Bold reforms needed to offset job losses as economy is structurally transformed

If pundits are right, the Greek economy will grow at a slower rate next year, between 3.0 and 3.5 percent, and will not be able to keep the general government budget deficit below the 3.0 percent of GDP target envisaged in the 2005 draft budget. Given the prospect of slower economic growth and the need to adopt a tougher fiscal stance, the chances are Greek joblessness will head north rather than south next year. To avert this deterioration from turning into a permanent trend threatening the social fabric, the government has to dare take a set of structural measures, aimed at what have long been regarded as sacred cows by the majority of politicians, unionists and the general public, as soon as possible. Greece’s entry into the eurozone and the ensuing easy monetary conditions, culminating in the lowest interest rates seen in generations and an admittedly expansive fiscal policy (whose extent can be disputed), succeeded in keeping the Greek economy growing at above average EU-15 growth rates in the last few years. But it did little to boost employment and reduce unemployment. It is no coincidence that Greece has one of the highest unemployment rates and one of the lowest employment rates in the European Union. To be fair, one has to admit that job creation was hindered by structural changes taking place in the economy. As far as the structural factors are concerned, the greater degree of concentration observed in certain industries, the declining share of agriculture in the GDP and the drive toward attaining greater efficiency by many individual firms in various sectors stand out. The closing-down of thousands of small companies in labor-intensive sectors such as textiles also compounded the problem, creating a wedge between satisfactory job creation and growth. The latter may partially explain the persistence of some regional differences in unemployment, whereby parts of Macedonia in northern Greece display higher jobless rates than in other parts of the country, such as Crete. Although the structural transformation of the Greek economy taking place in the last few years has not helped on the employment front, it is generally considered necessary for the long-term health of the local economy because it leads to a more efficient allocation of resources and bigger, more competitive companies. The decrease in self-employed workers and the increase in salaried workers confirms the new reality. To some, it resembles the similar transformation undergone by Spain years ago. Spanish unemployment soared above 20 percent in the 1980s, eased to around 17 percent in the first half of the 1990s, fell to about an average of 14.5 percent in the second half of the last decade and has dropped further, to about 11.4 percent, in the last couple of years. In addition, some other structural changes have taken place, making it more difficult to lower unemployment in the last few years. These changes concern women and migrant workers. The increase in the number of women entering the work force has made it more difficult to lower female unemployment, which is much higher than men’s, as evidenced by the fact that greater female participation was accompanied by higher unemployment rates. Moreover, part of job growth went unnoticed since it involved undocumented migrant workers from abroad entering the work force for the first time. Different estimates have migrant workers constitute between 15 and 20 percent of the country’s work force. These structural changes are unlikely to go away in the near future. Coupled with the prospect of slower economic growth, they make it harder for unemployment to decline in the near future. This, however, makes it more imperative for the government authorities to try to address the problem in a multidimensional way. Medium-term framework Starting with the budget, the authorities will have to set up a medium-term framework, leading to a decrease in spending on public administration, pensions, defense and public debt service. The increase in efficiency will ultimately boost growth and help job creation. Simplifying the tax system to reduce compliance costs and broadening the tax base at the same time as the progressiveness of personal income tax is being scaled back are also important because they create incentives for tax evasion and work in the «black economy.» In this fiscal context, taking measures to cut non-wage labor costs, such as employers’ social security contributions, is also important to improving business competitiveness and increasing demand for labor. Tackling trouble spots such as high youth and female unemployment is also important. Offering part-time civil service jobs for mothers, more daycare programs and more job-training programs in a bid to help the work force adjust better to technological demands should be part of a medium-term comprehensive plan. Efforts to create more employment data centers to try and match workers’ skills with available jobs should also become a priority. However, empirical evidence shows that no medium-term job creation program can succeed unless it includes a set of reforms to increase wage and labor cost flexibility, promote labor market flexibility and mobility, boost product market competition and promote technology and innovation. In the area of wage and labor cost flexibility, lowering the minimum wage for low-skilled workers and other vulnerable groups, along with the decentralization of the wage-bargaining process, thus allowing for greater wage differentiation at company level, are necessary. In the field of labor market flexibility, severance costs for so-called white-collar workers should be reduced and part-time jobs encouraged. Also important is providing incentives for more R&D spending, speeding up privatizations, fostering liberalization in certain sectors and enhancing competition in certain markets such as electricity. Undoubtedly, some of the above measures entail a good deal of political cost. But everybody should understand by now that they are important for closing the employment gap left by the ongoing structural transformation of the Greek economy and the coming cyclical slowdown.