DRAFT FOR DISCUSSION

GreeceDistortions from Special Labor Regimes and Legacy Problems The private labor market in Greece is compartmentalized and distorted, with especially heavy restrictions imposed on ex-state companies. These distortions adversely affect domestic and external competition, productivity, and growth. Removing them will require legal interventions, but also the bargaining playing field between employers and unions should be leveled to facilitate better market outcomes and allow restructuring to take place. Macroeconomic background The Greek labor market is segmented and not sufficiently flexible. The most prominent divide is between employment conditions in the public sector and the private sector. But even within the private sector, segmentation and rigidities are evident. While different industries confront different economic and workplace conditions, and therefore labor arrangements between these disparate industries vary and give rise to alternative bargaining and employment conditions, there are even different labor classes within industries and within individual firms. For example, some state-owned companies have undertaken reforms over the last two years to restrict tenure, introduce performance incentives, and reduce wages by some 35 percent, but private ex-state companies have not been able to remove privileges from the 1970-1990s. Also, the purely private companies have been adjusting within their own set of restrictions. This has further widened the gap between ex-state companies and others in the labor market. Segmentation and compartmentalization of the labor market are manifestations of obstacles to labor allocation and wage formation. These distortions make it difficult for the economy to adjust to shocks and are therefore macro relevant, especially in a time of crisis. Greece is trying to reallocate capital and labor resources to export industries and also, in the domestic economy in general, achieve lower costs for many vital inputs in the production process. When labor markets have difficulties adjusting prices and volumes, such reallocation of resources and lowering of costs are impeded and the required recession to squeeze out the costs by means of exaggerated unemployment will be larger than otherwise necessary. Indeed, companies that have good growth and export potential may be unable to reach this potential given the obstacles they face, and therefore may create fewer jobs than otherwise would be the case. This is a net loss for Greece that can be corrected if policies are adjusted. Examples of special labor regimes in Greece that cause important distortions and elevated supply costs can be found in the network industries (utilitiestelecom, energy, water), banking industry, some manufacturing industries, transport, but also in professional (restricted) service sectors, education, and even tourism.

2 Utilities and some manufacturing firms are typical examples where previous public ownership has carried into the industry or firm legacy labor relations that are harmful to competition, but that are nevertheless not removed from the firms as these become majority private companies, because incumbent unions have no economic, legal, or regulatory incentives to surrender privileges relative to their pure private sector counterparts. Utilities, banks, and professional services among others, provide crucial inputs to government, firms, and households, so if their costs are elevated, the entire economy loses competitiveness. For the privatization program, the issue of legacy labor conditions is also important because investors will require a discount before proceeding to take over public sector firms with rigid labor conditions and high costs. Further, restructuring and follow up investments will be impeded if labor volumes and prices cannot be adjusted rapidly after privatization to position the firms for competition in the private sector and export markets. With respect to the banking sector, reducing labor costs will be critical to strengthen the banks capital position and in the private education sector, there are more restrictions on wage levels and dismissals than in other private sectors, and labor agreements are conditioned by law and cannot be adjusted between the employer and the employees. For example, in case of a reduction in the workforce, the law restricts the freedom of private schools to adapt their headcount, and to separate the weaker performers. Top managers in firms afflicted by distortions are convinced that fostering a level playing field in labor conditions inside and across firms and sectors will lead to increased labor productivity and investment, lower unemployment, and higher growth rates. Examples of legacy problems and other distortions The distortions tend to be rooted in firms internal regulations and/or collective agreements dating back to 1970s, which lead to elevated labor costs via favorable clauses for certain groups of (grandfathered, if privatized) employees. Over time, many of these conditions have been converted into law, which have remained unaddressed by recent labor laws and reforms. Such special clauses include: Among legacy problems: 1

Tenure for certain groups of employees (one firm reports 75% legacy staff with tenure)1

Tenure is established given that employees can only be dismissed if two conditions are satisfied: (i) reaching pensionable age or completion of specific employment in the company; and (ii) insufficiency in performing duties, disciplinary measure of dismissal, and inability for any kind of work due to illness. In practice, these conditions have proven to be highly restrictive in manpower management.

