The origin and the impact of labour market institutions in Greece

On 10 June 2019, Daphne Nicolitsas (University of Crete) gave a talk on labour market institutions in Greece, tracing their impact on the loss of competitiveness in the Greek economy and questioning the flexibility of institutions as the labour market reacted with a delay to the downturn in economic activity. David Madden (St Antony’s College, Oxford) acted as the chair.

Labour markets are not frictionless, and dealing with these frictions calls for the establishment of institutions to protect employees from inter alia extreme income volatility. Institutions, Nicolitsas argued, have to be in sync with the context in which they operate however, and thus need to be revised over time. Alternatively, they risk, for example, protecting those who are not in need and delaying the growth process.

The gradual loss in competitiveness in the Greek economy in the years preceding the crisis was not met with institutional reform and likewise there was limited initial reaction of labour markets to the downturn in economic activity. These developments call for an investigation of the role of labour markets institutions in Greece.

The loss in competitiveness became evident in the large deterioration in the current account (the current account deficit as a percent of GDP stood at 15% in 2008) and the increase in unit labour cost at an annual rate of 5% between 2000 and 2008, a rate around three percentage points higher than the EU-15 average. Nicolitsas further added that Greece suffered from structural deficiencies as manifested by, inter alia, the gap between Greece and other EU-15 countries in the ease of doing business and the lack of technological content in Greece’s exports.
Prior to the outbreak of the crisis and up to 2012, Greek labour market institutions were characterized by multi-layered bargaining – this took place at national, sectoral, regional, occupational and firm-level – with the application of the “favourability”principle i.e. wages had to be higher at each lower (closer to the firm) level of agreement. Multi-layered bargaining can lead to wage changes which do not reflect changes in competitiveness. Sectoral collective agreements were in many instances extended administratively, by the Minister of Labour, if the bargaining parties covered at least 51% of the employees in a sector. The legislative framework permitted unilateral recourse to arbitration – a system which was used excessively and might have contributed to wage increases which were not aligned with developments in productivity and the financial circumstances of firms.

These institutional features, Nicolitsas argued, contributed to wage rigidity, binding minimum wages and limited representativeness of social partners into the collective bargaining procedures. Furthermore, the extensive use of arbitration contradicts the spirit of free collective bargaining and runs against ILO principles. The implications of these features are anemic growth, protection of insiders and a neglect of the unemployed.

Institutions impact on growth through their impact on the ability of firms to adjust their production process in the face of shocks. In effect, this means also that banks are less willing to lend to firms that are regulatorily constrained. As a result, firms hire fewer new employees and individuals turn to self-employment to seek a living. Self-employment can instill dynamism in an economy if this is a stepping stone towards an activity employing more individuals. If, however, self-employment does not evolve into something bigger over time, this could have a negative impact on the economy’s productivity. The fact that the functioning of product markets was also restricted by heavy regulation contributed to the negative impact of labour market institutions, as did the tax system which for a long time was more favourable to the self-employed.

The presentation was followed by a very engaging discussion in which the unionization rate vs coverage rate in Greece were commented on, as well as the ties of trade unions with political parties. The degree to which Greece’s membership in the eurozone masked the need for reform in the labour market was also raised, as well as the different reforms that took place during the period of the economic crisis, the political legacies of those reforms and the role of the Greek state in implementing and/or resisting them. Finally, the limited investment in equipment and training on the part of employers, for whatever reason, was also seen as contributing to the low productivity of the Greek economy.

Manolis Pratsinakis (Onassis Fellow, St Antony's College, Oxford)