Labour market outliers: lessons from Portugal and Spain

Spain has the highest unemployment rate (22.2%) of any European Union count ry, Portugal one of the lowest (7.30%). Superficially,these countries share many labour market features: the toughest job security, rules in the OECD, an apparently similar architecture of wage bargaining, and comparable gene rosity of their unemployment insurance systems, at least since 1989. We add ress the puzzle by examining Portuguese and Spanish labour market instituti ons, in particular job security, unemployment benefits and the system of wa ge bargaining. We then conduct empirical analysis of Spanish and Portuguese unemployment outflows and wage distributions, using micro data. We find di fferences in unemployment benefits (non-existent in Portugal until 1985, an d less generous nowadays), differences in wage flexibility (wage floors by category established by collective agreements are set at a lower relative l evel in Portugal), and, in practice, higher firing costs in Spain. A key ex planation of the difference in Portuguese and Spanish unemployment rates is the re,age adjustment process. Generous benefit levels malt have been nece ssary for the path Spanish unions took, but this was not the sole explanati on of different wage setting in Spain and Portugal.