Why high growth has not led to the creation of jobs

The Greek economy has been growing steadily since the mid-1990s, outpacing average EU growth since 1996. One would expect the country’s unemployment rate to be on a declining trajectory and employment on the rise during this period but this has not been the case, with the exception of 2002. Is this proof that growth numbers have failed to grasp an unpleasant reality, as some analysts and opposition politicians claim, or there is something else to this? The answer is that the GDP figures are telling the truth, perhaps not the whole truth, but that they cannot reflect some structural changes taking place in the Greek economy all these years. Indeed, the numbers show that the Greek GDP (gross domestic product) expanded by 3.5 percent in 1997, 3.4 percent in 1998, 3.6 percent in 1999, 4.2 percent in 2000, 4.1 percent in 2001 and a preliminary 4.0 percent in 2002. The GDP is also expected to grow by more than 3.8 percent this year. By any means, this is a very good record. This is not the case, however, when it comes to the unemployment rate and employment. The joblessness rate surpassed the 11 percent mark in 1998 from under 10 percent in 1997 and rose further to just under 12 percent in 1999 before falling to an average 11.4 percent in 2000, 10.5 percent in 2001 and 9.9 percent in 2002. How has employment fared in the same period? Poorly. Barring 1998 when total employment grew by around 4.0 percent after easing by about 0.5 percent a year earlier, employment remained stagnant in 1999 and 2000, fell again in 2001 and posted an average increase of 1.0 in 2002. It is no surprise, therefore, that Greece has the lowest employment rate among all European Union members. According to Eurostat, Greek employment fell below the average EU rate from 1999 to 2001. Greek employment stood at 55.6 percent in 2001, 55.9 percent in 2000 and 55.4 percent in 1999 versus an average 63.9, 63.2 and 62.2 percent respectively in the EU during the same period. Female employment was the second lowest in Greece with 41.2 percent, just above Italy’s 40.9 percent, with the EU average at 54.8 percent. Nevertheless, it should be noted that both unemployment and employment have shown some improvement in the first quarter of 2003, building on the favorable trend of 2002. With the economy growing at a 4.2 percent year-on-year rate, the unemployment rate fell to 9.9 percent versus 10.9 percent in the same period in 2002 and total employment increased by 2.5 percent year-on-year. The main question though remains. Does this combination of strong growth, accompanied by a drop in unemployment and an increase in employment, signal the beginning of a new, more favorable trend in employment or it is just a coincidence? To give the right answer one has to understand what caused Greek unemployment to rise and employment to ease or remain flat up to 2001 although the economy was expanding at healthy rates. Once again, the explanation has to do with the transformation of the Greek economy, which few analysts and politicians have noticed. Agriculture’s share in the Greek GDP has been on the decline for many years now, contributing to an increase in unemployment. Furthermore, thousands of small firms, unable to compete in labor intensive sectors, such as textiles, have closed down, taking with them tens of thousands of jobs. Many of these businesses, whether farms or firms, were run by extended family members who were practically self-employed. Some of these members sought other employment, becoming salaried employees in larger firms which filled the void and grabbed the market share left over, while others swelled the ranks of the unemployed. Higher concentration rates observed in some industries confirm this trend, which is confirmed by employment figures as well. It is no coincidence that the sluggish growth of total employment in the last few years has been accompanied by a decrease in the number of self-employed and workers in the rural sector in the years before 2002 and an increase in the employment of salaried workers employed in larger firms. The Finance Ministry expects wage earners’ growth in employment to be the key behind a projected 1.0 percent year-on-year rise in total employment this year and 1.2 percent in 2004. In addition to the above factors, downsizing in some big industrial concerns aiming at enhancing operational efficiency has also added to unemployment, while restraints in public sector hiring and the substantial increase in the labor force with the participation of women and immigrants did not help things either. Given all the above, it should not be a surprise that strong economic growth failed to simultaneously reduce unemployment significantly and boost employment in the last two years. Sooner or later this restructuring process is going to enter its final phase and healthy GDP growth rates should have a greater impact on lessening unemployment and increasing employment. The Finance Ministry tends to believe so. But it is still too early to claim this when wage earners’ employment grew by just 0.5 percent year-on-year in the first quarter of 2003, though total employment expanded by 2.5 percent. Even so, the structural transformation of the Greek economy does not fully explain why strong GDP growth has not had a greater effect on unemployment and employment. The difference may be found in other areas, such as a lack of proper training and education corresponding to job openings, sizable social security contributions – ranked among the highest in the EU – and the failure to introduce greater flexibility in the labor market in the form of part-time employment in both the private and public sectors. It is not difficult to figure out why strong economic growth has failed to produce the desirable effects in employment, assuming one not only looks at the headline GDP and employment numbers. It will be more difficult, however, to bring about the desirable outcome if one fails to reform the «sacred cows» of the Greek political system and society.