Portugal - Human Resources and Income Distribution

More about the Economy of Portugal.

Wages and the Distribution of Income

Two approaches are used to determine how income is divided among citizens of a country. The first approach, involving the size of distribution of income, compares the household income shares received by the richest 20 percent of the population, the poorest 20 percent, and the three quintiles between these extremes. This approach yields an income concentration, or Gini ratio: the higher the ratio, the greater the degree of inequality. Gini ratios can be useful in comparing the degree of income inequality within a country over time or among countries during the same time frame. The International Labour Organisation estimates for Portugal indicate that the Gini ratio changed little between 1967-68 (0.423) and 1973-74 (0.431), corresponding to the end of the Salazar and Caetano administrations, respectively. By comparison, in the early 1970s, France's Gini ratio was 0.416, Germany's 0.376, and Sweden's 0.346. It may also be useful to compare the household income share received by the poorest 40 percent of the population with the share received by the richest 20 percent. According to this indicator (richest 20 percent and poorest 40 percent), Portugal's income distribution profile at the end of the Caetano period (3.5) reveals by comparison relatively greater equality in Spain (2.4) and Italy (3.0) but greater relative inequality in Costa Rica (4.6), Mexico (5.3), and Brazil (9.5). Portugal's income concentration profile, on the other hand, was similar to that of France (3.3) and Argentina (3.6) during the early 1970s.

The second, or functional, approach to income distribution measures the shares going to the various productive factors--entrepreneurship, land, capital, and labor. Wages and salaries or compensation of employees are concepts that normally show the proportion of national income or national product going to labor. In the aftermath of the 1974 military coup, the newly formed labor unions within the General Confederation of Portuguese Workers-National Intersindical (Confederação Geral dos Trabalhadores Portugueses-Intersindical Nacional--CGTP-IN) greatly increased their strength from mid-1974 to November 1975. The unions focused on expansion of the public sector, employment guarantees, and income redistribution. In response to labor's demands, the government instituted income-leveling policies that included a large increase in the minimum wage for a substantial proportion of the work force, a freeze on rents, a highly graduated income tax, and a ceiling on salaries. As a consequence of official measures affecting wages and salaries (including the US$800 a month ceiling on the maximum salary), the average pay gap between unskilled workers and managers shrank from 1:7 in 1973 to 1:4 in 1975. To protect increases in nominal wages, prices of essential commodities, particularly food, were fixed at below market levels. Real wages increased 25 percent between 1973 and 1975, and the share of the wage bill in national income rose explosively from 52 percent in 1973 to 69 percent in 1975. At the same time, the proportion of national income flowing to capital and entrepreneurship (including income of artisans and other self-employed workers) was sharply eroded.

Official policies were also reflected in the distribution of income. Average wage income of the lowest quintile almost doubled in real terms between 1972 and 1976; the second and third quintiles obtained an increase of 59 percent and 45 percent, respectively; but the real remuneration of the top 5 percent declined by 19 percent from 1972 to 1976.

In January 1979, the General Union of Workers (União Geral dos Trabalhadores--UGT) was organized. The UGT was viewed as a viable, democratic alternative to the CGTP-IN, which, as of the beginning of the 1990s, continued to be communist dominated, as it had been since its formation. By 1990 these two union confederations were roughly equal in size, and 30 percent of the labor force was unionized.

How had the working class fared since the revolution? Following the short-lived, government-induced wage explosion in 1975-76, the share of employee compensation in national income (52.9 percent in 1979) was again much the same as in 1973 (51.6 percent), and from 1979 to 1989 that share was on a downward trend. Real wages per capita increased only 10 percent between 1973 and 1989, a reflection both of slow labor productivity growth (20 percent) during this sixteen-year postrevolutionary period and the widening "tax wedge," i.e., the higher social security taxes contributed by both the employer and the employee. Real wages per capita moved on a downward trend between their peak level in 1976 to their lowest point (below their level in 1973) in 1984. From 1984 to 1990, real wages rose each year in response to the brisk demand for labor associated with Portugal's economic recovery. The rate of unemployment fell to 4.7 percent in 1990, the lowest level since the mid-1970s. This rate brought the cumulative decline since the unemployment peak of 1985 (8.5 percent) to 3.8 percentage points. An estimated 250,000 new jobs were added between 1985 and 1990.

The Portuguese government submitted legislation in 1988 to abolish the restrictive individual and collective dismissal regulations that had been in effect since 1976. Although approved by parliament, the law was declared unconstitutional by the courts. In the following year, however, the government gained court approval of less sweeping labor reforms: dismissal procedures were simplified and the conditions eased regarding both the termination of individual contracts and collective layoffs. Under this law, older unemployed workers were permitted reduction of the early retirement age from sixty-two to sixty. Until the 1989 labor reform, unemployment rigidity was coupled with a high degree of real wage flexibility. Consequently, adjustment to external shocks, such as the sudden price explosion of imported oil between 1979 and 1980, was effected by reducing real wages rather than the numbers of employed.

As a result of its EC membership, Portugal received transfers from the European Social Fund in support of training programs managed by private firms. The fund's contribution to the Portuguese labor market amounted to 1 percent of GDP in both 1987 and 1988, of which two-thirds was invested in training an estimated 160,000 young persons.

