CFP Warns Portuguese Salaries Now Outpace Output — Wage Bill to Hit 48.5 Per Cent of GDP, Highest Share Since at Least 1995

Portugal's independent fiscal watchdog has issued an unusual warning about the country's labour market — and it is not about unemployment. The Conselho das Finanças Públicas (CFP) projects that compensation of employees will reach 48.5 per cent of gross domestic product in 2026, the highest share on record since the series began in 1995, while labour productivity is expected to grow just 0.2 per cent.

The assessment, contained in the CFP's new Perspetivas Económicas e Orçamentais 2026-2030 report published this week, delivers a much more cautious read on Portugal's seemingly healthy jobs numbers than the headline figures suggest.

The headline numbers look strong

On the surface, the data from the CFP paints a glowing picture of the Portuguese labour market:

• Employment growth is projected at 1.4 per cent in 2026 — 0.5 percentage points above the CFP's own September forecast of 0.9 per cent.
• Unemployment is set to fall to 5.8 per cent.
• Labour-force participation — the share of working-age people either in work or actively looking — is on track to reach an all-time record high.
• 2025 outperformed expectations: INE recorded employment growth of 2.3 per cent last year, more than double what the CFP had pencilled in.

In a year marked by external shocks, the conflict in the Middle East and tariff uncertainty from Washington, those are the kinds of numbers that governments usually lean on in speeches. Finance Minister Joaquim Miranda Sarmento has done exactly that several times this month.

But the engine is not getting more efficient

The CFP, led by Nazaré Cabral da Costa, argues that the strength of the employment numbers is masking a deeper problem: productivity. The report projects that apparent labour productivity — the value generated per worker — will grow by just 0.2 per cent in 2026, following a 0.4 per cent contraction in 2025.

That would be the second consecutive year of effectively no productivity growth, even as hiring stays strong. The watchdog attributes this to a structural phenomenon with an English name: labour hoarding.

"Firms are holding on to workers even when activity slows or faces negative shocks, because they know hiring qualified staff later will be extremely hard," the CFP writes, noting that a high share of Portuguese firms continue to flag recruitment difficulty as a binding constraint on their operations.

With fewer new entrants to the labour market — the working-age population is set to grow just 0.5 per cent in 2026, against 1.5 per cent in 2025, as immigration slows — companies are competing more intensively for the people already there. The result is rising wages against flat productivity.

Why 48.5 per cent matters

The CFP's headline finding is that the share of GDP paid out as employee compensation will reach 48.5 per cent this year, the highest level since at least 1995 — as far back as the comparable series goes. The report notes that this is the result of "variations in per-worker pay that exceed productivity growth."

In plain terms: a larger and larger slice of everything the Portuguese economy produces is being handed to workers in wages. That sounds unambiguously good from a distributional point of view — and for workers, in the short run, it is. But the CFP flags two concerns.

• Corporate margins are being squeezed. If output per worker is flat while pay rises, the gap comes out of company profits. Over time, that weakens the ability of firms to invest, automate, or absorb the next shock.
• Competitiveness erodes. Portugal's traditional edge in Europe — lower labour costs relative to Germany, France, or the Netherlands — narrows when wages grow faster than productivity. For exporters, in particular, that translates directly into lost market share.

The CFP frames this as a warning rather than a crisis. But it lands on top of the watchdog's other concerns about the 2026 budget — a fragile surplus now threatened by storm-damage spending, freight-sector support, and energy-cost offsets — and against the backdrop of the UTAO debt-repayment warning published last week.

Labour hoarding: a European pattern, but sharper in Portugal

Labour hoarding has been a continent-wide story since the post-pandemic reopening. Eurostat data showed productivity stagnating across most of the euro area through 2024 and 2025 as firms burned by the 2022-23 hiring crunch refused to let staff go even during downturns. Portugal's version of the pattern is sharper for three reasons, according to the CFP:

1. Immigration has slowed. AIMA's processing backlog and the tightening of the job-seeker visa route have cut new inflows of foreign workers, squeezing the supply side.
2. The economy skews to labour-intensive services. Tourism, hospitality, construction and retail — all major employers — have limited room to raise output without adding bodies.
3. Capital investment remains weak. Portugal 2030 execution stood at 16.8 per cent in April, and the Compete enterprise programme, which funds productivity-boosting equipment, is at just 5.2 per cent. Firms that would otherwise be automating or modernising are not, because the EU funds they were counting on are arriving slowly.

What it means for expat workers and employers

• Expect wage growth to keep running hot. With unemployment at 5.8 per cent and fewer new workers, companies are going to keep raising pay to retain staff. Expat professionals in sectors like tech, finance, and healthcare should continue to see offers trending up in 2026.
• Hiring will stay slow and competitive. Labour hoarding means firms let positions sit vacant for longer rather than compromise on quality. Average time-to-hire for skilled roles in Lisbon has crept above 60 days, according to private recruitment data.
• Small-business margins are under real pressure. For expats running Portuguese-based companies, rising wage bills against flat productivity is the warning light. The Portuguese Small Business Federation (CIP-PME) has already flagged that members in retail and hospitality are absorbing wage costs they cannot pass on.
• The policy response is the labour reform. The government's labour package — currently bouncing between bilateral talks and the Social Concertation table — is explicitly framed as an attempt to raise productivity through greater flexibility on working time, short-term contracts, and task-based pay. Whether it delivers is another question.

The fiscal backdrop

The CFP numbers feed into the watchdog's broader budgetary projection, which is slightly more optimistic than the government's own. The CFP now expects a budget surplus of 0.1 per cent of GDP in 2026, marginally better than the "very fragile" surplus flagged by Miranda Sarmento. That optimism is driven by stronger-than-forecast revenue — but the CFP warns that ongoing measures to cushion the economy against the energy crisis, new freight support, storm-damage spending, and the defence build-up to meet NATO's 2 per cent target could swallow that buffer quickly.

The bigger point is that if wages keep rising faster than output, the revenue side of the budget may look strong (more income-tax receipts, higher VAT) but the structural base of the economy weakens. That is exactly the pattern that got southern Europe into trouble before the 2011 bailout — and the reason the CFP is raising the issue now, while the economy is still, on paper, growing.

Source: Conselho das Finanças Públicas, Perspetivas Económicas e Orçamentais 2026-2030 (April 2026); ECO; INE labour market statistics.