3 Maturity coefficient that provides for several types of automatic wage developments and/or increases of allowances based on the duration of the service irrespective of productivity and cyclical conditions. (one firm reports 2.2% maturity wage increase each year). Lack of pay for performance. Disconnect between remuneration and performance assessment. Multiple allowances (one firm reports 150 allowances in its collective labor agreement; these are paid monthly on top of the national collective agreement) Work place inflexibility in personnel transfers and work floor assignment Legacy overtime compensation that is higher than in competing private sector firms. Higher social security contributions than competitors based on legacy social security benefits (e.g. one company has pension contributions of 36 percent for its pre-1993 employees compared to 20 percent for IKA-insured employees)

Among issues that affect the overall private sector labor market: 13th and 14th wages are legal obligations in the private sector (banks pay even 14 wages) even though these have been eliminated in the public sector. 2 While paying the wage bill in 14 installments is not a distortion by itself, making this obligatory introduces rigidities. Collective labor agreement expiry. All working conditions enter into private contracts six months after the expiration of a collective agreement if no new agreement is concluded (after effect).3 Therefore unions have no incentive to enter into negotiations during difficult times, unless in firms that are seriously endangered already. Further, the initiation of a labor arbitration procedure is compulsory for an employer if so requested by the Unions.4

Greek Law No 1082/1980 (Official Gazette A 250/1980) and Ministerial Decision No 19040/1981 (Official Gazette B 742/1981) as amended by Ministerial Decision No 2006743/538/0022 (Official Gazette B 170/1991); National General Collective Labor Contract 15.07.2010, article 1. Greek Law No 4504/1966 (Official Gazette A 57/1966); National General Collective Labor Contract 15.07.2010, article 2. Further, those allowances have also been included in Labor Regulations as well as in all types of collective labor agreements (branch, professional, enterprise). Greek Labor Law (L.1876/1990). Paragraph 2 of article 16 of Law 1876/1990 as amended by article 14 of Law 3899/2010.

4 Working time inflexibility. Restrictions on overtime, weekend work and work shifts are especially harmful for seasonal tourism activity. Further, working time reduction through part-time work can only be done by reducing the number of working days worked but not the hours per day worked. Hiring/firing restrictions. Recent liberalizations (higher limit for collective dismissals) do not apply to all firms. Moreover, in some firms and sectors, in case a reduction in the workforce is necessary, management may be unable to choose those that will be let go. Mediation and arbitration mechanisms are relatively ineffective, too much based on exclusively legal arguments, and too lengthy. Judicial procedures are far too lengthy.

Why do these distortions need to be addressed in law? Employers explain that it is impossible to renegotiate internal legacy regulations because unions have no incentives to do so: Legacy staff cannot be replaced by new private employees because of tenure, When the collective agreement expires, all its favorable terms (for employees) carry into all individual contracts, which takes away the bargaining power from the employer Inadequate mediation/arbitration; culture of favoring labor; majority is composed of union or labor party lawyers; no use of economic analysis, only legal considerations. Judicial system extremely lengthy, costly, and uncertain procedures to enforce layoffs.

Corrective actions to consider A horizontal approach introducing a more level playing field is preferred over firm specific interventions. However, in some cases specific legal intervention might be needed to repeal legislated internal regulations for specific companies afflicted by specific restrictions. Horizontal interventions to address the legacy issues of ex-state companies: Tenure: introduce a legal provision to remove tenure in all private sector contracts by specifying that the compulsory dismissals of employees upon completion of a service or age limit, do not render the relevant labor contracts of said employees of a definite duration. For the privatization program, extend Art.40 of Implementation Bill I to Chapter B companies; this would transform contracts of definite duration to private sector

5 contracts of indefinite duration, whereby standard layoff procedures would apply.5 Further, introduce a legal provision that the reasons for dismissal which may be included in Labor Regulations and/or Enterprise CLAs are considered to be indicative. Disciplinary proceedings do not constitute a typical or essential precondition for termination of the labor contract and do not limit such right to terminate in case of offences that justify dismissals. Maturity: introduce legal provision to freeze maturity in all private sector contracts.6 Obviously, firms that wish to do so must have the option to reintroduce maturity in their negotiations. The aim, however, is to remove rules and privileges that effectively have become barriers for firms sound management and flexibility to adapt to hard times. Legacy SS contributions: reduce special SS contribution rates along IKA benchmark rates, while taking the actuarial position of each pension scheme into consideration.

