Hard labor for the bailout negotiators

Economists and businessmen lined up at the Delphi Economic Forum last week to insist that the labor market is not where the challenges for the Greek economy are to be found anymore. Somehow, though, the debate over whether further liberalization is needed or not has come to dominate the efforts of the government and its lenders to conclude the second review.

The institutions departed Athens on Friday noting that “important progress” had been made in the previous days. The government also declared itself satisfied with the pace of negotiations after a seemingly shaky start. Prime Minister Alexis Tsipras told reporters at the European Council in Brussels on Friday that a “technical agreement,” or staff-level agreement (SLA), is feasible by March 20.

However, there are still several important issues that have to be resolved and Tsipras’s statement could yet prove far too optimistic. The most contentious of these, overtaking differences about fiscal measures and expansionary interventions to offset their impact on the most vulnerable in society, is the call for more labor reforms. While all sides in the negotiations could agree that there was convergence in some areas, they would also accept that they remained far apart on new changes to labor legislation.

The government believes that the local labor market has been deregulated enough due to interventions made as part of the country’s bailout programs since 2010. It argues that the effort to restore workers’ rights must begin now so they feel they have a stake in the economy’s recovery. Finance Minister Euclid Tsakalotos has argued that if workers feel they are excluded, this has political consequences such as the rise of the far right in Europe and Donald Trump’s success in the US.

Numerous steps have been taken since the beginning of the crisis to increase the Greek labor market’s flexibility and bring down labor costs. These include doubling to 36 months the maximum duration for which temp agencies can loan workers to firms, increasing the length of temporary or indefinite contracts from two to 12 months, reducing the notice of termination to four months, limiting the maximum severance pay, increasing the maximum staff members that can be fired each month, allowing enterprise agreements that contained different employment and pay conditions from sectoral collective deals, abolition of the extension principle, and the reduction of the minimum wage to 680 euros gross.

The word from Delphi was that enough has been done to ensure that labor market rigidity is not an obstacle to job creation or Greece’s competitiveness. Unions have largely been bypassed and employers have the upper hand, with high unemployment (23.1 percent in December) as well as a deregulated environment making it a buyer’s market.

During the forum last weekend, Bank of Greece Governor Yannis Stournaras was one of those who emphasized that further liberalization should not be a priority. He did so while presenting a slide showing how Greece’s unit labor costs compared to other eurozone countries have dropped significantly since the start of the crisis.

The latest employment balance data, published on Thursday, emphasize just how flexible the local labor market has become. According to the Labor Ministry’s Ergani register, only 43.2 percent of the new hirings made in February were for full-time positions. Forty percent of the hirings were for part-time positions and nearly 17 percent for shift work. Over the last six months, flexible forms of labor have accounted for more than half of the hirings made in Greece.

In its recent Article IV consultation on Greece the International Monetary Fund highlighted it was a lack of reforms in other areas, rather than the labor market, that had dampened the impact of the changes made over the last seven years.

“The reforms allowed for a significant reduction in labor costs, helping to narrow Greece’s wage-competitiveness gap relative to trading partners,” IMF staff wrote. “However, parallel reforms intended to address rigidities in product markets have not generated the hoped-for increases in productivity and competitiveness, due to slow implementation in the face of strong opposition from vested interests.”

The government undertook a commitment when it signed up to the third memorandum of understanding with its international lenders in July 2015 to launch a review of “existing labor market frameworks, including collective dismissals, industrial action and collective bargaining, taking into account best practices internationally.” It was agreed that the review would be carried out by a group of eight experts appointed by Athens and the institutions.

The committee made a set of 12 recommendations, most of which were unanimous, in its final report last September. These included leaving the rules on calling a strike unchanged, not removing the prohibition of lockouts (denial of employment initiated by the employer in a labor dispute), offering the alternative of short-time work in the case of collective dismissals and giving the social partners the responsibility of negotiating a range of work-related issues, such as seniority pay, the duration of collective agreements and whether arbitration is needed.

The government expected that these proposals would form the basis of the discussions about bringing local labor legislation in line with the best practices in Europe and elsewhere. However, the IMF took a different point of view, despite its belief that the lack of effective product market reforms is the main problem for Greek competitiveness.

“With no exchange rate flexibility and a long way to go to reduce unemployment, there is little doubt that further labor market flexibility is needed to attract both domestic and foreign investment and facilitate the restructuring of indebted Greek firms,” wrote Fund officials in their Article IV report, while warning against efforts to unwind previous reforms: “Instead, existing reforms should be complemented with additional measures to bring Greece’s collective dismissals and industrial relations frameworks in line with international best practice.”

As a result, the IMF has been pushing for an increase in the threshold for collective dismissals (currently at 5 percent of the work force per month) and the scrapping of the need for pre-approval from the Labor Ministry for such action. The Fund also wants to see “appropriate” quorum requirements for unions calling strikes and for employers to have the right to implement “defensive” lockouts. The IMF believes this would reduce the number of strikes and their cost.

The Fund’s view, though, is totally at odds with the government’s, while the EU lenders have remained mostly silent on the issue. The two questions that come to mind are how we have arrived at the point where, at such a crucial time in the negotiations, the views on this issue can be so divergent and whether there is any chance they can be reconciled in the coming days.