IL .~~~~~~~~~-. ~~ ~ ~ ~ ~ p U) ~ ~ ~ ~ ~ z F 2 I ^ ,,, , (~L : .7 i XU ,A+>!X- B Q X 't X ' v ~ ...... ml -* .-~. Z a S ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~(N g~~~~~~~~~ * Recent World Bank Technical Papers No. 428 C. Mark Blackden and Chitra Bhanu, Gender, Growth, annd Poverty Reduction: 3pecial Progrwa nIASSistance for Africa, 1998 Statuis Report on Poverty in Sub-Saha ran Africa No. 429 Gary McMahon, losd Luis Evia, AlbErrto Pasc6-Font, and Jose Miguel Sinchuz, An Enviromncmntal St n,/ll of Artisanal, Sniall, ind Mediumn7 Mining in Bolivia, Chile, and Peru No. 430 Maria Dakolias, Cour/'t PerformSance aronnd the World: A Comnparative Perspective No. 431 Severin Kodderitzsch, Reforms in Albanian Agriculture: Assessing a Sector in Transition No. 432 Luiz Gabriel Azevedo, Musa Asad, and Larry D. Simiipson, Managemnent of Water Resources: 13Bulk Water Pricing in Brazil No. 433 Malcolm Rowat and Jose Astigarraga, Latin Atmerican lnsolveLncy Systens: A Conmparative Assessmnieit No. 434 Csaba Csaki ancl John Nash, eds., Regional and International Trade Policy: Lessonsfor the EU Accession il the Rural Sector-WWorld Bank/FAO Workshop, jinie 20-23, 1998 No. 435 lain Begg, EU Investmnent Grants Reviezi No. 436 Roy Prosterman and Tim Hanstad, ed., Legal Inpedinments to7 Effective Rural Land Relations il Eastern Erope and Central Asia: A Comnparative Perspective No. 437 Csaba Csaki, Michel Dabatisse, and Oskar Honisch, Food and Agriciulture in the Czech Republic: Fromi a "Velvet" Transition to the Challenges of EU Accession No. 438 George J. Borjas. Econiomic Research o(n the Determzinants of Imnmigration: Lessonis kftr the Europciini Union No. 439 Mustapha Nabli, Financial Integration, Vlulnerabilities to Crisis, and EU Accession in Five Central European Couontries No. 440 Robert Bruce, loannis Kessides, and Lothiar Kneifel, Overconming Obstacles to Liberalization u)/ tlhe 'hClecoilm Sector in Estonia, Poland, the Czech Republic, Slovenlia, and Hungary: An Overvieiw of Key Policy Concerns ammil Potential Initiatives to Facilitate the Trantsition Process No. 441 Bartlomiej Kaminski, Hunrigary: Foreign Trade lssues in the Cinitext of Accessioti to the ELI No. 442 Bartlomiej Kaminski, The Role of Foreign Direct Investmnent anid Trade Policy in Poland's Accessiini to thi Europeant Union No. 443 Luc Lecuit, John Elder, Christian Hurtado, Francois Rantrma, Kamal Siblini, and Maurizia Tovo, DeMlStifying MIS: Guidelinesfor Maniagement Information Systems in Social Fu,'nds No. 444 Robert F. Townsend, Agricultural lncentives in Sub-Saiharai Africa: Policy C'li, s. No. 445 lan Hill, Forest 1M/annagemnent in Nepal: Econonitics of Ecology No. 446 Gordon Hughes and Magda Lovei, Economnic Reforni and Environnmental Perfcrmnauice in Transitioln Econonliics No. 447 R. Maria Saleth and Ariel Dinar, Eoaluatiuig Water listitiutiopis and Water Sector Perforniamic, No. 449 Keith Oblitas arid J. Raymond Peter in association with Gautam l'ingle, Halla M. Qaddumi, and Ja'antha Perera, Transferring Irrigation Managenment to Farmners in Andlhra Pradesh, India No. 450 Andr6s Rigo Sureda and Waleed Haider Malik, eds., Ju#dicial Challenges in the New Mille,i,iiiionii Proceedtuigs of the Second Suinniit of the lbero-Anierican Suprenie Colurts No. 451 World Bank, Pr;vatization of the Power annd Natuiral Gas Induistries in Hungary and Kazaklistane No. 452 Lev Freinkman, Daniel Treisman, and Stephen T itov, Shbuational Budgeting in Russia: Preeniplini a Potential Crisis No. 453 Bartlomiej Kaminski and Michelle Riboud, Foreign Investmnent and Restructwling: The Evidence from Hungary No. 454 Gordon Hughes and Julia Bucknall, Poland: Conpilying with EU Enviromnieneal Legisliature No. 455 Dale F. Gray, A5sessnient of Corporate Sector Value and Vulnerability: Links to Exchange Rate and( Financial Crises No. 456 Salman M.A. Sal man, ed., GroundWater: Legal and Policy Perspectives: Proceedings of a World Banik Seninar No. 457 Mary Canning, P'eter Moock, and Timothy Heleniak, Reformiing Education in the Regions ofRussii No. 458 John Gray, Kaztikhstan: A Revie7V of Farni Restruictu/ring No. 459 Zvi Lerman and Csaba Csaki, Ukraine: Review of Farmn Restructuring Experiences; No. 460 Gloria La Cava and Rafaella Y Nanetti, Albania: Filling the Vulnerability Gap No. 461 Ayse Kudat, Stan Peabody, and Caglar Keyder, eds., Social Assessmienit and Agricu/ltural Reforni in Central Asia and Turkey No. 462 T. Rand, J. Haukohl, and U. Marxen, Municipal Solid Waste Incineration: Requirenientsfor a Successful Project (List continues on the inside back cover) WORLD BANK TECHNICAL PAPER NO. 519 Europe and CentralAsia Poverty Reduction and Economic Management Series Does Euroscleros:is Matter? Institutional Reform and Labor Market Performance in Central and Eastern Europe Michelle Riboud Carolina Sdnchez-Pdramo Carlos Silva-Jduregui The World Bank Washington, D.C Copyright © 2002 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing March, 2002 1234040302 Technical Papers are published to communicate the results of the Bank's work to the developnment com- munity with the least possible delay. The typescript of this paper therefore has not been prepared in accor- dance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to mem- bers of its Board of Executive Directors or the countries they represent. The World Bank does not guaran- tee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. The boundaries, colors, denominations, and other information shown on any map in this vol- ume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. The material in this publication is copyrighted. The World Bank encourages dissemination of its work and will normally grant permission promptly. Permission to photocopy items for internal or personal use, for the internal or personal use of specific clients, or for educational classroom use, is granted by the World Bank, provided that the appropriate fee is paid directly to Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, U.S.A., telephone 978-750-8400, fax 978-750-4470. Please contact the Copyright Clearance Center before photocopying items. For permission to reprint individual articles or chapters, please fax your request with complete information to the Republication Department, Copyright Clearance Center, fax 978-750-4470. All other queries on rights and licenses should be addressed to the World Bank at the address .above or faxed to 202-522-2422. ISBN: 0-8213-5090-0 ISSN: 0253-7494 Michelle Riboud is a Manager in the Poverty Reduction and Economic Management Unit of thie World Bank's Europe and Central Asia Region. Carolina Sanchez-Paramo is a Young Professional in the Poverty Reduction and Economic Management Unit of the World Bank's Europe and Central Asia Region. Carlos Silva-Jauregui is a Senior Economist in the Poverty Reduction and Economic Management Unit of the World Bank's Europe and Central Asia Region Library of Congress Cataloging-in-Publication Data has been applied for. CONTENTS Foreword .................................................................. VI Abstract..vii Acknowledgments ............. . viii I. Introduction .... ....... I II. How Flexible Are Labor Markets in CEE Countries? An Analysis of Labor Market Institutions in the 1990s ........................................................ ..3 Employment Protection Legislation .4 Passive and Active Labor Market Policies .7 Strength of Unions and Tax Burden on Labor .12 III. Output and Labor Market Dynamics in the Transition ........................................ 17 Output. 1 7 Employment, Unemployment, Labor Force Participation and Wages .18 IV. What Explains These Labor Market Dynamics? ....................................................... 25 Macroeconomic St:abilization Policies .25 Structural Reform; .................. 27 Labor Market Institutions .29 V. Conclusions ............. _ _ . 37 Annex I. Additional Tables and Figures . .............................. 38 Annex II. Constructing the Employment Protection Legislation Index ....... . 51 Annex III. Trade Unions and Collective Bargaining in the EU Accession: Countries ..-..... 56 References ....................................................................... 60 TABLES Table l. Employment Protection Legislation in EU Accession Countries. Late 1990s . 5 Table 2. Features of the Unemployment Insurance System in EU Accession Countries (1) Late 1990s .8 Table 3. Features of the Unemployment Insurance System in EU Accession Countries (II) . 9 Table 4. Spending on Passive and Active Labor Market Policies in EU Accession Countries .10 Table 5. The Role of lJnions and Payroll Taxes in EU Accession Countries .13 Table 6. Output per sector in EU Accession Countries. 8 Table 7. Labor Force Participation Rates in EU Accession Countries .22 Table 8. Real Wages in EU Accession Countries: Growth Rate and Level .23 Table 9. Inflation Rate in EU Accession Countries .26 Table 10. Subsidies to the Enterprise Sector in EU Accession Countries .26 Table 11. Privatization Modalities for Medium and Large Enterprises in EU Accession Countries ............................................................ 29 Table 12. Short- and Long-Term Unemployment in EU Accession Countries ................................. 31 Table 13. Share of Unofficial Economy in EU Accession Countries ............................................... 33 Table 14. Employment Accession and Separation Rates in EU Accession Countries ...................... 33 FIGURES Figure 1. Employment Protection Legislation Index in Selected OECD and EU Accession Countries ...................................................7 Figure 2. Tax Burden on Labor in Selected OECD and EU Accession Countries ........................... 14 Figure 3. Evolution of GDP in EU Accession Countries, 1990-2000 .............................................. 17 Figure 4. GDP and Aggregate Employment Levels in EU Accession Countries ............................. 19 Figure 5. Unemployment in EU Accession Countries .................................................. 20 Figure 6. Evolution of Aggregate Employment in EU Accession Countries ................................... 27 Figure 7. Correlation between GDP and Aggregate Employment Growth Rates in EU Accession Countries ............................................................ 30 BOXES Box 1. Support to the Unemployed in Selected OECD and EU Accession Countries ................. I I Box 2. Similarities in the Demographics of the Unemployed in Slovak Republic and Spain ...... 21 Box 3. The Importance of Institutions: Job and Worker Flows During Transition in Estonia and Slovenia ....................................................... 34 ADDITIONAL TABLES IN ANNEXES Table Al. I Employment Protection Legislation in OECD and EU Accession Coumtries ................... 38 Table AI.2 Employment Protection Legislation in OECD and EU Accession Countries ................... 39 Table AI.3 Features of the Unemployment Insurance System in Selected OECD and EU Accession Countries ............................................... 40 Table AI4 Spending on Passive and Active Labor Market Policies in selected OECD and EU Accession Countries. 41 Table AL5 The Role of Unions and Payroll Taxes in Selected OECD and EU Accession Countries ................................................ 42 Table AI.6 GDP in EU Accession Countries: Growth Rates and Levels .43 Table AI.7 Employment in EU Accession Countries: Growth Rates and Levels .44 Table AI.8 Employment-to-Population Ratios in EU Accession Countries .45 Table AI.9 Unemployment Rates in EU Accession Countries. 46 Table AI.10 Unemployment Inflows and Outflows in EU Accession Countries .47 Table AI. I I Unemployment Rates in Selected OECD Countries ... 48 Table AI.12 Short and Long-Term Unemployment in Selected OECD Countries ... 49 Table Al. 13 Labor Force Participation Rates in Selected OECD Countries .50 Table AI. 1 Employment Protection Index: Selection of Indicators and Weighting Scheme .51 Table AII.2 Employment Protection Index: Conversion into a Common Scale .52 Table AII.3 EPL Index: Dismissal Regulation for Permanent Employees (12 indicators) .................. 53 Table AII.4 EPL Index: Regulation of Temporary Forms of Employment (6 indicators) .. 54 Table AII.5 EPL Index: Procedures and Standards for Collective Dismissals (4 indicators) .. 55 iv ADDITIONAL TABLES IN ]BOXES Table Bl.l Spending on Passive and Active Labor Market Policies .............................................. I I Table B2. 1 Unemployment Rates by Education Levels, Slovak Republic .......................................... 21 Table B2.2 Unemployment Rate by Age Groups, Slovak Republic .............................................. 21 Table B2.3 Unemployment Rate by Education and Age Groups. Spain, 1998 .................................. 21 Table B3.1 Comparison of Labor Policies in Transition .............................................. 34 ADDITIONAL FIGURES IN BOXES Figure B3.1 Rate of Job Deslruction in Estonia and Slovenia during Transition .35 Figure B3.2 Employment Accession and Separation in Estonia and Slovenia during Transition. 