Employment and Sectoral Composition of the Labor Force

From 1960 to 1973, Portuguese policy measures supported a shift of resources, including labor, from low-productivity toward high-productivity uses, especially export-oriented industries. Rapid and accelerated economic growth was reflected in the profound alteration of the sectoral composition of the work force. Between 1960 (the year after Portugal became a charter member of EFTA) and 1973, the share of the civilian labor force engaged in agriculture, forestry, and fishing fell from nearly 44 percent to just under 28 percent, whereas the share of labor engaged in industry (including construction) increased from slightly less than 29 percent to almost 36 percent, and in the services sector (including transport and communications) from nearly 28 percent to slightly more than 36 percent. The shift of labor out of agriculture involved a reduction of the number engaged in that sector (a decline of about 550,000 workers between 1960 and 1973), as well as in the proportion of farmers in the total labor force.

Because of heavy emigration, the working population of continental Portugal shrank from more than 3.1 million in 1960 to just only 2.9 million in 1973, and employment fell by an annual rate averaging 0.5 percent. The rapid shrinkage in the number of workers in agriculture was not accompanied by an equal or greater rise in the industrial and services sectors. Nearly two out of every three Portuguese taking up nonagricultural employment during this period did so in another West European country. France was, even at the beginning of the 1990s, host to about 80 percent of the emigrant workers, most of whom worked at unskilled or semi-skilled jobs. The 110,000 Portuguese in Germany, by contrast, had found higher-skilled work, with some two-thirds employed in industry in 1977. Consequently, net emigration between 1960 and 1973 exceeded 1 million, a number greater than the natural increase in the Portuguese population. In the thirteen years of war, from 1961 to 1974, 1.5 million Portuguese had seen military service in Africa, and during 1974 one in every four adult males was in the armed forces. During this period, unemployment was kept down to about 4 percent (and to less than 3 percent in the early 1970s), largely because of massive labor emigration to industrialized Western Europe and the military draft.

After the revolution, the demobilization of the military draftees and the return of Portuguese nationals from Africa produced important additions to the mainland population and labor force. From a combined strength of 220,000 at the beginning of 1974, the armed forces demobilized some 95,000 persons in that year and 60,000 in 1975. Furthermore, an estimated 500,000 returnees (retornados) were repatriated, mainly from Angola and Mozambique, and most of them were totally without resources, having had to leave the former colonies with only the barest essentials. Initially, their former occupations made them difficult to integrate into the metropolitan economy: 67 percent had held service jobs (as public employees or office workers), whereas only 20 percent had been engaged in industry, and 4 percent in agriculture. Consequently, the Portuguese government had to shoulder an extremely heavy burden in the form of the various benefits granted to the returnees, including cash subsidies, provision of hotel accommodations, and assistance with purchases of essential goods. The sum of these benefits was estimated at 14 billion escudos in 1976, or about 11 percent of total government spending. In all, the increase in the civilian population from 1974 to 1976 was probably about 900,000, i.e., 10 percent of the total population in 1973.

Following this brief population burst in the number of mainland residents, Portugal's population and labor force resumed their natural rates of growth; for example, in the 1980-89 decade, the annual percentage increases were 0.5 percent and 1.4 percent, respectively. Between 1973 and 1990, Portugal's labor force grew by more than 1.8 million, of which more than half was absorbed in the services sector and over a third in the industrial sector. Although the share of the work force in agriculture, forestry, and fishing resumed its historical relative decline (from nearly 28 percent of the total in 1973 to almost 18 percent in 1990), the absolute number of workers in that sector increased slightly. Industry's share in the labor force remained virtually unchanged between 1973 and 1990 (at about 35 percent), but the services sector nearly added 1.2 million employees, its share in the total rising from over 36 percent in 1973 to 47.4 percent in 1990. A major explanation for this growth of almost 11 percent was the explosive increase of civil service employment after the Revolution of 1974.

Human resources and income distribution

One of the striking characteristics of the Portuguese people is their propensity to emigrate. In the late 1980s, an estimated 3.5-4.0 million Portuguese passport holders were living in foreign lands, equal to over a third of the population residing in Portugal. Emigration, which was once a reflection of Portugal's international importance as a maritime and colonial power, became in the twentieth century, according to Thomas G. Sanders, "a reflection of its poverty and economic weakness." As a consequence of this population diaspora, large numbers of Portuguese migrants lived in Latin America (mainly Brazil and Venezuela), industrial Western Europe (mainly France and Germany), Africa (predominantly the Republic of South Africa), and North America (the United States and Canada). The Portuguese emigrants to the EC countries, numbering over 1 million, differed in several ways from those who went overseas: most of them were temporary workers who planned to return to their homeland, and most originated from the mainland rather than Madeira and the Azores (Açores in Portuguese).

Portugal's comparative poverty within the EC was closely associated with lower per capita investment in human and physical capital. On the other hand, Portuguese workers were recognized for their strong work ethic, adaptability, and frugality. Among middle-income countries, few could match Portugal for its high family savings rate. Real wage rates over extended time periods closely reflected labor productivity, which in turn was correlated with the factors mentioned above. Although government intervention could temporarily alter the distribution of income in favor of labor through the manipulation of wage rates and consumer prices--as indeed happened in the mid-1970s--labor productivity eventually determined labor's earnings.

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