu-
lative structural distortion.
"As the unemployment figures rise, extra jobs
can only be provided outside industry and only
the government can provide jobs where there is
no prospect of profits. Hence governments are
tempted to create still more jobs in the public
services, and as they raise taxation to pay for
them, in due course company profits and workers'
living standards are further squeezed with the
result that there is still more pressure against
company profits in industry. In consequence
industry invests still less, more industrial
workers become redundant and still more workers
need to be fitted into the public sector." 1/
3.27 If indeed the temptation to dramatically increase public sector
regular employment is resisted, then under the existing policy regime,
since first time job seekers are not eligible for unemployment compensation,
there will be little or no amelioration of the adverse effects of unemploy-
ment. It has been emphasized that among those workers who slipped through
the net of ameliorative policies during 1974-78 the deprivation sometimes
associated with unemployment appears to be minimal. There is some evidence
that suggests, however, that the costs of unemployment are likely to increase.
3.28 If youth unemployment continues to rise, as it is likely to do,
then the average duration of unemployment will increase. The ability
of families to support their unemployed children may be reduced as a
consequence. Even if that does not prove to be the case, the distributional
issue of asking the unemployed and those who support them to bear most of
the costs of a maladjustment of the economy as a whole is likely to become
more prominent. The political implications of rising unemployment are
1/ R. Bacon and W. Eltis Britain's Economic Problem: Too Few Producers,
Macmillan, London, 1976.
- 43 -
not, however, obvious. Table 11 indicates that rates of unemployment are
markedly higher in the Lisbon and Porto (Norte Litoral) regions and that the
proportion of all unemployed workers concentrated there, two-thirds in 1977,
has been increasing. The youth and lack of political organization of the
unemployed should be taken into account before concluding that continuation
of this pattern of geographic concentration will sharply increase the poli-
tical volatility of Portugal's two largest cities.
Table 11: THE REGIONAL STRUCTURE OF UNEMPLOYMENT
Regional Distributionof the Unemployed Unemployment Rate
Regioes 1975 1976 1977 1975 1976 1977
Norte Litoral 27 25 29 6.1 6.7 9.2
Norte Interior 5 1 1 4.8 1.7 1.8
Centro Litoral 10 14 16 3.2 5.4 7.3
Centro Interior 13 13 7 5.6 6.7 4.6
Lisboa Interior 5 3 3 5.2 4.0 4.5
Lisboa Litoral 34 40 41 7.0 9.8 11.1
Alentejo 5 3 3 4.1 3.1 4.0
Algarve - 1 - 1.2 3.6 -
Source: INE
3.29 Perhaps the most telling argument against a policy of non-
intervention concerns a dynamic resource cost. The short run cost of
leaving part of the labor force idle may be low because, with the existing
stock of capital, the marginal productivity of labor is low. It is to be
hoped, however, that in the medium or longer run, the demand for labor will
grow sufficiently to use all the surplus productively. This poses questions
as to how long individuals remain in unemployment and whether, when demand
increases, unemployed workers will still be capable of productive work
or will have had their capacity for work destroyed by idleness.
- 44 -
3.30 There are two obvious means by which government can increasethe proportion of unemployed workers benefitting from ameliorative policies.One solution is to change the criteria for eligibility for unemploymentcompensation. Making first time job seekers eligible would reduce thepolitical tensions generated by the maldistribution of the costs of un-employment. Despite its potentially high budgetary cost and the difficultyof administering such a greatly enlarged unemployment compensation programit would not, however, address the problem of the erosion of the humancapital of young unemployed workers.
3.31 A second alternative is the creation of temporary public em-ployment for young unemployed workers. The criticism above of publicsector employment generation focused exclusively on regular wage employ-ment. Government "youth corps" engaged in a variety of public worksprojects could avoid the problems noted by paying wages well below regulargovernment scales, by holding expenditures on non-labor costs to a minimumand by making it clear that such employment is meant only as a temporaryway station and under no circumstances offers security of tenure. Theestablishment of a group apart from regular public sector workers wouldavoid the risk that the low productivity of these temporary workers wouldadversely affect the productivity of others. A program such as this couldbe financed by the Unemployment Fund which, if aggregate demand remainsbuoyant, will experience a decline in the number of workers eligible forsupport, but no decline in financial receipts. Similarly as recoverycontinues the requests for funds to subsidize the operating costs of firmson the verge of bankruptcy should decline.
3.32 This proposal, of course, requires detailed elaboration andassessment. As a response to the problem of youth unemployment, whichthreatens to worsen in the medium term, it appears to be more promisingthan either a policy of non-intervention, or of increasing the numberof people, willing and able to work, who remain idle while living offthe public dole.
