Summary: This is a more detailed report than the one released by the IMF yesterday. Though the main message is not fundamentally different, the EC review includes several interesting boxes. In the lines below we refer to the EC estimates of how structural reform may affect trend growth and employment and how much wage adjustment is needed to reduce the unemployment rate to its “natural” level and to halve Portugal’s net external debt.
The impact of reform on potential growth: The European Commission (EC) has estimated what would be the impact of structural reform on Portuguese trend GDP should it close half of the gap it currently has with the EU’s top three performers on indicators such as markups, active labour market policies, taxation, labour participation rate, etc.
The reduction in markups should yield the highest benefiting the medium term as it could raise potential GDP by a accumulated 2.8% over the next five years. Active Labour Market Policies follow suit with an estimated potential GDP impact of 0.6% in the next decade. In the longer run, increasing the share of medium skilled workers in total employment could raise potential GDP by a accumulated 11% over the next 50 years. The EC estimates that the total impact of reforms could add up to over 23% rise in trend GDP and close to 7% rise in employment over the next fifty years.
Lowering wages: The EC estimates that wages need to fall by about 5% to reduce the unemployment rate to its “natural” level, i.e., the level closest to zero that allows for wage stabilisation. Looking at the external debt, the EC estimates that wages need to decline between 2% and 5% cumulatively over the next 10 years to reduce Portugal’s net external debt (i.e. private and public sector debt minus assets relative to the rest of he world) by half. However, the EC points out that these estimates need to be taken with great caution given that they depend strongly on a number of assumptions, namely on productivity.In any case, these numbers suggest that raising the minimum wage would potentially damage the chances of significantly reducing the unemployment rate in the medium/long term.