Unemployment in Greece - A Survey of the Issues


WP/96/91-EA

Unemployment in Greece: A Survey of the Issues
by Dimitri G. Demekas and Zenon G. Kontolemis


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.