35 v Foreword The Poverty Reduction and Economic Management Unit in the World Bank's Europe and Central Asia Region has been undertaking a series of analytical works on issues pertinent to the economies in the region. These issues include transition issues; issues of economic integration pertinent for the Central and Eastem Europe countries which are candidates for accession to the European Union; poverty issues; and other economic management issues. The analytical work has been conducted by staff of the unit and other Bank staff, as well as specialists outside of the Bank. This technical paper series was launched to promote wider dissemination of this analytical work, with the objective of generating further discussion of the issues. The studies published in the series should therefore be viewed as work in progress. The findings, interpretations, and conclusions are the author's own and should not be attributed to the World Bank, its Executive Board of Directors, or any of its member countries. Pradeep K. Mitra Sector Director Poverty Reduction and Economic Management Unit Europe and Central Asia Region vi Abstract Have the Central and European countries (CEECs) who aspire to join the EU introduced in their labor markets the same rigidities that exist in other European countries ? Are they victims of the so-called "eurosclerosis"? Are these rigidities wasting potential for productivity growth and leading to persistently high unemployment levels ? The paper shows that the labor market policies these countries have adopted (different as they are) do not generally appear excessively rigid when compared to those of EU and OECD members. In terms of employment protection, for instance, they tend to rank in the middle of the proposed "labor market flexibility scale." Furthermore, although they have adopted-again with some degree of vaiiation-the set of policies (passive and active) common to all EU and OECD countries, the Central and Eastem European countries are actuaally devoting modest amounts of budgetary resources to the unemployed. Finally, candidate countries have moved away from centralized wage bargaining toward a more decentralized system of wage negotiation. Where the CEECs really stand out is in terrns of the tax burden on labor: theirs is the highest in Europe. How rnuch do prevailing rigidities matter? The authors find that they cannot on their own, account for the dramatic labor market developments that have occurred as a result of wide-ranging economic; reforms during the transition process. However, one cannot conclude that labor market institutions are insignificant. A number of indicators suggest that they may play a more crucial role in the future in determining candidate countries' ability to engineer a recovery of employment and a decline in long-term unemployment. vii Acknowledgments The following study was prepared by Michelle Riboud, Carolina Sanchez-Paramo and Carlos Silva-Jauregui. The authors would like to express their gratitude to government officials of the Czech Republic, Estonia, Hungary, Poland, Slovak Republic and Slovenia for providing much of the information on which this report is based. They would also like to thank participants at the Labor, Employment and Social Policies in the EU Enlargement Process which took place at Baden, Austria in June 28-30, 2001 for their comments. Finally, special thanks to Tina Mlakar who provided excellent research support throughout the preparation of this study and to Dolly Teju, Isabelle Chaal and Anita Correa for their outstanding work processing this report. viii I. Introduction Whether or not labor market rigidities are an important contributor to persistently high levels of unemployment remains at the center of an important debate in Europe. European labor markets are often viewed as rigid and inflexible in opposition to those in North America where legislation is less protective of employment and fosters greater mobility. The fairly high umemployment rates that persist in numerous parts of Europe are often attributed to these iigidities. The debate has taken renewed relevance with the potential entry of new countries in the European Union (EU hereafter). As those countries are compelled to have laws and policies consistent with the "acquis communautaire", an interesting question is whether they have introduced in their labor markets the same rigidities that exist in other European countries. An even more fundamental question is whether those rigidities, if they exist, are slowing down the adjustment of labor markets in these economies, wasting potential for productivity growth and leading to a persistently high level of unemployment. In other words, are Central and Eastem European countries (CEE hei:eafter) likely to contract a European disease, commonly called "eurosclerosis" on their way toward accession into the EU? Does this disease really matter? The paper will thus attempt to answer the following questions: * To what extent have the CEE countries - which aspire to enter the EU - adopted labor market institutions (job security provisions, support programs for the unemployed and other related polic:ies) which make the functioning of their labor markets relatively inflexible and rigid? * How do their policies and legislation compare with those in the member countries of the EU and OECD? * To what extent have these institutions shaped labor market adjustment dynamics in these economies during the transition? How does the impact of institutions on labor market outcomes compare to that of macroeconomic and structural reforms? Have labor market institutions and policies had an impact on the effectiveness of economic reform programs"' In other words, to what extent do they "matter"'? In our search for answers, we examine labor market institutions during the 1990s for a group of EU accession countries (i.e. the Czech Republic, Estonia, Hungary, Poland, Slovak Republic and Slovenia), following the methodology used by the OECD (1997, 1999). This allows us to compare our res,ults for the CEE countries with those presented by the OECD for its member countries, including EU countries. We then discuss the role played by these institutions in the context of the ongoing macroeconomic and structural reforms. In doing so, we relate to the economic literature that views labor market adjustment not uniquely as a function of labor market institutions, but rather as the result of the interaction between such institutions and other factors outside the labor market (Blanchard and Wolfers, 1999). 1 We show that: * CEE countries, although adopting the set of policies and institutions common to European countries, do not constitute a monolithic group. There is diversity among them and, as a result, some countries have a more flexible labor market than others. However, when compared to EU and OECD members, most of these countries tend to be in the middle of the 'labor market flexibility' scale. * CEE countries have experienced tremendous changes in their labor markets - in terms of labor reallocation across economic sectors, changes in pattems of labor force participation and employment-to-population ratios, and emergence of unemployment. These changes would not have taken place without wide-ranging economic reform programs. Changes in fiscal and monetary policy, price and trade liberalization, privatization and introduction of financial regulations have had a huge impact on labor market dynamics. * Even if the impact of labor market institutions has remained modest and hard to uncover, one should not conclude that they are insignificant. There are a number of signs such as low employment creation, a rising proportion of long-term unemployed, specific pattems of labor force participation and the size of the informal economy that reflect the impact of labor market institutions. One can also relate differences between countries to the diversity of policies and institutions. The rest of the paper is structured as follows. Section II presents a description of selected labor market institutions in these countries and compares them to those in EU and OECD countries. Section III documents the main labor market developments. Section IV discusses the macro and structural reforms implemented during the 1990s and their effect on the labor market, compared to that of institutional changes. Finally, Section V concludes. 2 II. How Flexible Are Labor' Markets in CEE Countries? An Analysis of L abor Market Institutions in the 1990s. Measuring the degree of flexibility or rigidity of labor markets is not an easy task due to tle lack of a unique quantifiable indicator that can serve as barometer. As pointed out by Freeman (2000), "there is no generally accepted taxonomy for classifying economies into clifferent institutional groupings, not even a scale to measure the distance between particular institutional settings. Are Japantese institutions closer to those of the United States or Germany? Are United Kingdom institutions more American or European? We have no measures of institutions to answer these questions definitely". It is nevertheless possible to take into consideration a set of indicaltors and classify countries on the basis of existing knowledge of the policy relevance of these indicators. This is ihe approach followed by Lazear (1990), Nickell (1997), Blanchard and Wolfers (1999) and the OECD in its Jobs Study and Employment Outlook (1994, 1999). We have adopted a similar ipproach in this paper and discuss different sets of indicators of labor market policies and institutions. This set includes (i) an employment protection legislation index; (ii) various measures of the coverage, cost, and effectiveness of passive and active labor market policies; and (iii) indicators of union strength and tax burden on labor (e.g. payroll taxes)'. Using these indicators, we find that: * CEE countries do not constitute a monolithic group. Despite their common recent history and similar steps taken to join the EU, they have adopted somewhat different labor policies. In terms of employment protection, Hungary seems to have adopted the most flexible legislation and Slovenia the least flexible. * Despite some disparity, these countries - when compared to EU and OECD members, tend to be in the rniddle of the 'labor market flexibility' scale (with the exception of Slovenia). Their labor markets are definitely less flexible than those in the United States or the Unite(d Kingdom, but certainly not as rigid as those in Southern Europe. * Although CEE countries have adopted - again with some degree of variation - the set of policies (passive and active) common to all EU and OECD countries, they are devoting modest amounts of budgetary resources to the unemployed and, in this respect, are closer to the United States, the United Kingdom an(d Southem Europe than to Central and Northern Europe. * Finally these countries have moved away from a centralized wage bargaining system and towards a more liberalized system of wage negotiation. However, institutions and social norms inherited from the previous regime still play an imiportant role in the bargaining process. Also the tax burden on labor in these countries is the highest in Europe. Due mainly to lack of accurate data we do not examine in detail the role of minimum wages. However, the available evidence seems to suggest they are not binding in most of the countries studied here. 3 We comment on both the differences and the commonalities with respect to each type of indicators below. Employment Protection Legislation. Employment protection legislation refers to regulations that restrict the employers' freedom to dismiss workers. While their objective is to "protect" the welfare of employees by reducing their exposure to unfair actions and to the iisk of fluctuating incomes, these regulations may increase the costs of employing workers. The consequence can be a reduced flow of vacancies and thus, lower employment levels. We construct two different Employment Protection Legislation indices (EPL, versions I and 2) for the six CEE countries using the OECD methodology. Version 1 considers exclusively legislation on permanent and temporary employment, while Version 2 expands the scope of the index to account for legislation on collective dismissals. Both indices aim at measuring the degree of strictness of the legislation. The use of the OECD methodology in both cases allows us to make comparisons not only among CEE countries, but also with EU members and other OECD countries. Although we construct both indices below, we will only discuss the expatnded version (Version 2)2. This version of the EPL is a weighted average of 22 indicators, some readily available in quantitative form (e.g. notice period or severance payment), some constructed from qualitative information (e.g. difficulty of dismissal)3. The indicators for the Czech Republic, Poland and Hungary are based on OECD data, and the indicators for the remaining, non-OECD countries are based on the review of their most recent labor legislation. The EPL index takes values 1 to 6, and the higher the value the stricter is the employment protection legislation. Clearly, countries in Central and Eastern Europe do not constitute a monolithic group. When we compare the value of the EPL index for all six countries, we find substantial disparities (Table 1). Hungary has the most flexible labor legislation, with an EPL index value of 1.7, closely followed by Poland (2.0) and the Czech Republic (2.1). Slovak Republic and Estonia occupy the middle ground, with an index of 2.4 and 2.6 respectively. Finally, Slovenia has the most restrictive labor regulations, with an EPL index value of 3.54. These disparities can, in tum, be explained by differences in regular employment legislation, temporary employment legislation and collective dismissals legislation, with differences in temporary employment legislation being the largest (i.e. the standard deviation of this indicator represents 50 percent of its mean value, compared to 15 percent for the other two indicators). 2 Version 1 can be found on Tables Al. 1 and AI.2, in Annex I. 3 See Annex II for a detailed methodological description of the EPL index. 4 Slovenia is about to adopt a new, much more flexible labor code. We have included in all tables EPL values corresponding to this new legislation for the reader to appreciate the magnitude of the potential changes, which will bring the EPL index to 2.3. 