Among these, rigid labor laws stand out as a persistent obstacle, locking the country into a cycle of low productivity and limited opportunities. To thrive in a competitive world, Portugal must rethink its approach to labor, embrace change, and chart a path toward greater dynamism and inclusivity.

The Weight of Rigidity

Portugal’s labor market operates under a framework designed to safeguard workers, but this framework has evolved into a straitjacket for businesses. Dismissals are so costly and complex that they dissuade companies from hiring, stifling growth before they begin. Small businesses, the backbone of the economy, are especially vulnerable. For a team of five, one underperforming employee could reduce productivity by 20%, yet terminating their contract is often too burdensome.

This rigidity does not just affect businesses, it impacts workers too. Companies, wary of the long-term commitments inherent in permanent contracts, lean heavily on temporary or precarious arrangements. As a result, many employees find themselves trapped in uncertainty, while businesses remain hesitant to invest in their workforce’s long-term development.

The Productivity Paradox

Portugal’s productivity crisis is deeply intertwined with these labor market constraints. A recent study reveals that productivity per hour worked has stagnated at just 71% of the EU average figure that has barely budged in over two decades. This lack of progress perpetuates a vicious cycle: stagnant productivity caps wage growth, and low wages, in turn, deter the talent and investment needed to drive innovation.

In this environment, it is no surprise that many of Portugal’s brightest minds choose to seek opportunities abroad. While emigration broadens horizons and brings invaluable skills to those who leave, the nation suffers from the loss of its most capable and ambitious citizens.

Learning from Others

Other countries facing similar challenges have shown that progress is possible. Spain, for instance, has implemented labor reforms that strike a balance between flexibility and fairness. By simplifying hiring and dismissal processes while maintaining robust worker protections, Spain has fostered an environment where businesses can grow, and employees can prosper. Portugal has the potential to follow suit, with inherent strengths such as elevated levels of digital literacy, safety, and multilingual proficiency already laying the groundwork for success.

Toward a Modern Labor Market

Reforming labor laws does not mean abandoning the principles of fairness and security. On the contrary, a modernized approach can better serve workers and businesses alike. Flexibility in contracts, for example, must be paired with safeguards such as fair severance packages for dismissals without cause. This ensures that workers are treated with respect while enabling businesses to adapt to changing circumstances.

Equally important is fostering a culture of meritocracy. Workers should see their contributions recognized and rewarded, while businesses must feel confident in making decisions that prioritize innovation and performance. By shifting the focus from protecting inefficiency to promoting excellence, Portugal can build a labor market that empowers everyone to succeed.

A New Vision for Portugal

At its core, this is about more than economics—it is about the kind of society Portugal wants to become. A dynamic, equitable labor market can do more than improve productivity and wages. It can help stem the tide of emigration, attract international talent, and bring home the Portuguese diaspora. It can inspire confidence in a nation ready to compete on the global stage.

The geopolitical and trade uncertainties of today demand adaptability. Portugal’s labor market, as it stands, is ill-equipped to meet these challenges. But with bold reforms, the country can transform these obstacles into opportunities, positioning itself as a leader in innovation and inclusivity.

Seizing the Moment

Portugal stands at a decisive moment. The world is moving forward, and we must decide whether to cling to outdated systems or embrace the future. By modernizing labor laws, reducing bureaucracy, and encouraging both personal and economic growth, Portugal can unleash its full potential.

This is a call to action for policymakers, businesses, and citizens alike. Together, we can break free from the constraints holding us back and build a society where opportunity thrives, talent flourishes, and Portugal takes its rightful place as a beacon of progress and possibility.

Author

Paulo Lopes is a multi-talent Portuguese citizen who made his Master of Economics in Switzerland and studied law at Lusófona in Lisbon - CEO of Casaiberia in Lisbon and Algarve.

Paulo Lopes