Front Matter Page
European I Department
Contents
Summary
1. Introduction
2. Labor force, employment, and unemployment in Greece
a. Participation rates and the composition of the labor force
b. Employment
c. Size and composition of unemployment
d. Duration and persistence of unemployment
e. Unemployment and vacancies
f. Unemployment, wages, and prices
3. A formal analysis of unemployment persistence in Greece
4. Labor market institutions in Greece
a. Regulations on dismissals
b. The unemployment benefit system
c. The wage determination system
d. International comparisons and a preliminary assessment
5. The impact of government wage and employment policies on unemployment
a. The model
b. Empirical results for Greece
6. Conclusions
Tables
Appendix I: The Insider-Outsider Model and Empirical Results for Greece
Appendix II: Government Employment and Wages and Labor Market Performance
References
Summary
During the 1980s and early 1990s, the performance of the Greek labor market deteriorated sharply. The unemployment rate increased from about 2 percent in the 1960s and early 1970s to an average of 8 percent in the 1980s and close to 10 percent in the 1990s. This development reflected fundamental changes in the supply and demand for labor. The female participation rate increased as production was restructured, releasing from the shrinking agricultural sector a large number of relatively low-skilled farm workers, many women. Aggregate output and employment growth slowed and the educational profile of the labor force improved rapidly, perhaps increasing the mismatch between jobs and workers. These factors, however, do not by themselves explain the rise in unemployment: a well-functioning labor market should have adjusted to the changing supply and demand conditions. This did not happen. Unemployment increased (despite discouraged worker effect), spells became longer (especially for younger, better-educated workers), and the Phillips curve shifted outward.
A formal analysis points the finger at the inflexibility of real wage aspirations of wage-setters and the slow adjustment of demand to shocks as factors behind the deterioration of labor-market performance during the last 15 years. Labor market institutions are partly responsible. Firing regulations are onerous, and other costs—such as state bureaucracy—may have discouraged job creation. But the main factor was the rapid expansion of the public sector during the 1980s. The paper develops and tests empirically a model that suggests that the expansion in the number of easy, life-time government jobs and the increase in the public/private relative wage during the 1980s depressed private sector employment and raised workers’ effective reservation wages, thus contributing directly to the rise in unemployment.