Employment Adjustment in a “Sclerotic” Labour Market: Comparing Portugal with Germany, Spain, and the United Kingdom / Beschäftigungsanpassung in einem „sklerotischen“ Arbeitsmarkt: Ein Vergleich von Portugal mit Deutschland, Spanien und Großbritannien

Summary measures of the overall strictness of a country’s employment protection laws have proven popular constructs in cross-country studies of the covariation of labour market institutions and macroeconomic outcomes. Portugal occupies an unenviable position in the rankings, and is often alleged to be a near exemplar of a sclerotic labour market. We critique this reputation via an analysis of the process of labour adjustment in Portugal, benchmarked to the experiences of Germany, Spain, and the U.K. Our one-step error-correction model indicates that Portugal palpably displays a higher speed of employment adjustment to deviations from the long-run equilibrium than its reputation as the exemplar of over-ambitious job protection legislation would imply. In conjunction with its low employment-output elasticity, there results a fairly rapid convergence to the long-run path. Portugal is in no sense an outlier in the employment adjustment process vis-a-vis the U.K. and Germany. Our simulation exercise does “confirm” one inference from conventional ranking exercises, namely, the smooth labour adjustment mechanism obtaining in the U.K., where the maximum impact of an exogenous change in output is reached very quickly. The German case is most notable for an apparent deterioration in the process of adjustment in recent years. Frankly, Spain represents something of a challenge to the theoretical model in terms of the underlying relationship between the relevant variables and in the sensitivity of the key estimates to model specification. Accordingly, further work is required before we can safely comment on that country's long-run pattern of labour adjustments.