4 Regular employment le jislation establishes the rules for hiring and firing procedures for permanent workers, notification requirements, and severance payments. This legislation is most .lexible in Hungary and Poland, with index values of 2.1 and 2.2 respectivel]y. In Hungary a written statement to an employee is sufficient for the dismissal to take place, while in other -ountries the notice of dismissal must be shared with a third party, usually an employee representative body. In addition, in Hungary and Poland 'unsatisfactory performance' and 'job redundancy' are sufficient reasons for dismissal, whereas in the Czech Republic, Estonia, Slovak Republic and Slovenia employers are required to take into account social considerations, to look for retraining or even to ensure the worker's transfer to another suitable position. Finally, in both Hungary and Poland the notice period is short and the severance payment small5. Table 1. Employment IProtection Legislation in EU Accession Countries, Late 1990s Regular Temporary Collective EPL;Strictness Employment Employment Dismissals Index Index Index Version 2' Index Rankz Czech Republic 2.8 0.5 4.3 2.1 3.0 Estonia 3.1 1.4 4.1 2.6 5.0 Hungary 2.1 0.6 3.4 1.7 1.0 Poland 2.2 1.0 3.9 2.0 2.0 Slovak Republic 2.6 1.4 4.4 2.4 4.0 Slovenia 3.4 2.4 4.8 3.5 6.0 Slovenia3 (2.9) (0.6) (4.9) (2.3) (4.0) CEEC average 2.7 1.2 4.1 2.4 EU averge' 2.4 2.1 3.2 2.4 OECD averages 2.0 1.7 2.9 2.0 Source: OECD (1999) Employmenit Outlook 1999. World Bank estimates for Estonia and Slovenia. I/ Weighted average of indicators lbr regular contracts, temporary contracts, and collective dismissals. 2/ All rankings increase with the strictness of employment protection. 3/ Based on proposed labor code. 4/ Does not include Greece and Luxemburg. 5/ Average for all OECD countries on Table Al. I. Temporary employnment legislation regulates the use of fixed-term contracts, their renewal and maximum duration, as well as the functioning of temporary work agencies. The Czech and Hungarian legislations stipulate the least amount of restrictions (index values of 0.5 and 0.6 respectively), while the Estonian, Polish, and Slovak legislations are stricter, with index values that are two to three times higher. Slovenia is an outlier in the group with the most restrictive legislation of all 2nd an index value of 2.4. These differences respond mainly to the fact that in the Czech Republic and Hungary temporary contracts can be used with almost no restrictions or limits to their number or duration, while in other countries they can only be used for specific reasons and for a limited period. In S The thorough reader may consult Table AII.3, Annex II, for details. 5 contrast, differences in the regulation of temporary work agencies are nil, with the exception of Slovenia where their use is limited to 2 months6. Collective dismissals legislation defines the term 'collective', as opposed to 'individual', and stipulates notification requirements and payments associated with such dismissals. As was the case with regular and temporary employment, Hungary and Slovenia have the least and most restrictive legislation, with index values of 3.4 and 4.8 respectively, while the remaining countries fall in the middle. Although the definition of 'collective dismissal'7 and most notification requirements are very similar in all these countries, there are some differences regarding the additional delays and costs imposed on employers in the case of collective dismissals vs. individual dismissals. For example, in Poland an additional month delay is required for the notification to take place, while in the Czech Republic the delay amounts to almost four months. Similarly, in Hungary and the Czech Republic there are no additional costs associated with collective dismissals, whereas in the other four countries the employer has to disburse additional severance pay or provide additional compensation, such as retraining or re- employment. Differences in employment protection legislation not only exists among CEE countries, but also, and to an even greater extent, among the members of the European Union and other OECD members. As already shown by the OECD study (1994, 1999) as well as by Nickell (1997) the EPL index ranges from 0.7 to 3.7 among OECD countries (Figure 1 and Table AJ.1)8. This large diversity is fully reflected within the EU which includes countries such as the United Kingdom, Ireland, and Denmark which do not have a strict legislation and, at the other side of the spectrum, countries in Southern Europe (Italy, Spain and Portugal) which have by far the most protective legislation (with an EPL index equal to or larger than 3.1). Germany, France, and some Scandinavian countries occupy the middle of the range. What constitutes no surprise is the comparison with the United States. That comparison does support the frequent assertion that European labor markets are much less flexible than the United States labor market. The United States index is the lowest of all. However, it is closely followed by the Anglo-Saxon countries which are part of the European Union, United Kingdom and Ireland. The comparison between the two sets of countries shows that CEE countries tend to be in the middle of a "labor market flexibility" scale. Slovenia is the exception and falls at the end of the range (until the new legislation under preparation is approved). Labor markets in CEE are definitely less flexible than in the United States, the United Kingdom or Canada, but certainly not as rigid as in some countries of Southern Europe. Out of a total of 26 countries classified by order of increasing EPL index: (i) Hungary, Poland and the Czech Republic hold positions 9, 10 and 11 respectively, (ii) Slovak Republic and Estonia hold rank 16 and 18 respectively and (iii) Slovenia is number 25. If Slovenia adopts its new labor code, it would climb up the ladder to rank 16 (Table AI.2). 6 Idem. Table AII.4, Annex II. 7Dismissal of more than 10 employees. 8 All tables containing data for OECD and EU countries can be found in Annex I. 6 l'igure 1. Employment Protection Legislation Index in Selected OECD and EU Accession Countries Employment Protection LgIAslation Index Range: I (low) to 6 (high) 3.5~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Os~ ~~~O Source: OECD Employment Outlook (1999). These cross-country differences in the overall ranking, although not large, are enough to suggest that, when adopting new labor legislation during the transition period, the CEE countries may have been influenced more by geographical or cultural proximity than by the desire to imitate a single European model. For instance, Estonia is close to Norway or Sweden in terns of the EPL index, while Slovenia seems closer to Italy or Germany. Passive and Active Labor Market Policies We analyze here the different policies adopted by the CEE countries to support the unemployed. We distinguish between passive (i.e. unemployment insurance system) and active policies (i.e. job assistance, training, public works, wage subsidies, etc). While passive labor market policies may create incentives to remain unemployed for a longer period of time, active policies aim at facilitating the re-entry into the labor market. The final impact on unemployment will depend on the features of the various programs, notably their relative generosity and importance in budgetary terms. We again find that diveisity prevails . Although CEE countries have adopted a package of measures similar to those of other European countries, they differ significantly in terms of benefits, coverage and duration of their programs, as well as in terms of their relative preference for passive or active policies. Passive Labor Market Policies: Unemployment Insurance (UI) The generosity (or lack thereof) of a particular unemployment insurance system depends on the quantity and duration of the benefits, and the system's eligibility rules. Hence, we concentrate on these features. 7 A simple way to compare 'benefit quantity' across the CEE countries is to look at benefit replacement ratios - i.e. initial level of benefits divided by some average measure of previous earned income. Replacement ratios in the CEE countries range from 40 to 64 percent, except in the case of Estonia where this number is 10 percent9 (Table 2). An alternative way to perform this comparison is to express benefits as a fraction of the minimum and average wages in each country. Then unemployment benefits represent between 60 and 100 percent of the minimum wage, and between 10 and 45 percent of the average wage (Table 3). Although they are within the EU and OECD ballpark (35 to 75 percent), these numbers reveal important differences across countries. Table 2. Features of the Unemployment Insurance System in EU Accession Countries (I), Late 1990s Beneflt RR Benefit Duration (%) (months) Czech Republic 50 6 Estonia 13 3-6 Hungary 64 it' Poland 405 12-246 Slovak Republic 60 6-127 Slovenia 63 3-247 CEE average 48 (55)" EU average9 60 OECD average'° 58 Source: OECD Employment Outlook (1995, 1999), IMF World Economic Outlook (1999), IMF Article IV - Consultation with the Slovak Republic, World Bank estimates for Estonia and Slovak Republic, The World Bank,(1999), The World Bank (1998). 1/ Description of categories: (i) Benefit RR - Benefit Replacement Ratio - initial benefit level divided by previous earned income, (ii) Benefit Duration - Benefit Duration - maximum duration, in months, depending on various criteria (age, family status, employment record/ contributive history). 2/ Data for Czech Republic, Estonia and Slovenia are from 1998; data for Hungary are from 1997, and data. for Poland and Slovak Republic are from 1996. 3/ Benefits are set at 60% of minimum wage. This amounts to approximately 10% of the average wage. 4/ Requires 4 years of employment. 5/ The replacement ratio is 40% of the average wage for the year prior to unemployment. 6/ Benefit duration increases with previous employment tenure. 7/ Benefit duration is a function of the worker's contributive history. 8/ Figure in parentheses does not include Estonia. 9/ Does not include Greece and Luxemburg. 10/ Average for all OECD countries on Table AI.3. Benefit duration also varies from country to country. For instance, maximum duration in the Czech Republic and Estonia is 6 months, compared to 12 months in Hungary and Slovak Republic, or even 24 months in Poland and Slovenia (Table 2). These figures are similar to those in the EU and OECD countries (e.g. 6 months in the United States, 12 months in the United Kingdom, 24 months in Spain, no limit in Belgium). 9 Unemployment benefits are a function of the minimum wage, rather than of previous earned income. As a result the level of protection, measured by the replacement ratio, is very low, especially for those with high salaries. 8 Table 3. Features of the Uriemployment Insurance System in EU Accession Countries (II) (percent) 1991. 1992 1993 1994 1995 1996 1997 1998 Czech Republic Coverage rate 46.5 50.5 47.1 44.2 50.1 51.4 49.2 % minimum wage 63.8 75.2 83.3 93.5 92.2 102.7 88.1 % average wage 30.2 28.4 26.6 25.2 23.8 24.0 20.0 Estonia Coverage rate 56.4 46.3 39.9 45.4 53.6 55.1 % minimum wage 60.0 60.0 40.0 35.3 28.4 27.3 %average wage 16.9 10.4 7.6 8.0 6.7 7.2 Hungary Coverage rate' 76.8 78.1 74.1 76.7 79.0 73.5 71.3 73.6 %minimum wage 75.0 75.0 75.0 75.0 75.0 % average wage 28.1 26.9 24.6 23.4 23.3 Poland Coverage rate 79.0 52.3 48.3 50.1 58.9 51.9 30.5 22.9 %minimumwage 100-305 100-310 95.3 98.0 81.0 110 % average wage up :0 100 up to 100 36.0 36.0 36.0 45.c, Slovak Republic Coverage rate 82.0 34.0 34.0 23.0 23.0 28.0 27.0 28.0 % minimum wage 61.7 72.2 70.6 106.9 109.3 % average wage 24.0 24.6 23.4 31.3 32.8 Slovenia Coverage rate 40.0 45.0 43.1 42.1 30.3 30.3 32.6 32.6 % minimum age2 100-300 100-300 100-300 100-300 100-300 100-300 100-300 187.2 % average wage2 32.7 44.1 47.1 43.3 43.4 43.1 43.9 Source: Employment and Labor Market country reports prepared by the European Training Feundation (1999), EBRD Transition Report (1999), Central Bank of Estonia, and OECD Employment Outlook (1999). 1/ Data include (i) unemployment benefits, and (ii) income support once unemployment benefits are exhausted. 2/ Data from the annual reports of t}ie Slovene National Employment Office, the Bank of Slovenia Monthly Bulletin, and The World Bank (1998). Instead of directly comparing eligibilitv rules across countries, which would be rather cumbersome, we use the coverage rate as a proxy indicator - i.e. percentage of unemployed receiving unemployment insurance benefits (Table 3). Coverage rates in the Czech Republic and Estonia are around 40-50 percent, having remained fairly stable over the last decade. This has also been the case in Hungary, although coverage is much higher there (70-75 percent). In contrast, the remaining three countries have seen coverage rates fall continuously throughout the 1990s, from 80 to 20 percent in Poland and Slovak Republic, and from 40 to 30 percent in Slovenia. Not surprisingly, such differences in benefit quantity and duration, and in coverage rates translate into differences spending in unemployment insurance. The CEE countries spend less than 1 percent of GDP on unemployment insurance, with the exception of Poland where this figure is 1.7 percent (Table 4). Nevertheless, even at this low level, there is significant variation across countries, with Slovenia spending 0.9 percent and Estonia spending less than 0. 1 percent. These aggregate spending figures, however, can be misleading since they are partly a function of the number of inemployedl0. To correct this caveat, we consider the ratio of GDP JO For example, assume country A and country B have the same unemployment insurance system, but the unemployment rate in country A is double that in country B. Then spending will appear to be higher in country B, even though both systems are equally generous. 