There Is No ‘Competitive Economy’ On/Off Switch

As anticipated by many observers, elections in Greece ended in stalemate as many Greeks elected to support the Coalition of the Radical Left and other anti-austerity parties over that the two traditional parties, New Democracy and PASOK.

One of the bailout conditions that the leader of the Coalition of the Radical Left, Alexis Tsipras, refuses to meet is to reduce the minimum wage by 22% to make the Greek economy ‘more competitive’.

On the surface, this seems like a reasonable thing to make the Greek economy more competitive. A lower minimum wage and looser labour laws would reduce the cost to hire a new employee, which in turn would promote investment. Of course economies are more complicated than that. Greece’s sorely needed labour market reforms could not possibly be done quickly enough to avoid the harm of austerity.

First of all, Greece, like many OECD countries, has shown evidence of downward nominal wage rigidity. Within the Greek labour market, employees are unlikely to accept a reduction in wages. So, a cut in the minimum wage is, therefore, much less likely to actually reduce wages and make Greek labour less expensive. Greece’s two enormous labour unions  – Greek Civil Servant Union(ADEDY), and the General Confederation of Greek Workers(GSEE)  – will ensure that any minimum wage laws that are passed will be rolled-out as slowly as possible. In fact, today GSEE sent a press release reminding it’s members that their contracts are not subject to new wages until they are up for renewal.

Secondly, it will take years for the government to pass labour reforms. Greece has one of the most heavily-regulated labour markets in the world. It’s not as simple as cutting the minimum wage. Greece was ranked 147th out of 183 countries in terms of labour market rigidity by the World Bank. As an example, it’s currently virtually impossible to even hire workers on contract or temporary basis:

As regards floors under working conditions, these are many (see Demekas
and Kontolemis 1997, Kufidu and Mihail 1999, and Mihail 2003), including rules for compensation for individual and collective dismissals (EPL), for licensing overtime and shift-work, and for approving temporary and part-time contracts. In fact, temporary contracts are only permitted when there are “objective” reasons such as seasonal work, and temporary work agencies are effectively illegal.

The recent elections show that Greece’s political system is now basically paralyzed. Even if Greece, somehow cobbles a government together that can agree to aggressive budget cuts, how could the possibly meat the needed labour market reform conditions?

It’s nice to think that if Greece makes the economy ‘more competitive’ it can avoid the economic harm of austerity measures. But, there is no way for the Greece to become competitive overnight. The process of labour reforms would take years, even if it happens now, as the Greek economy stagnates or worse.