Horizontal interventions to make the overall labor market more flexible: 13th and 14th wage. Introduce a legal provision to remove these bonuses in any provision of law (including ministerial decision and presidential decree)/labor regulation/collective labor agreement. (Already eliminated and replaced with much less generous bonuses in the general government.) As noted, while pay frequency is not a distortion per se, making these bonuses optional is a coordinated way of reducing costs in the economy and fostering competitiveness, employment, and growth. Therefore, firms should maintain the option to reintroduce a bonus in their individual negotiations. Collective agreements expiry: introduce legal provision that upon 6 months of the expiry of the collective labor agreement, the working conditions are determined by other concurrent collective agreements (in the case of enterprise agreements by sectoral agreements; in the case of sectoral agreements by national agreements). Employees should not continue to receive all benefits from previous agreements, but these should be able to adapt to changed circumstances, as needed for a healthy and responsive economy. Mediation/arbitration: introduce economic analysis alongside legal considerations for efficient and impartial mediation/arbitration mechanisms. In order to strengthen the

The public sector has removed tenure for Chapter A public companies employees in the Implementation Bill I, but did not extend this removal to Chapter B public firms or the private sector.
6

The public sector wage grid reform significantly reduced the maturity coefficient and made pay partially based on performance, but this reform was not extended to ex-state companies.

6 collective bargaining process, the labor arbitration procedure should be initiated only if both parties (the Unions AND the Employer) agree to it being initiated. Flexibility: introduce a legal provision to allow reductions in hours worked per day alongside the possibility to reduce the number of working days already in effect. Further, in seasonal industries exceptions to overtime/working hour arrangements/weekend work should be introduced. In the education sector, private schools should be allowed to increase teaching hours. Hiring/firing restrictions. Introduce a legal provision to extend the recent liberalization to all firms in the private sector Judicial system: as with special tax courts, accelerate and simplify court cases of labor disputes

Legal basis. The basis for these legal changes to private labor contracts should be in the public interest with respect to the principle of proportionality (i.e. establishing a level playing field).7 Otherwise, the Constitution will not allow any changes. Indeed, there is precedent of the Greek government intervening in collective agreements under this principle; for instance in the government has intervened during 1985-87 to freeze wages so as to curb inflation. Next steps: Continue to collect information from affected companies and sectors. Discuss the policy scope for legal interventions during the next mission (including increasing the chances of renegotiation of existing firm level agreements). Request the government to provide a survey of existing internal regulations that need to be screened for repeal.

Please note that any changes in legislation need to observe Directive 2001/23/EC, which establishes safeguards of employees rights in the event of transfers of undertakings. Essentially, it says that contracts and agreements remain in place in the case of change of ownership of a firm. Thus, the rights and duties of the employees from the transferred undertaking will be recognized and the transfer of an undertaking is not ground for dismissal per se. In principle, the working conditions of the employees are maintained for the duration of the collective agreement of the undertaking. However, these conditions may be amended, at least one year after the transfer of the undertaking and if the Member States so authorize. This is especially relevant in SOEs that are to be privatized.

7 Notes Law 3522/2006 (Art 38 Para. 3) specifically created new labor conditions for newly hired staff but kept tenure and maturity in place for legacy staff. Maturity also applies for newly hired staff. 13th and 14th salary payments are provided for in law for private firms (Law 1082/80, Art 1, para. 1 and MD 19040/1981 and Law 4504/1966 Art 3, para. 16). 14th (balance sheet bonus) payment in banks is provided for in law. Some legacy firms pay 25% SSC against 13% for IKA by competitors (Law 3655/2008). Is it possible to amend law 3899/2010 to reduce the weekly working time by 10-20% with respective compensation to enhance working time flexibility. Greek jurisprudence has adjudicated that in case of contracts with a definite duration (legacy contracts), technical or company financial reasons do not constitute a reason for employment termination, except if the company gets liquidated. Broadband penetration and investment in Greece is among the lowest in the EU. This is related to excessive costs and regulatory rigidities. There is documented evidence that in some firms, full time equivalent remuneration per employee is much higher than full time equivalent remuneration per employee in competitor firms in Greece or abroad. On top of this, productivity per employee in competitor firms is much higher than in Greece. These excess costs are related to rigidities in labor markets. Some companies cannot restructure their labor costs and become competitive in the export market (where Greece has large potential) because they cannot engage in collective dismissals as do other firms. The 2010 liberalization does not apply to all firms. One company reported 150 bonus payments in its collective labor agreement, including a regularity allowance (for showing up at work), computer screen allowance, standby allowance, bagging allowance, vessel mooring allowance, etc. Internal Regulation of Geniki Bank SALaw 1048 DU 24/09/1975 Administrative and office personnel of some companies are swept into the hazardous and arduous list of professions qualifying for special retirement privileges. The list for hazardous jobs should be restricted to truly specific hazardous work assignments, not to entire firms. Safeguarding employees rights in the event of transfers of undertakings (Council Directive 2001/23/EC).