Greece may be winning the battle against the twin deficits and competitiveness on the basis of relative unit labor costs but it is still losing the war on jobs. The financial markets appear to be complacent about it for now, but they may start paying more attention in the future since the dismal labor market conditions cannot go on forever without political and social repercussions. Therefore, more has to be done to address the problem in the labor market and put less strain on the hundreds of thousands of Greek families also hit by a barrage of taxes.
If the pundits are right about the economy’s performance in the fourth quarter, the real gross domestic product may shrink by 3.5-3.6 percent this year compared to the latest government estimate of 4 percent. It will be an improvement compared to a contraction of 6.4 percent in 2012, but it shows economic activity is still falling, albeit at a declining rate. The official projections by the government, the European Union and the International Monetary Fund call for a recovery to the tune of 0.6 percent next year but the market consensus (Bloomberg) and the Organization for Economic Cooperation and Development OECD see a contraction of 0.4 to 0.5 percent.
Although the contraction is decelerating and the economy may pick up next year, conditions in the labor market will most likely remain bad. The number of unemployed will stay high, above 1.2 million people, while employment is expected to remain broadly stagnant at 3.6 million. Readers are reminded the unemployment rate stood at 7.7 percent in 2008, the first year the real GDP fell into negative territory, and was above 27 percent according to the most recent figures.
In an interesting research paper focusing on the Greek job market, Renaissance Capital, a leading Russian investment banking firm that operates in high-opportunity emerging markets, noted there will be more than 2.0 dependents, that is, pensioners, children, unemployed and non-working adults, per employee, in Greece in 2014. This calculation is based on the IMF estimate for 3.6 million employed and a population of 11 million people.
This is a point we have also made in the past to show the strains felt by a growing number of families. This becomes clear if one takes into account the tax hikes and the ongoing pay cuts in the private sector, which further compress purchasing power. In addition, there has been a huge loss of wealth as residential real estate prices plunged by 40 to 50 percent on average since 2009 according to brokers, Greek bold holders saw their investments suffer a blow after the haircut imposed by the PSI, and the stock market nosedived, losing more than 70 percent of its value since its peak in 2007. The rise in the poverty rate is a direct consequence of the austerity bite and the poor labor market conditions and is felt the most in the large urban centers, such as the Attica region, where the cost of living is higher.
Renaissance Capital took this observation a step further by noting Greece’s ratio of population to employees has gone up from 1.5 in 2005-10 to 3.0 now and is by far the worst in the countries they reviewed. Spain comes second with 1.9 dependents per worker and Italy follows with 1.7 dependents. On the opposite side, Germany’s ratio is estimated at 1.0 based on IMF/UN data, the UK’s at 1.1 while the ratio of the United States stands at 1.2. Of course Greece’s ratio may be exaggerated by the underground labor market but even if adjusted downward by, let’s say, 20 percent to take it into account, it is still way above the other worst-performing countries. “The shrinking imports and the very low car sales per capita confirm the broader picture,” the report says.
In other words, the Greek jobs market is in such a dismal state that even an anemic recovery will not do much good in 2014, putting more pressure on Greek households despite the anticipated improvement in macroeconomic fundamentals. According to Renaissance Capital, Greece has to create 600,000 new jobs to return to the still poor 1.5 ratio of population to workers. To do so, it will take five years of the record-breaking annual job creation of 120,000 in 1995 to achieve the goal.
The markets appear to be paying more attention to the country’s first primary surplus since 2002 and the estimated flat-to-positive current account balance, while ignoring the dismal labor market data. The Athens stock exchange general index has risen by more than 46 percent in the last 12 months on increased trade. The benchmark 10-year Greek bond yield is trading around 723 basis points compared to 1,053 points at end-December 2013 and almost 4,000 basis points on March 7, 2012, following the biggest ever sovereign debt restructuring (PSI).
They may continue to move so as long as there is political stability and progress in rebalancing the economy. However, the dismal labor market has the potential to cause political turmoil by heavily influencing voters’ decisions at the elections for local governments and the European Parliament next May. It is therefore necessary that more is done to stimulate direct investment and put more people to work. Restarting the four big highway projects is a step in the right direction. Of course, politics may assert itself much earlier if the coalition government and the troika are unable to find common ground in some contentious issues, but that should be avoided.