9 spending to the unemployment rate (both in percentage terms) as an alternative measure of expenditure. We then find that these countries have been spending a relatively small amount of resources to support the unemployed (between 0.01 and 0.12 percent of GDP per percentage point of unemployment). Table 4. Spending on Passive and Active Labor Market Policies in EU Accession Countries' Unemployment Passive policies Active policies Rate (%) % GDP Spending % GDP Spending per unemployed per unemployed Czech Republic (1999) 8.8 0.31 0.04 0.19 0.02 Estonia (1998) 9.9 0.08 0.01 0.08 0.01 Hungary (1997) 8.7 0.56 0.06 0.40 0.04 Poland (1996) 14.3 1.71 0.12 0.49 0.03 Slovak Republic (1996) 11.1 0.54 0.05 0.56 0.05 Slovenia (1998) 7.9 0.89 0.11 0.83 0.11 CEEC average 0.68 0.06 0.42 0.04. EU average3 1.73 0.26 1.16 0.16 OECD average4 1.43 0.23 0.92 0.14 Source: OECD Employment Outlook (1997. 1999), CEM Slovak Republic, ELFS (1998), RZS (1999). 1/ Data from different years - 1997, 1998 and 1999 (in parentheses) 2/ Spending per unemployed: Ratio of GDP spending on Ul to unemployment rate (both in percentage terms. 3/ Does not include Luxemburg. 4/ Average for all OECD countries on Table AI.4. These numbers are generally lower than those of EU and OECD members, which devote more than 1 percent of GDP (0.25 percent of GDP per percentage point of unemployment) to unemployment insurance (Table AI.4). In this regard, unemployment insurance policies in CEE countries are closer to those of the United States, the United Kingdom and Southern Etrope, than to those of countries in Central and Northern Europe (see Box 1). Active Labor Market Policies Active labor market policies cover a vast array of programs, including job search assistance and counseling, training for unemployed and youth, employment subsidies, direct job creation and special measures for disadvantaged groups. Given the extensiveness and varied nature of all these different programs, we feel that a detailed discussion and cross-country comparison of their features and roles is beyond the scope of this paper. We therefore limit our analysis to spending in active labor market policies. The EU accession countries spend between 0.08 and 0.83 of their GDP in aclive labor market policies (Table 4). Even though these are not large arnounts, they reveal important differences across countries - i.e. Slovenia spends a share of her GDP that is ten times higher than that spent by Estonia. When we adjust this measure to account for differences in unemployment rates, these countries spend between 0.01 and 0.11 percent of GDP per percentage point of unemployment. 10 Box I. Support to tlhe Unemployed in Selected OECD and EU Accession Countries The ratio of GDP spending to the unemployment rate can be also interpreted as the amount out of each dollar produced by a labor force member that is spent on the unemployed. For instance, if the Czech Republic spends in Ul 0.04 percent of GDP per I percentage point of unemployment, we can also say that out of each dollar produced by a labor force member 4 cents are given to the unemployed in the form of Ul. When we think in these terns, we can see that on average the CEE countries spend 6 cents on passive labor policies out of every dollar produced by a labor force member, and an additional 4 cents in active labor market policies. In contrast, EU (OECD) countries spend 26 (23) cents in passive polices and 16 (14) cents in active policies out of every dollar. This is more than a sevenfold difference (Table Bl.l). However, substantial differences exist among OECD members. The Netherlands, Denmark and Austria are among the countries that spend the most per unemployecl worker, with 85 (55), 60 (34) and 32 (14) cents spent on passive (active) policies respectively. When compare to this group, the CEE countries seem to be spending even relatively smrller amounts in support of the unemployed. Table Bl.I Spending on Passive and Active Labor Market Policies' Passive policies Active policies Total % GDP Spending per % GDP Spending per h. GDP Spending per unempl.2 unempl.2 unempl.' EU average3 1.73 0.26 1.16 0.16 2.89 0.42 OECD average4 1.43 0.23 0.92 0.14 2.35 0.37 OECD - high spending Netherlands 2.81 0.85 1.80 0.55 4.61 1.40 Denmark 3.12 0.60 1.77 0.34 4.89 0.94 Austria 1.22 0.32 0.52 0.14 1.74 0.46 OECD - low spending United States 0.25 0.06 0.18 0.04 0.43 0.10 Japan 0.52 0.13 0.09 0.02 0.61 0.15 UK 0.82 0.12 0.37 0.05 1.19 0.17 Spain 1.41 0.09 0.81 0.05 2 22 0.14 CEEC average 0.68 0.06 0.18 0.04 0.86 0.10 Czech Republic 0.31 0.04 0.19 0.02 0.50 0.06 Estonia 0.08 0.01 0.08 0.01 0.16 0.02 Hungary 0.56 0.06 0.40 0.04 0.96 0.10 Poland 1.71 0.12 0.49 0.03 2.20 0.15 Slovak Republic 0.54 0.05 0.56 0.05 1.10 0.10 Slovenia 0.89 0.11 0.83 0.11 1.72 0.22 Source: OECD Employment Outlook (1997, 1999), CEM Slovak Republic, ELFS (1998), RZS (1999). I/ Data from different years - 1996, 1997 and 1999 (see Table 4). 2/ Spending per unemployed: Ratio of GDP spending on Ul to unemployment rate (both in percentage terms). 3/ No data for Luxemburg. 4/ Average for all OECD countries on Table AI.4. In contrast, countries like the United States, Japan and Spain spend much smaller amounts both on passive and active policies. All three devote between 6 and 13 cent; out of every dollar to Ul, and between 2 and 5 cents to active policies. These numbers are significantly closer to those of th, CEE countries. Hence, even though on average the CEE countries spend less on the unemployed than OECD and EU members, their policies are fairly similar to those of some OECD/EU countries. Data for a larger selection of OECI) countries can be found on Table AI.4. 11 Although, compared to the EU and the OECD, spending in active labor market policies in these six countries is fairly low on average, substantial variation exists among the former. For example, the United States and Japan spend less than 0.2 percent of GDP on active policies, while the Netherlands spend 0.8 percent (Table AI.4). This suggests that, in general, the CEE countries have followed closely the practices of the first group, hence devoting modest amount of resources to these programs (see Box 1). Relative Weight of Active and Passive Labor Market Policies When choosing between active and passive policies, the experience of the CEE countries is mixed. Estonia, Slovak Republic and Slovenia spend almost the same on both types of programs, measured as share of GDP per percentage point of unemployment, while the other three countries favor passive policies over active ones. In doing this, they are closer to the average OECD member. In fact most countries in the EU and the OECD devote more resources to their passive labor market policies than to their active ones, the exceptions being Italy, Norway and Sweden. Strength of Unions and Tax Burden on Labor We discuss here two of the main factors that influence wage formation and determine labor costs; namely the role of unions in the collective bargaining process and the tax burden on labor. We choose to concentrate on these two measures for the sake of comparability between our results for the CEE countries and Nickell's results for the OECD countries. In most European countries, with the exception of the United Kingdom, trade unions play a significant role in wage determination and, even when the number of unionized workers is fairly low, agreements reached under collective bargaining can extend to non-union members, thus covering a large fraction of the labor force. Furthermore, the impact that collective bargaining can have on wages is likely to depend on the degree of coordination that exists between different unions and employer associations, as well as on the extent to which the government is involved in the negotiation process. Similarly, payroll and other taxes can increase the cost of labor, even in the absence of upward pressure on wages. Although, in theory, part of the tax burden can be passed onto workers through lower wages, it is not unreasonable to expect that high taxes on labor may have a negative effect on hiring and firing decisions. We find that, compared to countries in the EU and the OECD, the CEE countries fall in the middle of the range in terms of union strength and coordination regarding: collective bargaining. In contrast, they have very high payroll and other taxes, well above those in Spain, Italy or the Netherlands - which set the upper limit in the EU. 12 Wage Bargaining: The Role of Unions and Employer Associations' 1 The CEE countries offer a fairly homogenous picture regarding wage bargaining and the role of unions/employer associations. During the last decade, these countries have all started to move away from a centralized wage bargaining system, and towards a more liberalized regime of wage negotiation, and these changes have been especially relevant for newly created firns. As a result, although union density and coverage are still high, there are important differences between the public and the private sectors, with unions holding a much weaker position in the latter. We present data on union membership and de facto union coverage,, as well as on the degree of coordination among unions and employer associations. Membership is measured as the percentage of all salaried workers who belong to a union, while coverage is captured through a coverage index that takes a value of 1 when collective agreements cover less than 25 percent of all salaried workers, 2 if this number is between 26 and 69 percent, and 3 when coverage is above 70 percent. Finally, the degree of union and employer coordination is measured through an index that ranks from 1 (low) to 3 (high). Union densitv ranges from a low 34 percent of all salaried workers in Poland, to a reasonably high 62 percent in Slovak Republic. Union coveraze, however., is large (above 70 percent) in most countries, with the exception of the Czech Republic and Estonia (Table 5). Table 5. The Role of Unions and Payroll Taxes in EU Accession Countries 1' 2 3 4 5 Union density Union coverage Coordination Payroll tax rate Total tax rate (%) index Union Employer (%) (%) Czech Republic 42.8 2 1 1 47.5 73.4 Estonia 36.1 2 2 1 33.0 63.3 Hungary 60.0 3 1 2 44.0 81.5 Poland 33.8 3 2 1 48.2 80.0 Slovak Republic 61.7 3 2 2 50.0 81.0 Slovenia 60.0 3 3 3 38.0 69.1 CEEC average 49.1 43.4 74.7 EU average4 44.4 23.5 53.0 OECD average5 39.6 19.5 45.4 Source: Columns I (except Slovenia) and 2 (except Czech Republic and Hungary) from ILO (1997) World Labor Report 1997- 98 and OECD Employment Outlook (1997); data for Slovenia, the Czech Republic and Hungary estimated by the World Bank. Columns 3, 4 and 5 from (i) Deloitte Touche Tohmatsu Intemational - Taxation in Eastem Europe (1997), (ii) Bank of Estonia, (iii) Polish Agency for Foreign Intestment, (iv) EIU (1998), and (v) Labour Regulalions in Eastern Europe, Business Eastem Europe. I/ All data for 1995, except for Denmark, Ireland, Italy, Spain and Sweden (1993), and estimated data for Slovenia. 2/ Percentage of salaried workers that belong to a union. 3/ 1: less than 25% of salaried workers are covered by collective agreements, 2: between 26 andi 69% are covered, 3: 70% or more are covered. 4/ No data for Greece and Luxemburg. 5/ Average for all OECD countries in Table AI.5. 11 Annex III contains a detailed discussion on these issues for each one of the EU accession countries considered in this paper. 13 However, this does not translate into high union bargaining power due to low coordination among unions (Table 5). In fact, although sometimes basic guidelines are established through tripartite negotiations with the government, most wage bargaining takes place at the industry or the firm level and, in practice, in the private sector wages are set by employers. Figure 2. Tax Burden on Labor in Selected OECD and EU Accession Counthies Tax Burden on Labor - Payroll tax rate (%) 60 50 30 20 Tax Burden on Labor- Total Tax Rate (Y.) 90 so 70 50- 40 30 10 Source: OECD Employment Outlook (1999). In contrast, EU and OECD members present a more varied picture. Both union density and union coverage differ substantially across countries, with the United States and Sweden representing the two extremes (Table AI.5). In addition, coordination levels have changed 14 substantially over recent years, with no identifiable unique trend. For exalmple, unions and employer associations in Scandinavian countries and Central Europe tend to coordinate their wage bargaining activities, while very little coordination exists in the United Kingdom or the United States (OECD, 1997; Nickell 1997). This places the CEE countries somewhere in the middle of the range, togetherwith countries like Belgium or the Netherlands. Payroll taxes Payroll taxes in Eastern European countries are high, even for Wmestern European standards. Rates range from :33 percent in Estonia to 50 percent in Slovak Republic, while only France, Italy, Spain and Sweden have rates above 30 percent, and in no case higher than 40 percent (Table 5 and Figure 2). During the transition period the fiscal pressure to maintain high payroll taxes, or even to increase them, was extremely strong. Unemployment was on the rise and this forced governments to continuously increase spending on unemployment insurance systems and active labor market policies. An aging population and declining employment rates also put additional strain on the public pension system, through falling revenues and increased, outlays. Finally, a decrease in other types of lax proceeds due to the economic contraction obliged to look for alternative sources of revenues to cover public expenditures, in particular for health and social assistance. Despite these problelns, some countries have recently started to lower their payroll taxes (e.g. Hungary), albeit at a very slow and gradual pace, and there is reason to believe that other will follow as the economic situation improves, bringing unemployment down. Moreover, the tax burden on labor exceeds the amount of the payroll tax. Consumption and income taxes also affeci: labor income and are part of the tax wedge between labor costs and take-home pay. When both consumption and income taxes are considered, the total tax burden on labor varies greatly between countries and Eastern Europe continues to exhibit the highest total tax rates (Table 5 and Figure 2)12. Thus, according to the evidence presented in this section, we can say that, by the end of the 1990s, the EU accession countries had adopted labor market institutions that indeed resembled those in EU countries. However, in doing so they followed up to neither the most nor the least flexible 'role models', but opted instead for a fairly moderate set of institutions, hence placing themselves in the rmiddle range of the flexibility scale. It is only with respect to payroll taxes that CEE countries stand at the extreme of the range. 