Cutting job protection and welfare benefits when an economy is in recession is counterproductive, according to research by the OECD.
The finding published yesterday will prove contentious because those are the very policies that the Troika – the European Commission, the European Central Bank and the International Monetary Fund – are demanding of Greece, Portugal, Spain and Italy.
The Paris-based think-tank argues that labour market and benefit reforms are beneficial because they boost growth and increase overall employment. However, it also warns that when an economy is shrinking, such measures can do more harm than good, by increasing unemployment.
It said: "There is some evidence that in 'bad times', certain labour market reforms [of unemployment benefit systems and job protection in particular] can make the economic situation temporarily worse." The OECD recommends that such reforms should be postponed until economies are growing again: "In still depressed economies, such reforms would therefore be more quickly beneficial if carried out only once the labour market shows clear signs of recovery."
The Troika has required Greece and Portugal to impose far-reaching labour market reforms in return for their respective rescue packages. European governments have also put pressure on the leaders of Italy and Spain to implement similar reforms.