Neccesities in Adjusting The Portuguese Labour Market

The labour market performance of Portugal is worrisome. Although participation rates are relatively high in international comparison – including for women and the low-skilled – employment trends have decreased since the beginning of the 2000’s. The unemployment rate has doubled over the past five years, reaching 8% in 2007, with a growing share of long-term unemployment, as the labour market was not able to get job-seekers back into work as effectively as in the past. Employment protection legislation, overall, remains restrictive in comparison with other OECD countries. To facilitate the adjustment of the economy to the forces of globalization and reduce the social costs of the adjustment process, policies have to focus on easing labour market regulations that hinder workers’ mobility, while reinforcing the support to job losers.

Several reforms have been made over the past few years, including changes to the labour code, stronger controls of undeclared work, bringing the social security schemes of the private and public sectors closer and tighter eligibility conditions for unemployment benefits. These measures are an important step to strengthen work incentives and facilitate workers mobility; but more needs to be done to further improve the adaptability of the labour market.

A new framework for active labour market policies (ALMP) is under discussion. It envisages rationalising the programmes in place and improving their effectiveness. It is important to move ahead with the reform, so as to improve the effectiveness of activation strategies, especially given the large financial resources allocated to active programmes.

But besides this additional measures are needed to improve the functioning of the labour market. A further easing of employment protection legislation should be undertaken. Current dismissal rules are relatively stringent, in particular for individual dismissals, and procedures tend to be long and costly. By expanding the scope of formal dismissals carried out according to the rules, measures that ease regulations would reduce uncertainty for the employer about the specific cost of dismissal when hiring and could thus increase job creation, in particular with regular contracts. It would also allow workers to benefit from greater certainty that the rules will apply upon termination of contract. Conditions for temporary employment should also be relaxed: these jobs are often used by young cohorts as stepping stones for more durable employment in the future. It is important to combine the easing of employment protection legislation for temporary work with an easing for permanent work to avoid worsening the division of the labour market.

The government has launched a comprehensive review of labour relations, with the stated objective of fostering job creation, reducing the segmentation of the labour market and enhancing mobility, while improving the protection of displaced workers. The conclusions that determine the factors prohibiting the labour market’s adjustments have been under discussion with the social partners with a view to present a reform proposal to the parliament. The changes envisaged include revisions to the labour code as well as specific measures to facilitate the application of the law. There are also suggestions for reviewing bargaining procedures to give more room to agreements at the enterprise level and for increasing the adaptability of working time. The proposals go in the right direction and, if enacted, would represent a step forward.


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