12 See also Table Al.5 for EU and OECD data. 15 III. Output and Labor Market Dynamics in the Transition Before trying to assess the role played by labor market institutions in shaping the labor markets of CEE countries, it is imporTuant to consider the economic and social context in which these institutions were introduced or modified. The past decade has beerL a time of dramatic transformnation in Central and Eastern Europe. The fill of the Soviet Block and the transition from command to market economy produced remarkable c'.ianges in the social, political and economic infrastructures of CEE countries. From an economic point of view, these changes were most important in real output (as measured by GDP) and factor nmarkets, particularly in labor allocations, as the rules of economic interactions between members of the ex-soviet block, and between them and the rest of the world changed dramatically with the introduction cf market-based practices. While in the command-economy system the risk of open unemployment and dislocation due to economic fluctuations was virtually nil, efficiency in the allocation of resources vas poor. The rewards that market systems assign to different degrees of human capital or to specific ,kills were practically undifferentiated, and labor and capital productivity was low. Wages in the command production system were centrally determined and highly compressed. Labor mobility was :or all practical purposes non-existent. In a nutshell, job security was the prize, but this came at the ,cxpense of efficiency and distorted market incentives, that eventually generated. fatigue in the socialist ?roduction model. Output As the old socialist economic model was breaking apart, real output collapsed in every country of the soviet-block, albeit with different intensities (Figure 3). In response, the new leaders of the CEE economies formulated reformi strategies focusing on macroeconomic stabilization and structural reforns at the micro level. Modem market structures were gradually introduced. Labor markets adjusted to the new economic environment by reducing employment and labor force participation, especially of women, which was unusually high in CEE, and by increasing open unemployment to rates unseen in this part of the world. Figure 3. Evolution of GDP in EU Accession Countries, 1990-2000 GDP Dvnamkas 260 . 250 -4- (Czecb Re pb_ E- 140 * 1 a-- 130 - IRa,- a* 2bn-jk Repb2i A 110 - -rei ._- ~ 2 00 -e . - ' Y -'-' = 3 = = '' '' iio -~~~~- 70 1990 1991 1992 1993 199J "99 1"6 9 2993 129 2o , ~~~~~~~Year Source: SIMA (WDI database and Unified Survey FYOI database, National Authorities, IMF and World Barik country team estimates. 17 In addition to changes in the level of GDP, the restructuring process involved a significant shift in economic activity across sectors. By 1998 the contribution of agriculture to total GDP had fallen in all countries to at least half its 1989 level (Table 6). A decline also occurred in the industrial sector over the decade, with its share of GDP falling between 7 percentage points for Slovenia (from 45.6 to 38.6 percent) and 27 percentage points for Slovak Republic (from 58.5 to 31.6 percent). As a result of these changes, the service sector share of GDP grew significantly. Table 6. Output per sector in EU Accession Countries (% of GDP) Agriculture Industry Services Private sector 1989 1998 1989 1998 1989 1998 1990 2000 Czech Republic 8.5 4.2 57.7 39.2 33.8 56.6 5.0 80.0 Estonia 21.0 6.3 40.6 26.7 38.4 67.0 10.0 75.0 Hungary 15.6 5.5 46.7 28.2 40.7 66.3 20.0 80.0 Poland 12.9 4.9 52.4 32.0 34.7 62.4 25.0 70.0 Slovak Republic 9.4 4.4 58.5 31.6 32.2 64.0 5.0 75.0 Slovenia 5.5 4.0 46.6 38.6 48.9 57.4 10.0 55.0 Source: The World Bank (2000) and EBRD Transition Report (2000). 1/ Data for 1997 instead of 1998. 2/ Data for 1991 instead of 1990. Even more drastic that these sectoral shifts, though, was the transformation of these economies from public sector to private sector dominated economies. The share of GDP produced by the private sector went from a low 5 percent in the old Czechoslovakia in 1990 to as much as 80 percent in the Czech Republic and Hungary in 2000. Only in Slovenia was this transformation less intense and the private sector, while dominant, is smaller than elsewhere. Employment, Unemployment, Labor Force Participation and Wages The transition had significant repercussions on labor market outcomes, in terms of both levels and composition. The level of employment responded to the initial output decline (Figure 4). As a result, aggregate employment fell substantially at the beginning of the 1990s and continued to decline in most countries, although at a slower pace, throughout the decade. However, while output started to grow in the mid nineties and has in some cases surpassed the pre-transition levels (Poland, Slovenia) employment levels have not recovered. 18 Figure 4. GDP and Aggregate Employment Levels in EU Accession Counties (1990 = 100) Czech Republic, 1990-200? 1 990-o20 160 ----- -- 160 1 140 - - - - - - - - - -N 130 - 110 .-----__.._.__ III11 I19 -u0:- -=zz-i-------- 14D -- ----- -- __ _ __ _ _ 90 ICo__ ____ . __ _._ ._ _ los*1c 40o_ _ __ __ __ __ 11,____.___ _______ __ 1990 1991 102 1993 1994 1993 146 1997 1992 IYW '.0 1999 140 1992 1 199) 10 195 1996 997 1940 I"* so Yew Hungary, 1990-2000 __ _.200 _, 0.__ 40 ~ ~ - - -40--- 3 10 _.___ __ . __ .9-~,-~w __ _1_. __ 10 o_. _ _ _ _ _ 40 130 - -- 90 _ - _______ _______ _ 120- 2O I+ D' ' t° \ - - -__-___ 710 110§, - -. _ _ > '______ 40 -- --0- 70 - - -_ __ _ _ _ _ __ __ _ _ 60 60 1990 1991 I99 1993 199 4 199 1996 1997 199W 1999 mm ml91 IWD 199W 9194 IW4 1996 99 IW 9 W 19 " M 1M _ Y¢s~~~~~~~~~~~~~e Ytr Slovakia, 1990-2000 *oha, 1990-i 140 . ----- - --- - - 13 ' 120 ___________ no~~4 W* -- - ----10__ 120 _I - __ 120. ___ ._ . --~~'-~-- " _ -i "° -- - ----' -- 110' _ --,__._ ___ __- C -_ i In _ - - _,_____ ____ 940 -U- - = -- ------,_ _ _ _ __ ____* *0----Gj=,_- - 4 '- - 7't W __. _ _ _ _ _ __ _-- _- . _ . Z-U==.-._ 70 - ___ _ _ E__ _ 70------- ----------- - 60 1990 1991 1997 1903 IM9 199 19100 1917 1999 I999 719 lI 1991 1Oll 191 101 10 19* I"? 199 I-' 9101 Source: Employment and Labor Market :ountry reports prepared by the European Training Foundation (1999) and EBRD Transition Report (I1999). The flip side of such enmployment performance was, not surprisingly, a. substantial increase in uinemployment. With the excep-tion of the Czech Republic, all countries saw their unemployment rates mnove rapidly to double-digit figures during the early 1990s (Figure 5). Although some of themi have been able to bring those numbers down in recent years, high .inemployment is still one of the, most important concerns to policy makers in the region. 19 Figure 5. Unemployment in EU Accession Countries 100% Ui;employment rate, 1993-1999 (Survey) 16 -" 14 12 '9- ~~~~~~~~~~~~~~~~~~~~~Czech Republic 6 -_ Slovenia 4 2 0 1991 1594 1995 196 99 199I 1999 Year Source: Employrnent and Labor Market country reports prepared by the European Training Foundation (1999), EBRD Transition Report (1999), Central Bank of Estonia, and OECD Employment Outlook (1999). However, unemployment is not the only margin of adjustment when employment creation is weak. In the light of dim employment prospects, jobless workers can decide to exit' the labor force, instead of looking for a job. During the transition labor force participation rates fell substantially in these countries (Table 7). This fall was so large in some cases that it brought overall participation rates back to their 1960-64 levels, after continuous increases in the 1970s and 1980s. In addition, changes in the labor market, however, were not limited to the ups and downs of employment, unemployment or labor force participation. The substitution of centralized commands by market forces as the mode of labor allocation also altered the composition of these pools of workers, as certain worker characteristics become more valuable than others in the labor market. There was significant labor relocation away from agriculture and industry, and toward services, as a consequence of sectoral shifts in economic activity. This relocation was accompanied by a shift in labor demand towards a different skill mix and higher education levels, affecting the level of 'employability' of different types of workers. As a result, more and more the unemployed became either younger or older workers, or workers with low education or skills, giving rise to pattems that closely resembled those of the unemployed in the EU (see Box 2). 20 Box 2. Similarities in the Ulemographics of the Unemployed in Slovak Republic and Spain The evolution of unemployment in the CEE countries has been such that the characteristics of the unemployed resemble substantially those of unemployed workers in most EU countries. To illustrate this point we study the characteristics of the unemployed in Slovak Republic in 1994-2000 and compare them to the characteristics of the unemployed in Spain, also a high unemployment country, in 1997. Unemployment rates in Slovak Republic vary widely with education and age. Consistently unemployment rates have been negatively correlated with education, so that workers with a college education have performed much better than those with primary or even secondary studies (Table B2. 1). In addition, differences across education groups have widened over time. While in 1994 the unemployment rate for workers with an apprenticeship degree was 15 percent, compared to 4 percent for those with a college degree, in 2000 these rates were 20 and 5 percent respectively. That is., while in 1994 the unemployment risk of a worker with an apprentice degree was three times that of a worker with a college degree, in 2000 the unemployment risk of the former was five times that of the latter. Table B2.1 Unemployment Rates by Education Levels, Slovak Republic (%) 1994 1995 1996 1997 1998 1999 2000 Less than basic 44.2 39.5 64.3 66.7 88.5 NA NA Basic 27.4 26.9 23.7 27.6 25.8 33.60 39.0 Apprenticeship low 14.4 13.1 10.8 11.0 12.7 17.40 20.6 Vocational low 13.6 12.7 10.0 11.3 10.8 13.95 19.9 Apprenticeship complete 15.3 9.5 8.1 10.6 9.6 15.60 19.6 Vocational complete 9.8 7.1 7.4 8.2 8.7 13.10 14.0 Grammar 13.1 14.3 11.8 14.6 13.8 17.12 17.7 University (+) 3.8 2.9 3.4 3.2 4.2 '5.50 4.8 Source: Slovak Labor Force Survey Unemployment has also been much higher among young workers (15 to 24 years of age) than among prime-age ones (Table B2.2). However, unlike in the previous case, relative differences across the two groups have been fairly stable over time, with unemployment rates increasing by about 40 percent for both groups between 1994 anid 2000. As a result, the unemployment risk of a young worker has remained at a level that is about twice that of prime age workers. In contrast, unemployment has been systematically lower among older workers than amnong prime-age ones. This, however, responds to differences in participation rates between both groups rather than to a relative preference for older workers among employers. What is rnore importantly is that such a difference has become smaller over time, as the risk of unemployment among older workers has increased by 65 percent compared to 40 percent for prime-age ones. Table B2.2 LJnemployment Rate by Age Groups, Slovak Republic (%/f) 1994. 1995 1996 1997 1998 1999 2000 15-24 26.5 22.4 19.4 23.5 26.6 33.7 35.9 25-49 11.5 10.4 9.2 9.8 9.5 13.8 15.8 50-64 8.2 7.1 5.7 6.6 6.8 10.2 13.4 Source: Slovak Labor Force Survey. Finally, when we compare the characteristics of the Slovak and the Spanish unemployed we find them to be fairly similar - unemployment rates are high among the least educated and the young (Table B2.3). Table B2.3 IJnemployment Rate by Education and Age Groups, Spain, 19O98 (%) % unemployed in "la unemployed in group group Education groups _ Age groups Less than upper sec. 17.0 (12.6)' 15-24 34.1 Upper Secondary 15.3 ( 10.0) 25-49 16.5 College (+) 13.1 (8.5) 50-64 10.3 Source: Spanish Labor Force Survey. 1/ Data for male unemployment between parentheses. 21 Finally, real wages fell in most countries as a consequence of rising inflation levels. However, the decline was perhaps less than necessary. Real wages needed to decline to facilitate the reallocation of labor, but in some countries like Hungary, Poland, real wages (when measured with a production price index) did neither fall rapidly nor did they fall enough to facilitate the reallocation of workers and even in some countries like Slovenia real wages actually grew, rather than decline (Table 8).13 This reduced job tumover and prevented a more rapid absorption of the growing unemployment. Table 7. Labor Force Participation Rates in EU Accession Countries (%-) 1960-64 1970-74 1980-84 1990-94 1995-99 Czech Republic' All (15-64) 68.46 73.82 76.08 73.40 72.20 Female (15-64) 49.14 61.62 68.64 69.30 64.00 Estonia All (15-64) 75.70 81.40 82.00 79.40 78.70 Female (15-64) 67.30 77.60 78.90 75.90 74.90 Hungary All (15-64) 68.40 72.60 73.30 68.60 69.00 Female (15-64) 46.90 57.20 62.10 59.30 60.30 Poland All (15-64) 75.40 76.50 75.90 73.40 71.80 Female (15-64) 62.10 67.40 67.70 65.10 65.60 Slovak RepublIc2 All (15-64) 66.40 68.90 76.40 70.80 69.00 Female (15-64) 47.30 56.10 69.30 65.10 62.80 Slovenia All (15-64) 65.90 65.10 74.40 70.70 70.20 Female (15-64) 44.20 46.20 67.20 64.80 64.80 Source: Martin Rama and Raquel Artecona: "A database of Labor Market Indicators across Countries" Unpublished, The World Bank. I/ Data for 1990-99 from OECD. Data for 1960-84 estimated by the authors. 