Productivity, the Greek economy’s Achilles’ heel

The European Commission last week forecast a further deterioration in the competitiveness of Greece’s economy over the next two years, based on the comparison of two basic indicators – a nominal increase in salaries of 6 percent and a rise in productivity of just 2 percent last year. The problem is not that pay increases are too steep; Greek salary levels are among the lowest in the European Union. It is, rather, that productivity has not taken off. Nevertheless, the issue is not that simple. Economists generally agree that the definition of productivity is the product of labor during one man-hour in the sectors outside farming. At the same time, we can measure productivity per worker. A comparison of the two indicators shows a useful conclusion: While Greek productivity per worker is almost equal to the former EU-15 average, their productivity per man-hour stands considerably lower, at 71 percent of the average in 2004. This apparent paradox is explained by recently introduced factors in the measurement of productivity, which include the productivity of capital. Thus, if, for instance, modern equipment is introduced, productivity will improve in the medium term but total economic efficiency will not change because of the consumption of capital which depreciates over the longer term. The goal, therefore, is to find those measures which will improve simultaneously the productivity of both labor and capital. Little has been done in this direction in Greece yet. The Organization for Economic Cooperation and Development (OECD) has proposed that the Greek government adopt measures along five main axes: Boosting the flexibility of the labor market, further market deregulation, cutting red tape in the setting up and operation of firms, further simplification of the tax system and reducing incentives for early retirement. In all of the above, except the early retirement recommendation, the present government has made some small steps. Nevertheless, the main disincentives to labor remain intact. The chaotic tax system ultimately strengthens tax evasion, bureaucracy remains uncut and hiring new staff is highly risky, given the serious obstacles to layoffs. It is no surprise that the OECD forecasts that the Greek economy’s high growth rates will soon slow down. And Economy Minister Giorgos Alogoskoufis has been right to point out that «the (probable) exit of the Greek economy from the regime of supervision (by the EU) does not mean that the problems have been solved.» And the Stability Pact, which he sites as the best way forward for the economy, is not a cure-all, but a prerequisite.