A Comparative Study of The Portuguese and Spanish Labour Markets

Spain faces the highest unemployment rate among the European Union countries (22.2%), and Portugal one of the lowest (7.3%). However, superficially, these two countries share common labour market features: they both have the most stringent job security rules in the OECD, the architecture of their bargaining systems appears identical, and the generosity of their unemployment insurance systems seems, after 1989, roughly comparable. In this paper we address this puzzle by providing a systematic comparison of the Portuguese and Spanish labour markets. We find that, at a closer look, there are differences in unemployment benefits (non-existent in Portugal until 1985, and less generous nowadays, with the replacement ratio as a percentage of much lower wage level in Portugal), differences in wage flexibility (minimum wages by category established by collective agreements are set at a lower relative level in Portugal, giving employers more room for manoeuvre than in Spain), and, in practice higher firing costs in Spain. We conclude that a key factor in explaining the difference in Portuguese and Spanish unemployment rates since the late seventies is the wage adjustment process. In turn, the wage adjustment in the two countries may have been influenced by the unemployment benefit system and, to a lesser extent, by the degree of job protection.