2/ Data for 1990-99 from Lubyova (1999). 13 In spite of these developments, unemployment remained low in Slovenia as a result of the privatization process thai generated low dynamics in the labor market. 22 Table 8. Real Wages in EU Accession Countries: Growth Rate and L,evel 1990 1991 1992 1993 1994 1995 1996, 1997 1998 1999 Czech Republic real growth (%) -26.3 10.2 3.7 7.7 8.7 8.8 1.9 -1.3 4.5 index (1990=100) index 100.0 73.7 81.2 84.2 90.7 98.6 107.3 109.3 107.9 112.7 aftler initial decline (1991=100) 100.0 110.2 114.3 123.1 133.8 145.6 148.3 146.4 153.0 Hungary real growth (%) -0.2 -3.7 1.7 -0.5 5.1 -8.9 -2.6 3.4 3.5 index (1990=100) index 100.0 96.3 97.9 97.4 102.4 93.3 90.9 94.0 97.3 afterinitialdecline (1991=100) 103.8 100.0 101.7 101.2 106.4 96.9 94.4 97.6 101.0 Estonia real growth (%) 15.0 -59.4 2.3 10.1 6.2 2.1 7.6 6.7 3.7 index(1990=100i index 100.0 115.0 46.7 47.8 52.6 55.8 57.0 61.4 65.5 67.9 after initial decline (1992=100) 100.0 102.3 112.7 119.6 122.1 131.5 140.3 145.4 Poland real growth (%) -24.4 -0.3 -2.7 -2.9 0.5 3.0 5.7 6.8 index (1990=100) 100.0 99.7 97.0 94.2 94.7 97.5 103.1 110.1 decline prior to 1990 Slovak Republic real growth (%) -5.6 -26.3 8.9 -3.8 3.0 4.3 7 l 6.5 2.8 index (1990=10(0) index 100.0 73.7 80.3 77.2 79.5 82.9 88.8 94.6 97.3 afterinitialdeclinie (1991=100) 100.0 108.9 104.8 107.9 112.5 120.5 128.4 132.0 Slovenia real growth (%) 12.0 0.7 11.7 4.7 5.1 5.1 2.4 1.6 index (1990=100) 100.0 112.0 112.8 126.0 131.9 138.6 145.7 149.2 151.6 no initial decline ,'ource: Employment and Labor Market country reports prepared by the European Training Foundation (1999), and Central Bank of l,stonia. .I Hungarian Statistical Office. :!/ Polish Statistical Office. 3/ Slovak Statistical Office. 4/ Data for 1993-99 from Slovene Statistical Office (rate of growth of gross real wages). 23 IV. Whalt Explains These Labor Market Dynamics? Labor market dynamics can be seen as the outcome of interactions between labor market institutions and other economic forces. In the case of CEE countries, the fall of the Soviet Union and the transition from commamd to market economy were the sources of trermendous economic shocks that necessarily interacted with the labor market. Thus, whatever impact institutions may have had in the determination of labor market dynamics, they were clearly not the only factors affecting labor market outcornes in CEE during the transition years, particularly during the early transition. Factors outside the labor market had an enormous impact and were the driving force behind the significant shifts observed in the labor market at the beginning of the, transition. Big changes in employment, unemployment, and labor force participation could not have happened without stabilization policies and structural reform measures. The relevant question is whether the newly introduced labor market institutions facilitated (or hindered) these changes and to which extent they affected the structure and composition of supply and demand. This section analyzes first, labor market performance during the transition from the perspective of the impact of other reform policies that affected labor market outcomes. We pay particular attention at the role of macroeconomic stabilization and structural reform policies, and their impact on labor market outcomes. Second, we turn our attention to a discussion of the role of labor market institutions. Macroeconomic Stabilization Policies Initial conditions were an important factor in shaping dynamics of the transition process, rather than its outcome, since large heterogeneity existed among CEE economies. The degree of centralization and state control, imbalances in macroeconomic fundamentals, both domestic and external, the level of public indebtedness and the degree of interaction with the West varied tremendously among CEE countries before the transition. This heterogeneity, in conjunction with the developments in the political elite structure, influenced the policy agenda of reform in a number of areas, including the speed of reforms, how much FDI was embraced as a restructuring tool, the mechanism of privatization of state assets, the rigidity in the imposition of hard budget constraints, the degree of fiscal adjustment, and the design of the monetary policies and the exchange rate regime. Through many of these channels, the dynamics of the labor markets were affected as the CEE economies redefined their economic interactions. The need to cope with macroeconomic stabilization in the early stages of the transition focused the authorities to implement reform strategies that affected lalbor and other factor markets. Inflation was an important source of concern; particularly in Estonia where annual inflation rates peaked at 1,069 percent in 1992, but also in Poland and Slovenia (Table 9). Tight monetary policy was essential to establish control over inflation. Some countries also opted to use the exchange rate as a nominal anchor in an attempt to cope with inflationary pressures. This, with a loose fiscal stance limited credit to the private sector in many countries, slowing down the absorption of the unemployed. 25 Table 9. Inflation Rates in EU Accession Countries (%/6) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Czech Republic 10 57 11 21 10 9 9 9 11 2 4 Estonia 23 211 1069 90 48 29 23 11 8 3 8 Hungary 29 35 23 23 19 28 24 18 14 10 10 Poland 586 70 43 35 32 28 20 15 12 7 12 SlovakRepublic 10 61 10 23 14 10 6 6 7 11 9 Slovenia 550 118 207 33 21 14 10 8 8 6 8 Sources: SIMA (WDI database and Unified Survey FYOI database), National Authorities, IMF, and the Bank country team estimates. I/ Year-to-year change in annual Consumer Price Index, in percentage. The need to ensure fiscal sustainability forced the authorities to impose fiscal discipline and strong fiscal adjustment measures. As a result, fiscal policy changed its supportive role. This in tum reduced the availability of prevailing support mechanisms to the economy, both in the form of price supports and direct or indirect subsidies de facto imposing hard budget constraints to public enterprises and forcing their restructuring (Table 10). Table 10. Subsidies to the Enterprise Sector in EU Accession Countries (% of GDP) 1989 1993 1994 1995 1996 1997 Czech Republic 25.0 4.4 3.1 2.7 2.2 2.4 Estonia 0.9 0.5 0.4 0.3 Hungary 12.1 4.1 4.5 3.8 3.9 3.3 Poland 12.9 3.0 3.3 2.9 2.5 2.4 Slovak Republic 25.0 4.8 3.2 2.8 2.4 22 Slovenia 1.6 1.6 1.2 13 Source: IMF (1994), World Bank (2000). Overall, macroeconomic stabilization policies helped to impose hard budget constraints on the CEE economies and encouraged enterprise restructuring, which forced the reallocation of labor and other factors of production from inefficient sectors and activities to efficient ones. This produced enormous shifts in labor demand (and supply) moving away from industrial and agricultural activities into services, and from the public to the private sector. In conjunction with price liberalization policies, the imposition of hard budget constraints triggered the breakdown of state enterprises and helped to encourage the development of a new private sector. At the same time it fostered enterprise sector restructuring, changing the face of the CEE labor markets. As a result, unemployment appeared as a real and open phenomenon in CEE, one that will require the attention of the authorities for years to come. Labor force participation rates also changed significantly, particularly with the withdrawal of females from the labor force and the use of early retirement schemes in some countries to cope with the growing unemployment. These changes reshaped labor markets in CEE and brought them to resemble European labor markets 26 Structural Reforms Structural reforms played an even more important role in the shaping of the dynamics of labor markets during the tran isition. Market institutions were introduced in 'CEE via structural reform policies that liberalized trade and domestic prices, eliminated many state monopolies (particularly important was t.e monopoly in the banking systems), privatized state enterprises, promoted (or abstained from hindering) the development of a dynamic private sector, facilitated competition and efficiency, and redefined property rights and the legal and regulatory systems. These reforms were critical i:o reshape the new CEE economies and had a dramatic impact on labor and other factor markets, encouraging reallocation and restructuring in the real sector. With the liberalization of prices, the removal of restrictions to private sector development and the reduction in direct and indirect subsidies hard budget constraints were imposed to state firms, many of which could not cope with the new market conditions and the competition of the growing private sector. The state sector declined, shedding labor while the private sector was growing. However, resources released from the public sector were not fully absorbed by the private sector. In part this was the result of skills mismatch, as the new production platforrms demanded higher educated vvorkers, and workers with different skills, but the lack of absorption capacity was also the result of other factors including a weak financial sector that was not capable to intermediate resources effectively, thus limiting the availability of credit to the new private sector. Banking crises compounded the credit problem affecting the capacity of firms to grow and generate more employment opportunities. As a result of all these factors employment declined and unemployment grew rapidly in the newborn market econojmies. As mentioned above, employment levels have not recovered despite the return of strong output growth, thus increasing productivity throughout the 1990s (Figure 6). Figure 6. Evolution of Aggregate Employment in EU Accession Countries Emplo,vnet Dynamncs 95 lIl95 - --8>---- - ---._ _-> , . .~~~~~A -96.. L'. E -_-irch Rcq,bIc ,,_ E70}-_P,.. 65 - SDvak Rq,pbc -sSbvenia . 1990 1991 1992 993 1994 1995 1996 1997 1998 1999 N5 Yea, Source: Employment and Labor Market country reports prepared by the European Training Foundation (1999) and EBRD Transition Report (1999). 27 While the factors mentioned above were common in most transition economies, the dynamics of labor markets varied from country to country as a rainbow of policy options were implemented. Some countries, like Poland, used early retirement schemes to cope with the growing open unemployment, others, like Slovenia, used the privatization process to slow down or even delay the adjustment of labor, maintaining the structure of employment as much as possible and reducing the speed of reform. The use of a mix of different policies explain the different labor adjustment dynamics. Privatization played a critical role in shaping these labor markets dynamics, accelerating or retarding the adjustment in the real sector and turnover in labor markets. Different modalities of privatization of state assets were introduced, from restitution and insider's buyouts (sometimes at a discount) to management control and strategic investors involvement. Mass privatization schemes and direct sales to outsiders (both domestic or foreign) completed the picture (Table 1 1). These different privatization techniques implied different degrees imposition of hard budget constraints to the firms and thus different adjustment paths. Employment, unemployment and labor force participation levels were affected by the privatization options used in combination with other structural reforms policies and the degree of flexibility of labor markets. For example, in Slovenia job turnover was slow as most firms were privatized to insiders (managers, workers and pensioners) maintaining the status quo. Estonia and Hungary focused more on attracting foreign strategic investors, accelerating the adjustment process and boosting job turnover. The initial reform focus was on privatization and restrcturing of state enterprises rather than on facilitating the development of new firms in the manufacturing sector. With time small and medium size enterprises (SMEs) started to emerge in the manufacturing sector, in spite of the limitations imposed by the weak credit markets. With hindsight more support may have been needed to SMEs which have become not only one of the key engines of growth, but also one of the few areas were new job opportunities have been created in the manufacturing sector. Privatized firms engaged much more in job destruction than in job creation, relying on increases in productivity to survive. 28 Table 11. Privatization Modaliities for Medium and Large Enterprises in EU Accession Countries Insider Buiyouts Mass Privatizatlon Program Sales to Outsiders Other/5 Equal Access Large Little for the Whole Concessions foreign lforeign Employees" Managers'2 Population to Insiders share'3 share'4 Czech Republic Primary Secondary Tertiary Estonla Secondary Primary Tertiary Hungary Secondary Prmary Tertiary Poland Primary Secondary Slovak Republic Primary Secondary Slovenia Secondary Primary Tertiary Source: World Bank (2000). 1/ Employees' share exceeds 75 percant of total assets privatized. 2/ Management share exceeds 25 percent of total assets privatized. 