Do we really need to review labor legislation?

"It's easy to see that there's no genuine desire to change things. There's some desire to make some tweaks, small changes, but usually, in these economic matters, the fix is ​​almost always worse than the sonnet." This phrase, which would apply so well today, was written by Mário Centeno, the outgoing governor of the Bank of Portugal, in an interview with Público in February 2011 , before we had requested external assistance.

At the time, I advocated—and still do in principle—moving toward a single employment contract, eliminating fixed-term contracts. A decade and a half later, labor legislation changed with the Troika and then in 2023 with the Decent Work Agenda, but we're still far from achieving that goal. And the labor market remains as dual as it was—or slightly less so due to Troika -era reforms—with the division between permanent and fixed-term contracts marking the difference in rights.

We're apparently moving forward with yet another reform of labor legislation , initiated by the Minister of Labor, Solidarity, and Social Security, Maria do Rosário Palma Ramalho, which also applies Mário Centeno's 2011 statement. We're seeing increases in the terms and scope of fixed-term contracts, flexibility in dismissals extended to SMEs, and reduced rights for those with children, to name just three examples. These are patches, some of which are questionable when we consider, for example, measures related to parenthood in a country with a low birth rate. We can always argue that companies shouldn't be the ones contributing to the birth rate, but in reality, they should also play a role, given the advantage (or positive externality) they derive from having more babies.

But let's admit that these are all details. The question is: what's the point of making these changes to labor legislation that generate political, social, and economic instability? What impact will they have on international indicators regarding the degree of flexibility of Portuguese labor legislation, which, theoretically, attract foreign investment? Or what effect will they have on companies' costs—can these measures reduce them, becoming more competitive? And is that what we want? To gain competitiveness by strengthening the duality of the labor market by extending the terms and scope of fixed-term contracts? And what effect has the "Decent Work Agenda" had, the last amendment made in 2023, that is, two years ago? None of this has answers, in line with what is unfortunately the norm in public policies designed here.

OECD data—unfortunately not updated—tells us that the troika-era labor reform did indeed move the needle on the degree of rigidity. In 2013 , labor market rigidity was among the highest in the OECD (3.06) and has since declined, reaching 2.87 in 2019, placing the country at the top of the organization's average of 2.27 (the higher the index, the greater the rigidity). More recent data are not available, but the 2023 OECD report on Portugal warns that "the use of temporary contracts remains high and for long periods, while high procedural costs increase the cost of permanent contracts." And, of course, it recommends "improving the balance in employment protection between the different types of contracts, continuing efforts to promote the use of permanent contracts and reducing the costs of dismissal." But, apparently, this labor reform is not going in that direction, as it extends the terms and scope of fixed-term contracts.

We all know why fixed-term contracts exist. It was the legislator-politician's strategy to make the labor market more flexible—in other words, to make layoffs cheaper—without angering unions and voters. By attempting to reconcile these two worlds, they created a dual labor market that fundamentally harms younger workers. That is, those entering the labor market have fewer benefits, rights, or job security than those already in the market (the insiders).

There's another problem, common to many other areas of our community, which is legislative complexity. CIP president Armindo Monteiro drew attention to this, calling for measures to simplify labor legislation and clarify rules that generate differences in interpretation and litigation. This would certainly increase efficiency, reducing company costs without diminishing workers' relative position in relation to the law. Apparently, the only winners would be simpler and more straightforward rules—or rather, the losers would be lawyers and consultants.

The government must be concerned with promoting efficiency, but also with equity. This change in labor legislation, besides not appearing to go very far in improving efficiency, indicates that it exacerbates equity. This is because it creates no incentive to reduce fixed-term contracts and undermines the negotiating balance between the parties, an important element for a market economy to produce the best solutions and maximum equity and efficiency.

It is in times of economic growth and high employment—like the one we're currently experiencing—that labor legislation must be modified. And this is indeed the right situation. It's a shame that the government has once again chosen to make amends, which, as Mário Centeno said in 2011, means the amendment could be worse than the sonnet. Moving toward discouraging fixed-term contracts, eliminating them, and achieving a single-employment contract would be a much more important path for everyone, employers and employees alike, even if it meant making dismissals a little cheaper.