Portugal's job market stagnant despite reforms

But now his 90-day contract as a warehouse tally clerk, on a third of the pay he was used to, is about to expire, his wife has no job and he has lost his optimism. He has no choice but to accept the semi-freelancing deal his employer has offered on an even lower salary.

"It's that or unemployment again," Alves said.

Portugal's jobless rate rose again in the two quarters to the end of March, a worrying sign for a country that had to be rescued with the international bailout it exited last year that was accompanied by a tough programme of reforms.

More and better paid jobs are essential to guarantee steady tax revenues from the labour force, to bring down the deficit and the public debt, still at 130 percent of GDP, and ward off any potential new debt crisis or recession.

Some progress has been made on reforming the labour market but other reforms are on hold ahead of elections. So far growth, at 0.9 percent last year and estimated to accelerate in 2015, has not been strong enough to stimulate the labour market.

Over 8 percent of the workforce has been out of a job for longer than a year, the bulk of the 13.7 percent jobless rate.

"The Portuguese clearly want to continue to have a welfare state. But if your employment rate is low and people go away, how can you finance this?", said Albert Jaeger, representative of the International Monetary Fund in Portugal.

Thousands of Portuguese emigrated during the crisis and even last year, when the economy grew, net migration was a negative 13,000, partly masking the jobless problem along with state-sponsored internships that rarely transform into jobs.

Prime Minister Pedro Passos Coelho has acknowledged that unemployment will not return to pre-crisis levels of below 10 percent in the next five years even though it has fallen from the early 2013 record of 17.5 percent.

"The industry is adding value and exporting more, but companies are not creating jobs," said Joao Cerejeira, a labour economics expert at the Minho University. "Work without firm contracts has increased, job rotation is above the desired levels, professional training is at a halt, and the workforce is ageing fast, also putting pressure on the pension system."

REFORMS ON HOLD

Portugal has moved fast on reforms, making hiring and firing easier, improving incentives to work via a reform of personal income tax, reducing severance pay towards the EU average and improving productivity and competitiveness.

But the IMF says more changes are needed to tackle low external competitiveness, huge corporate debts which stifle investment as well as low education levels meaning there is a shortage of skilled workers.

However, an election due in September or October means that reforms have largely ground to a halt. With opinion polls suggesting a hung parliament and the ruling coalition slightly behind the main opposition Socialists, it is unclear when and in what form, if at all, they will resume under a new government.

While both sides pledge to stick to deficit and public debt cuts, their approach to economic problems is quite different, with the centre-right favouring tax cuts and other incentives for businesses, and the Socialists say advocating minimum wage hikes and measures that boost incomes to help consumer spending.

The Socialists say their plan will generate higher growth and more jobs with fixed contracts, as opposed to the present situation when "90 percent of those unemployed only find jobs with precarious contracts... companies are small, over-indebted and without capacity to create wealth and stable labour ties".

At 13.1 euros per hour labour costs in Portugal are already the lowest in western Europe, below Greece's 14.6 and 21.3 euros in Spain, where costs have increased, according to Eurostat. Private sector debt stood at 203 percent of GDP in 2013, above Spain's 172 percent and Greece's 136 percent.

Unions demand that minimum pay be raised from 589 euros per month. But the IMF has already warned against premature minimum wage increases. It said hikes "would further lower the chances of lower-skilled workers to make the transition from inactive or unemployed status to jobs".

In a study last week the Bank of Portugal suggested that wage cuts encompassing permanent contracts are needed to stimulate hiring - a hard sell in an election year.

Despite reforms, these contracts remain too shielded by labour laws and sectorial collective agreements, in detriment to other forms of employment that cover primarily young people on temporary jobs, it said.

One in three young people aged 15-24 is unemployed.

"Many companies are not tempted to hire because they are not confident enough about growth, but they do know that it's too costly and legally difficult to cut jobs or salaries," said Filipe Garcia, head of Informacao de Mercados Financeiros economic consultancy. (Editing by Axel Bugge)