3/ Foreign share is more than 25 percent of total assets sold. 4/ Foreign share is less than 25 percent of total assets sold. 5/ Includes restitution, and assets sales through insolvency proceedings. Other economic policies (or the lack of thereof) also affected the dynamics of key labor market variables. For instaice, the housing stock was determined by the needs of the previous production model, thus limiting the capacity for labor mobility and reallocation during the transition. This bottleneck was reinforced by a poorly develop (sometimes non existent) mortgage market. As a result, regional disparities in labor market outcomes emerged. Labor Market Institutions From the previous analysis clearly emerges the conclusion that labor market dynamics in CEE countries were significantly affected by the structural reform agenda. The sharp decline in total employment and relative increase in private sector employment, the shift in economic activity and reallocation of labor between sectors, the changes in skill mix and the reduction in real wages that were observed over one decade would not have happened without wide-ranging structural reforms. What has, then, been the impact of labor market institutions? Should we consider it as modest and relatively uni:mportant? Although data limitations do not permit us to perform a 14 ;rsac omk thorough econometric analysis , we use evidence drawn from previous research to make a number of observations that invite to a more cautious conclusion. In particular, we believe that labor market institutions may have contributed to shaping the adjustment of key labor market variables, affecting the rhythm of reform, even though their impact may have "masked" by the dramatic impact of other reforms. First, employment levels have not recovered. Although output started to grow in the mid- nineties and has in some case surpassed the pre-transition levels (Poland, Slovenia), employment levels have not followed the trend. In other words, the correlation between employment and growth, although positive, has been weak and employment continues to lag behind output recovery (Figure 7). 14 Another caveat is the impossibility to evaluate the degree of enforcement of regulations and policies. 29 Figure 7. Correlation between GDP and Aggregate Employment Growth Rates in EU Accession Countries Czech Republic, 1991.1999 Estonia, 1991-1998. . , .,.m .bo -. .-w .,W ,. 0 2I D . , T -1400 ___.O 4_0 40 AW ... 00 W .1b-1 .0 <{ 0 5 1 y A T h __ .__ _ .......... _.F._ .... ____ ___.___ E , R =0.09641 .1603x-2.7864___---- R= 0.3844 GDP go.lh nu GDP V*.ib o Hunggary, 1991-1998. Poland, 1990-1997. I40 -20 .10 0 4D 4. .'0 Co 0 Z0 . - -- ----(2 O O- 0.5769x-2.6613 y0.Y-_7,. 3.49 _ - _ CDP grwtb di GDP grwom rat Slovak RepublIc, 1990-1997. Slovenla, 1990-199S. , ... . ~~~~~~~~~~~__ .......__ .. __ r--- ---------> _._ E t)--- 15 --° < 6 + -- 1, r --- _i,° _4 --- … I------ ----' ---F_ - __ - ----60 ,7_ 4 - , E ! y 0.3993x - 1.8529 - __ __ -0.394x-2.1332 _32 GDP g th r.7 GDP gmrowuh rie Source: Employment and Labor Market country reports prepared by the European Training Foundation (1999), Statistical Office of Estonia, and OECD Employment Outlook (1999). This is obviously a source of concern as employment-to-population ratios in CEE are among the lowest among EU and OECD countries (Table AI.8). Theory and past research does suggest that employment levels may be affected negatively by job security provisions (Lazear, 1990, Bertola, 1990, Hopenhayn and Rogerson, 1997). For example, Lazear (1990) using data from 22 countries (from Europe and OECD) over a period of 29 years, shows that job security provisions - by increasing both the costs of hiring and laying off workers - reduce the 30 employment-to-population ratio and increase unemployment. A similar conclUsion is reached by Heckman and Pages (2000) who analyzed data from Latin America and the Caribbean. Although the view that regulations have no substantial impact also prevail in the literature (Blank and Freeman, 1994; Freeman, 2000), one cannot dismiss the possible negative impact of regulations on total employment. Table 12. Short- g,nd Long-Term Unemployment in EU Accession Countries 1993 1994 1995 1996 1997 1998 1999 1993-1998 Czech Republic SRU' 3.2 3.0 2.8 2.7 3.3 4.5 5.5 3.3 LTU2 0.7 0.8 1.3 1.2 1.5 2.0 3.3 1.2 % LTU3 18.3 21.5 30.6 31.3 30.5 31.2 37.1 27.2 Estonia SRU 4.7 4.6 6.6 4.5 5.2 5.2 5.1 LTU 1.8 3.0 3.1 5.5 4.4 4.6 3.8 % LTU 27.6 39.5 31.9 55.0 45.8 46.9 42.7 Hungary SRU 8.1 6.3 5.5 5.0 4.7 4.3 3.6 5.6 LTU 3.8 4.4 4.7 4.9 4.0 3.5 3.5 4.2 % LTU 32.2 41.3 45.6 49.8 46.5 44.3 49.5 43.3 Poland SRU 9.9 10.1 9.0 8.6 7.0 6.6 8.5 LTU 5.0 6.4 6.2 5.7 4.5 4.0 5.3 % LTU 33.5 38.6 40.5 40.0 39.1 37.9 38.3 Slovak Republic SRU 8.5 8.0 6.1 5.3 5.7 6.0 8.7 6.6 LTU 3.7 5.7 7.0 5.8 5.9 5.9 8.4 5.7 % LTU 30.2 41.6 53.1 52.7 51.5 49.7 49.1 46.4 Slovenia SRU 2.9 2.3 1.8 2.4 2.1 1.8 2.2 LTU 6.2 6.8 5.6 4.9 5.3 6.1 5.8 % LTU 68.5 75.0 75.5 67.3 71.5 77.8 72.6 CEE average % LTU 35.0 42.9 46.2 49.3 47.5 47.9 45.24 45.1 EU average % LTU 41.45 42 .86 45.8 45.3 45.6 43 97 41.27 44.1 OECD average % LTU 39.15 40.46 43.2 42.7 43.0 41.17 39.07 41.6 United States % LTU 11.5 12.2 9.7 9.5 8.7 8.0 6.8 9.5 Sources: OECD-CCET Labor Market Database 1990-1997, Slovene Labor Force Survey, and Estonian Labor Force Survey (1995 and 1997). 1/ Short-term unemployment rate. 2/ Long-term unemployment rate. 3/ Percentage of total unemploymeni: due to long-term unemployment. 4/ Includes only the Czech Republic, Hungary and Slovak Republic. 5/ Does not include Austria. 6/ Does not include Finland. 7/ Does not include Ireland. Second, long-term inemployment is high among CEE countries, another feature that has been found as associated with stricter employment protection (Bentolila and Bertola, 1990; Nickell, 1997; Nickell and Layard, 1998). The unemployment pool of CEE economies has remained a fairly stagnant one, with low worker turn,over and increasing numbers of long-term unemployed individuals. Unemployment inflows and outflows, that is workers moving in and out of unemployment, represented on average less than 10 percent of the overall stock of unemployed individuals. This lack of dynamism meant that the probability that the average 31 unemployed individual left the unemployment pool was small and, thus, over time more and more individuals became unemployed for more than a year. In fact, in most countries of the sample the share of long-term unemployed has grown throughout the 1990s (Table 12). In this respect, CEE countries do resemble other European countries. In conltrast, long- term unemployed do not represent more than 7 percent of the pool of unemployed in the US - which has by far, the most flexible labor market. In sum, although no firm conclusion can be reached, it is worthwhile notirng that these two features - low job creation and high long-term unemployment - have often been identified as associated with inflexible labor markets. Both may become the source of social tensions and increasingly weigh on public budgets. Third, it is hard to imagine that changes in the age and sex comnposition of the labor force have not been - at least partly - the result of institutional changes (introduction of unemployment benefits, early retirement schemes, reduction of child care support). Indeed, the overall decline in labor force participation rates that we described in Section HI (Table 7) masks significant differences across demographic groups, with participation rates falling the most among women and older workers. The reduction in the amount of child care support provided by the state and the subsequent increase in child care prices, combined with a decline in the number of child care centers and the tightening of social assistance for mothers with small children, led numerous women to exit the labor force to attend their children. Similarly, the existence of support for the unemployed made it easier for employers to dismiss workers and early retirement schemes made it more attractive for older workers to exit the labor force. In many countries, those schemes were used as a device to control unemployment among this particular group of workers. High exit rates among certain groups of workers thus helped keep the unemployment rate below potentially higher levels. For example, in Hungary, the labor force participation rate fell to 11% for women aged 55-64, and to 30.8% for men in 1999 (compared to an EU average of 30.5% and 52.7% respectively) Moreover, 'selected exit', combined with the labor market entry of large numbers of young, more educated workers, substantially altered the overall composition of the labor force in the CEE countries. Whether labor force participation rates can remain at low levels for long periods of time without incidence on the sustainability of benefit systems may become an issue in some of these countries. Fourth, CEE countries stand out relative to EU countries with respect to payroll taxes (and overall tax burden on labor) which are at the high end of the range (Table 5). While past research has not shown clear evidence of the impact of high labor taxes on the level of employment, there is the presumption that high taxes on labor create incentives for self- employment and an increase in the informnal sector. In this regard, the effect of high payroll taxes may add to the effect of employment protection legislation' . Available data for CEE are scanty and subject to measurement errors but they suggest that this hypothesis may be releviant as the size of the informal sector in CEE countries is not insignificant. (Table 13). '5 Recent literature (Marquez, 1998; OECD, 1999; Kugler, 2000) suggests that job security provisions provide incentives for self-employment and operation in the informal sector. 32 Table 13. Share of Unofficial Economy in EU Accession Countres !(%) 1989 1990 1991 1992 1993 1994 1995 Czech Republic 6.0 6.7 12.9 16.9 16.9 17.6 1 1.3 Estonia 12.0 19.9 26.2 25.4 24.1 25.1 11.8 Hungary 27.0 28.0 32.9 30.6 28.5 27.7 29.0 Poland 15.7 19.6 23.5 19.7 18.5 15.2 12.6 Slovak Republic 6.0 7.7 15.1 17.6 16.2 14.6 5.8 Slovenia Source: Johnson et alia (1997). It is important to emphasize that there is significant variation across the EU accession countries both in terms of the kinds of labor market institutions adopted and in terms of labor market outcomes, and that significant patterns emerge relating the two. In general, those countries that have undertaken more radical and liberal reforms appear to have more fluid and dynamic markets, with larger job and worker flows (Vodopivec, 1999; Haltiwanger and Vodopivec, 1999; Bilsen and Konings, 1998). For example, when we compare employment accession and separation rates across countries, we find that Hungary, one of the most reformist countries, exhibits much larger flows than Slovenia, a moderate reformist (Table 14). We illustrate this point further by comparing job and worker flows in Estonia and Slovenia in Box 3. Table 14. Employment Accession and Separation Rates in EU Accession Countries Accession Rate (%) Separation Rate (°) Czech Republic (1994-98) 9.0 Estonia (1989-91) 15.5 16.2 (1992-94) 27.3 29.3 (1995-97) 19.3 19.0 Hungary (1991, state firms) 20.6 30.5 Poland (1991) 13.0 28.0 Slovak Republic Slovenia (1989-95) 13.0 (1990-96), 13.2 18.2 Source: Vodopivec (1999). Finally, it seems difficult to evaluate at this stage the impact of wage bargaining without further research. Past research has shown that institutions associated with collective bargaining tend to reduce the dispersion of earnings. In CEE countries, changes in the bargaining system have been accompanied by a sharp increase in private sector employment and a decompression of the wage structure. It is difficult to assess to which extent institutions and social norms inherited from the past still play a role in the wage determination process and whether wage inequality - although clearly increasing - has reached levels comparable to other countries. 33 Box 3. The Importance of Institutions: Job and Worker Flows During Transition in Estonia and Slovenia Following Haltiwanger and Vodopivec (1999), and Vodopivec (1999) we compare the experiences of Estonia and Slovenia to emphasize the role that labor market institutions played in shaping up labor market outcomes during the transition. The pace of institutional reform followed in both.countries differed substantially, and these differences had a significant impact on job creation and destruction, and on worker accession and separation rates. While Estonia pursued extremely liberal, radical reforms, Slovenia retained a considerable degree of employment protection and adopted much more generous income support policies (Table B3.1). Table B3.1 Comparison of Labor Policies In Transition. Estonia Slovenia Policy Change relative to Change relative to pre-transition pre-transition Employment Protection Job security removed Job security removed Liberal dismissal policies Restrictive dismissal policies No job preservation subsidies Job preservation subsidies Unemployment benefits Duration: Maximum of 6 to 9 months Duration: Maximum of 24 months Replacement ratio: 10% Replacement ratio: 60-70%o Wage policies Low minimum wage High minimum wage Low tax wedge High tax wedge Collective agreements Low density and coverage High density and coverage Privatization Individual sale methods Mixed methods Foreign trade No tariffs/quotas on impurts Up to 28% tariff rates FDI 1989-96 Cumulative inflow per capita: $459 Cumulative inflow per capita: $366 Maternity leave Increased from 1.5 to 3 years plus 10 weeks Remained at I year pregnancy leave Public childcare Price increases 14% decrease in number of centers 1% increase in number of centers Income support Up to 4 year extension of Ul for women with No change children under 6 Source: Orazem and Vodopivec (1999) The authors show that in Estonia both job destruction and, with a lag, job creation rates increased tremendously during the transition. In contrast, more protectionist and generous policies in Slovenia resulted in much lower rates. For instance, job creation rates -for which differences between both countries are biggest - were at or below I percent a year in Slovenia during 1989-94, while they kept increasing up to 10 percent in Estonia. In addition, job destruction rates differed significantly between both countries. In Estonia job destruction grew rapidly from 1989 to 1992, going from almost 0 percent to 14 percent, to decline slightly afterwards. In contrast, the Slovenian rate started to exhibit a declining trend as early as 1991 and always remained below 60 percent of the Estonian rate (Figure B3.1). It is also interesting to note that the comparison with Slovenia does not seem to be a special case since job flows in Estonia are also much higher than those reported for some other non-radical reformers such as Bulgaria, Hungary or Rumania (Bilsen and Konings, 1998). 