What is really important to remember about the productivity of the Portuguese economy? The answer to the question is given in Fatos que Contam, a space in collaboration with the Francisco Manuel dos Santos Foundation.
The Portuguese, or people who work in Portugal, work more hours than the average European, but have lower salaries.
A Portuguese person works an average of 38 hours a week, while in the European Union the average is 36 hours. If we look at countries like Germany the gap increases.
A German works an average of 34 hours a week – in a year there are approximately 177 fewer hours worked compared to a worker in Portugal.
But salaries do not reflect this difference, according to the .
In 2023, the annual net income in Portugal was, on average, around 17 thousand euros. While in Germany it reached 38 thousand euros. The difference is high even if we take into account the differences in the cost of living between the two countries.
Why do Portuguese people earn less?
The question arises: why do the Portuguese earn less when working longer hours than their European neighbors?
Essentially, it is due to the low productivity of the Portuguese economy. Productivity concerns the more or less efficient way in which a company or country uses its resources. Productivity is influenced by multiple factors: technology, organizational and management practices, the economic context, among others.
Now, productivity is also the great driver of wages. Therefore, as Portugal is integrated into the European Union, in which there is free movement of people, goods and capital, workers and capital will tend to move to other countries, where they are better paid, which becomes a problem for the our economy.
How is productivity measured?
The simplest way to measure a country’s productivity is by analyzing GDP per hour worked.
In Portugal, every hour, a worker generates an average of 30 euros. It is the fifth least productive country in the euro zone. It is behind the European Union when it comes to productivity.
For every 69 euros generated by a German worker, a Portuguese worker generates just 30 euros.
It is important to note that the cost of living in Germany is higher than in Portugal, but what these numbers show is that working more hours, despite necessarily increasing the product, is not enough.
There are other factors that have a major impact on productivity, such as the capital that our companies have, technology, management methods, working conditions, and the skills and qualifications of workers.
Have these discrepancies always existed?
Historically, Portugal has always been at the tail end of the so-called Europe of 15, in terms of productivity. Looking at the graph that shows the evolution in recent decades, we see that several Eastern European countries, which later joined the European Union, were surpassing us. This is the case of Czechia, Slovakia and Romania. Let’s understand why.
How has productivity evolved in Portugal?
Until 1995, the aggregate productivity of the Portuguese economy contributed decisively to economic growth and convergence with the European average. We are talking about a period of great transformations resulting from the establishment of democracy and, above all, accession to the European Union.
On the one hand, tax reforms were made, laws for economic competition and regulatory bodies were created. On the other hand, public infrastructures were built that greatly facilitated the increase in productivity: roads, electricity and sanitation, from the north to the south of the country.
From 1996 to 2018, Portuguese real GDP grew just 1.5% per year, on average, and low productivity contributed to this economic stagnation.
What explains this low productivity?
A possible explanation lies in the poor allocation of resources in the 1990s and 2000s. The available resources, namely European funds, bank credit that was facilitated at that time and the labor force itself, were channeled into less competitive sectors.
We are talking, for example, about civil construction, in which companies with low productivity were born and remained afloat, preventing investment in products and services that can be traded on international markets (exportable) and, therefore, more competitive and profitable.
What is competitiveness and how is it characterized in Portugal?
Competitiveness, in simple terms, concerns the set of institutions, policies and other factors, such as exports, that determine a country’s level of productivity.
Between 1995 and 2009, we saw a reduction in the competitiveness of the Portuguese economy. Since 2009, the scenario has oscillated between stagnation and slight improvements.
How can we reverse this scenario of low productivity and competitiveness which, as we have already seen, compromises the availability of labor and the capitalization of companies?
The path necessarily involves the correct assessment of our strengths and weaknesses and the mitigation of problems that arise in the competitiveness of the economy.
We start with the good news.
- Over the last 30 years, competitiveness conditions have clearly improved on the innovation side, namely through increased spending on investment and development.
- Since 2012, we have moved towards a situation of greater macroeconomic stability with the rebalancing of public accounts and economic growth, which has improved the competitiveness of our economy; in 2018 in particular, there is a significant improvement associated with democracy’s first fiscal surplus.
- Furthermore, we have focused on renewable energy, which makes us less dependent on the outside from an energy point of view.
- Finally, there are positive indicators regarding citizens’ perceptions of political stability, the rule of law or levels of violence and terrorism, among other aspects that also contribute to a country’s competitiveness.
That was the good news. What should we worry about when it comes to the competitiveness of our economy?
The main concern has to do with the education levels and qualifications of our active population.
As we said in our first program, the advances in education have been enormous since April 25th. However, we started at a great disadvantage compared to our European partners. This means that we are currently still the country in which the percentage of people between 15 and 64 years old with at least completing secondary education is lowest – 59% versus 75% on the European average.
What is there to improve?
We talk about workers’ skills, but today we know that the qualifications of employers and entrepreneurs are fundamental.
The qualifications of management teams are not yet at the desired level in the Portuguese business sector. In fact, Portuguese employers are the least qualified among the 27 countries in the European Union.
“Companies with more qualified entrepreneurs and managers are more productive and pay better salaries.”
And this is reflected in the success of companies. Looking at Portuguese entrepreneurs, studies show us that the more educated they are, the larger the size of their companies at birth, the faster they grow and become exporters. Furthermore, on average they are more productive, pay better wages and invest more in worker training.
It is important to take all these dimensions into account when designing the institutions, policies and practices that will influence economic activity from now on.
