Wednesday, 29 December 2010


I often complain that Greece has a poorly performing labour market which is partly to blame for our substantial current account deficit. Part of our challenge over the next few years will be to liberalise this, and indeed the Government has taken some very bold steps in this direction.

In a mythical labour market with no rigidities, employers would snap up the most suitable employees for their vacancies immediately and the first job one would be offered would be the job they are best suited to. Hence people would snap up the first job they were offered, or at any rate one of the first jobs they were offered. This, as we've discussed a couple of times, is not the case in Greece, or indeed anywhere in the world. Some 52,000 Greeks are in fact unemployed by some degree of choice - in that they were offered a job and turned it down for some reason.

This may not sound like much but these people were enough to fill every last vacancy in Q2 2010 with a good deal to spare, and of course by drawing down their (or their folks') savings or taking welfare payments they actually cost us a pretty penny. Now, the fewer these people become, the better the prospects for our labour market. As the figure below shows, we are slowly getting there. The six-year trend points downwards even after allowing for the effects of rising unemployment, and has been accelerating rapidly since mid-2009, when people finally realised the state the country was in.

So far so good, but this doesn't really sit well with me. Why would there be such substantial differences in work-shy-ness from quarter to quarter, even after allowing for unemployment? This is not culture at work - culture doesn't change in three months. It must be something else, and I think I know what.

The figure below takes the 'excess' workshy (the percentage of unemployed turning down job offers that cannot be explained by the unemployment rate) and correlates it with public admin vacancies as a share of the labour force. The intuition is that the public sector recruitment process is extremely bureaucratic and takes a substantial amount of time, during which time the better-qualified applicants will receive other job offers. The problem is that people who think they have a good chance of getting a public admin job but don't know for certain (i.e. the best qualified, with the least access to corrupt 'facilitators') will turn down jobs offers until the results of their applications have come in.

Feast your eyes, friends:

This is amazing because it suggests that the way in which the public sector recruits could be responsible for wasting some of the best of Greece's human resources as well as a lot of money. Which is really beyond tragic. It also means I've been very unfair to these people, calling them workshy and worse on occasion. Many of these people are actually victims of the system.

I suspect I can see another determinant peeking out here: subjective forecasts of short-term GDP growth. 2006 was almost certainly an aberration in the above chart, but it was also the year in which the Greek economy grew the fastest in this dataset. A look at my figures suggests that the residuals in any regression fitted to the above would correlate very well with the next quarter's y-o-y GDP growth.

If all of the above is true I predict that unemployment will become more stable in 2011, as reduced public sector spending and very poor economic forecasts will force many of these people to take up their job offers. The potential gains are in the order of perhaps 0.5% to 1%, which in our case is brilliant. If the Government or the IMF bother to produce a forecast based on realistic projections of economic growth, unemployment could end up surprising them on the upside.

UPDATE: From a seasonal point of view, Q2 was traditionally the quarter in which public sector vacancies made up the greatest share of the total. If you're working off seasonally adjusted estimates of unemployment, remember to factor this in next time.

Now all I need is some economist to test all of this for me. Volunteers most welcome!

UPDATE: I have now run this regression on my small sample. It works very well. The GDP variable is the strongest one while the other two are less statistically significant. Strictly speaking, the public sector vacancies variable is only significant at the p= 0.055 level, just shy of the 0.05 that would have made me entirely comfortable. Then again, with 22 observations I am lucky to get any singificant variables. And I'm not too sure about the linearity of the relationships anyway. See the results below:

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