34 Box 3 (continued). The differences in employment accession and separation rates are even more striking. While Estonia underwent a period of tremendous worker turnover (i.e. high accession and separation rates) between 1989 and 1994, worker flows remained fairly stable in Slovenia (Figure B3.2), exhibiting almost no trend. Figure B3.1 Rate of Job Destruction in Estonia and Slovenia during Transition (Ml Rate ofJob Desruction . 1 ; / IM t9w 9WI 1W2 ! 1 9 1W 7 V_.9 These differences in job and worker flows between the two countries are attributed by the authors to differences in both labor market institutions and speed of reforms (for instance, as mentioned earlier, there were substantial differences in their approach to privatization). Figure B3.2 Employment Accession and Separation in Estonia and Slovenia durin1 Transition M(l Empbymnent Accestion (%) Empbynieot S.vati,on Rawe -, ~~~~~~~~~~~~~~~~~~~~~~20 It I 1m 1Wi 1W1 992 IW2 IWi 99S 1IWi 997 1M 19i 1W 12 m9) 94 IWf I IW7 VY_ .. Source: Haltiwanger and Vodopivec (1999); Vodopivec (1999). 35 V. Conclusions In this paper, we have studied labor market dynamics in six CEE countries over the last ten years, paying special attention to the nature of the labor market institutions these countries have recently adopted and to their impact on labor market performance. We have done so using the OECD methodology so that we could compare institutions in CEE countries seeking EU membership with those in EU and OECD countries. This exercise was motivated by the desire to shed some light on the ongoina debate on the role of institutions in labor market performance, a debate of particular relevance to countries in Europe where unemployment remains high on the list of policy concerns. The first question we addressed was whether CEE countries - candidates for EU accession - had adopted institutions similar to those in the EU and, as a consequence, introduced in their labor markets the samle rigidities that exist in EU countries. We found that, indeed, the CEE countries have adopted a set of labor market institutions that broadly resemble those in the EU. However, just as labor rnarkets and institutions in Europe exhibit enorrnous diversity, we find variation across the CE]_ countries in terms of employment protection legislation, support to the unemployed, taxation on labor and strength of unions. Compared to EU members, we showed that CEE countries fall in the middle of the 'flexibility' scale regarding their employment protection legislation. They have not adopted legislation as flexible as that in the United Kingdom or Ireland, nor have they copied the highly rigid southern European model. They also spend relatively little to support lhe unemployed, as measured by the share of every dollar generated by a labor force member that is spent on unemployment insurance or active labor market policies. The CEE average spending in both passive and active labor market policies falls below the EU and the OECGD average, and the behavior of these countries resembles that of the United States, Japan and Southem Europe, rather than that of Denmark or Sweden in this respect. Where CEE countries stand out is in terms of labor taxation where they rank among the highest in all EU and OECD countries. In assessing the impact of those institutions on labor outcomes, we argued that the dramatic changes observed during the 1990s in employment, unemployment, labor force participation and wages could not have occurred without the macroeconomic and structural reforms these countries have embraced as part of the transition process. As a result, the effect of institutions may have been rmasked by the magnitude of these other reform-induced changes. We also assert that the effect of institutions, although hard to uncover, should not be disregarded. Although instituations may not have played a substantial role during the first phase of adjustment, they are likely to become more important in the next few years. In particular, we have tried to show, using evidence drawn from other research, that existing labor market institutions, although moderate, may be partly responsible for the lack of recovery of employment and the rising share of long-term unemployment. While the impact on total unemployment remains uncertain, data also suggest that institutions in CEE countries may well have an impact on the composition of the labor force and of employment. 37 Annex I. Additional Tables and Figures Table AI.I. Employment Protection Legislation in OECD and EU Accession Countries Regular Temporary Collective EPL Strictness for OECD and CEEC Empl. Empl. Dismissals OECD vs. CEEC Index Index Version 1' Versiot 22 Index Rank3 Index Ranki OECD Austria 2.6 1.8 3.3 2.2 12 Z3 12 Belgium 1.5 2.8 4.1 2.1 10 2.5 13 Denmark 1.6 0.9 3.1 1.2 8 1.5 8 Finland 2.1 1.9 2.4 2.0 9 2.1 9 France 2.3 3.6 2.1 3.0 17 2.8 17 Germany 2.8 2.3 3.1 2.5 15 2.6 16 Ireland 1.6 0.3 2.1 0.9 4 1.1 5 Italy 2.8 3.8 4.1 3.3 19 3.4 19 Netherlands 3.1 1.2 2.8 2.1 11 2.2 10 Norway 2.4 2.8 2.8 2.6 16 2.6 15 Portugal 4.3 3.0 3.6 3.7 20 3.7 20 Spain 2.6 3.5 3.1 3.1 18 3.1 18 Sweden 2.8 1.6 4.5 2.2 13 2.6 14 Switzerland 1.2 0.9 3.9 1.0 6 1.5 7 U.K. 0.8 0.3 2.9 0.5 2 0.9 2 Canada 0.9 0.3 3.4 0.6 3 1.1 4 U.S. 0.2 0.3 2.9 0.2 1 0.7 I Japan 2.7 2.1 1.5 2.4 14 2.3 II Australia 1.0 0.9 2.6 0.9 5 1.2 6 New Zealand 1.7 0.4 0.4 1.0 7 0.9 3 EU average5 2.4 2.1 3.2 2.2 2.4 OECD averages 2.0 1.7 2.9 1.9 2.0 CEEC Czech Rep. 2.8 0.5 4.3 1.7 3 2.1 3 Estonia 3.1 1.4 4.1 2.3 5 2.6 5 Hungary 2.1 0.6 3.4 1.4 1 1.7 1 Poland 2.2 1.0 3.9 1.6 2 2.0 2 Slovak Republic 2.6 1.4 4.4 2.0 4 2.4 4 Slovenia 3.4 2.4 4.8 2.9 6 3.5 6 Slovenia4 (2.9) (0.6) (4.9) (1.8) (4) (2.3) (4) CEEC average 2.7 1.2 4.1 2.0 2.4 Source: OECD (1999) Employment Outlook 1999, Table 2.5. World Bank estimates for Estonia and Slovenia. I/ Weighted average of indicators for regular contracts and temporary contracts. 2/ Weighted average of indicators for regular contracts, temporary contracts, and collective dismissals. 3/ All rankings increase with the strictness of employment protection. 4/ Based on proposed labor code. 5/ Does not include Greece and Luxemburg. 5/ Average for all OECD countries presented on the table. 38 Table AI.2. Employment Protection Legislation in OECD and EU Accession Countries EPL Strictness for OECD and CEEC OECD versus CEEC OEC'D and CEEC Version 11 Version 22 Version 1I Version 22 Index Rank3 Index Rank3 Rank3 Rank3 OECD Austria 2.2 12 2.3 12 16 15 Belgium 2.1 10 2.5 13 14 17 Denmark 1.2 8 1.5 8 8 8 Finland 2.0 9 2.1 9 13 12 France 3.0 17 2.8 17 22 22 Germany 2.5 15 2.6 16 20 21 Ireland 0.9 4 1.1 5 4 5 Italy 3.3 19 3.4 19 25 24 Netherlands 2.1 11 2.2 10 15 13 Norway 2.6 16 2.6 15 21 20 Portugal 3.7 20 3.7 20 26 26 Spain 3.1 18 3.1 18 23 23 Sweden 2.2 13 2.6 14 17 19 Switzerland 1.0 6 1.5 7 6 7 U.K. 0.5 2 0.9 2 2 2 Canada 0.6 3 1.1 4 3 4 U.S. 0.2 1 0.7 1 1 1 Japan 2.4 14 2.3 11 19 14 Australia 0.9 5 1.2 6 5 6 New Zealand 1.0 7 0.9 3 7 3 EU average5 2.2 2.4 OECD average6 1.9 2.0 CEEC Czech Republic 1.7 3 2.1 3 11 11 Estonia 2.3 5 2.6 5 18 18 Hungary 1.4 1 1.7 1 9 9 Poland 1.6 2 2.0 2 10 10 Slovak Republic 2.0 4 2.4 4 12: 16 Slovenia 2.9 6 3.5 6 24, 25 Slovenia4 (1.8) (4) (2.3) (4) (1,) (16) CEEC average 2.0 2.4 Source: OECD (1999) Employment Outlook 1999, World Bank estimates for Estonia and Slovenia. I/ Weighted average of indicators for regular contracts and temporary contracts. 2/ Weighted average of indicators for regular contracts, temporary contracts, and collective dismissals. 3/ All rankings increase with the strictness of employment protection. 4/ Based on proposed labor code. 5/ Does not include Greece and Luxemnburg 5/ Average for all OECD countries in the table. 39 Table AI.3. Features of the Unemployment Insurance System in Selected OECD and EU Accession Countries (Late 1990s) Benefit RR Benefit Duration (%) (months) OECD Austria 50 5-12 Belgium 57 12-No limil: Denmark 70 60 Finland 63 24 France 70 27- 54 Germany 61 6- 32 Ireland 49 15 Italy 42 6 Netherlands 69 6 - 54 Norway 67 46 Portugal 65 10- 30 Spain 73 4 - 24 Sweden 75 12- 18 Switzerland 73 8.5 - 20 U.K. 36 12 Canada 59 12 U.S. 60 6 Japan 60 6 Australia 36 No limit New Zealand 30 No limit EU average3 60 OECD average4 58 CEEC Czech Republic 50 6 Estonia 105 3-6 Hungary 64 126 Poland 407 12_24s Slovak Republic 60 6-129 Slovenia 63 3-249 CEEC average 48 (55)10 Source: OECD Employment Outlook (1995, 1999), IMF World Economic Outlook (1999), IMF Article IV - Consultation with the Slovak Republic, World Bank estimates for Estonia and Slovak Republic, The World Bank (1999), The World Bank (1998). 1/ Description of categories: (i) Benefit RR - Benefit Replacement Ratio - initial benefit level divided by previous earned income, (ii) Benefit Duration - Benefit Duration - maximum duration, in months, depending on various criteria (age, family status, employment record/ contributive history). 2/ Data for Czech Republic, Estonia and Slovenia are from 1998; data for Hungary are from 1997, and data for Poland and Slovak Republic are from 1996. 3/ Does not include Greece and Luxemburg. 4/ Average for all OECD countries in the table. 5/ Benefits are set at 60% of minimum wage. This amounts to approximately 10%/9 of the average wage. 6/ Requires 4 years of employment. 7/ The replacement ratio is 40% of the average wage for the year prior to unemployment. 8/ Benefit duration increases with previous employment tenure. 9/ Benefit duration is a function of the worker's contributive history. 10/ Figure in parentheses does not include Estonia. 40 Table Al.4. Spending on Passive and Active Labor Market Policies in Selected OECD and EU Accession Countries I Unemployment. Passive policies Active policies rate % GDP Spending per % GDP Spending per unemployment. unemployment. OECD Austria (1999) 3.7 1.22 0.32 0.52 0.14 Belgium (1998) 9.5 2.51 0.26 1.34 0.14 Denmark (1999) 5.2 3.12 0.60 1.77 0.34 Finland (1999) 10.3 2.33 0.23 1.22. 0.12 France(1999) 11.3 1.85 0.16 1.33 0.12 Germany (1999) 8.7 2.12 0.24 1.30 0.15 Greece (1997) 9.8 0.50 0.05 0.3'i 0.04 Ireland (1996) 11.7 2.42 0.21 1.66 0.14 Italy (1999) 11.4 0.64 0.06 1.1( 0.10 Netherlands (1999) 3.3 2.81 0.85 1.8) 0.55 Norway (1999) 3.3 0.47 0.14 0.82 0.25 Portugal (1996/98) 5.2 0.83 0.16 0.87 0.12 Spain (1999) 15.9 1.41 0.09 0.81 0.05 Sweden (1999) 7.2 1.70 0.24 1.84 0.26 Switzerland (1997/98) 4.2 1.03 0.25 0.41 0.10 U.K. (1997/98) 7.0 0.82 0.12 0.37 0 05 Canada (1998/99) 8.3 0.99 0.12 0.51 0.06 U.S. (1998/99) 4.5 0.25 0.06 0.18 0.04 Japan (1998/99) 4.1 0.52 0.13 0.09 0.02 Australia (1998/99) 8.0 1.06 0.13 0.52 0.07 New Zealand (1998/99) 7.4 1.57 0.21 0.62 0.08 EU average4 1.73 0.26 1.16 0.16 OECD averages 1.43 0.23 0.92 0.14 CEEC Czech Republic (1999) 8.8 0.31 0.04 0.19 0.02 Estonia (1998) 9.9 0.08 0.01 0.08 0.01 Hungary (1997) 8.7 0.56 0.06 0.40 0.04 Poland (1996) 14.3 1.71 0.12 0.49 0.03 Slovak Republic (1996) 11.1 0.54 0.05 0.56 0.05 Slovenia (1998) 7.9 0.89 0.11 0.83 0.11 CEEC average 0.68 0.06 0.42 0.04 Source: OECD Employment Outlook: (1997,1999), CEM Slovak Republic, ELFS (1998), RZS (1999). Data for 1996, 1997 and 1999. 1/ Data from different years (in parentheses) 2/ Spending Measure 1: Ratio of GE1P spending on Ul to unemployment rate (both in percentage terrns. 3/ Spending Measure 2: Spending per unemployed individual as a percentage of GDP per labor force participant. 4/ Does not include Luxemburg. 4/ Average for all OECD countries in the table. 41 Table AI.5. The Role of Unions and Payroll Taxes in Selected OECD and EU Accession Countries 1' 2 3 4 5 Union density Union coverage Coordination _ Payroll tax mte Total tax rate (%)2 index3 Union Employer (%) (%/0) OECD Austria 41.2 3 3 3 22.6 53.7 Belgium 51.9 3 2 2 21.5 49.8 Denmark 80.1 2 3 3 0.6 46.3 Finland 79.3 3 2 3 25.5 65.9 France 9.1 3 2 2 38.8 63.8 Germany 28.9 3 2 3 23.0 53.0 Ireland 48.9 3 1 1 7.1 34.3 Italy 44.1 3 2 2 40.2 62.9 Netberlands 25.6 3 2 2 27.5 56.5 Norway 57.7 2 3 3 17.5 48.6 Portugal 25.6 3 2 2 14.5 37.6 Spain 18.6 3 2 1 33.2 54.2 Sweden 91.1 3 3 3 37.7 70.7 Switzerland 22.5 2 1 3 14.5 28.6 U.K. 32.9 2 1 1 13.8 40.8 Canada 37.4 2 1 1 13.0 42.7 U.S. 14.2 1 1 1 20.9 43.8 Japan 24.0 2 2 2 16.5 36.3 Australia 35.2 3 2 1 2.5 28.7 New Zealand 24.3 1 1 1 34.8 EU average4 44.4 23.5 53.0 OECD average' 39.6 19.5 45.4 CEEC Czech Republic 42.8 2 1 1 47.5 73.4 Estonia 36.1 2 2 1 33.0 63.3 Hungary 60.0 3 1 2 44.0 81.5 Poland 33.8 3 2 1 48.2 80.0 Slovak Republic 61.7 3 2 2 50.0 81.0 Slovenla 60.0 3 3 3 38.0 69.1 CEEC average 49.1 43.4 74.7 Source: Columns I (except Slovenia) and 2 (except Czech Republic and Hungary) from ILO (1997) World Labor Report 1997- 98 and OECD Employment Outlook (1997); data for Slovenia, the Czech Republic and Hungary estimated by the World Bank. Column 3 and 4, and tax rates for the OECD from Nickell (1997). Columns 3, 4 and tax rates for the CEEC from (i) Deloitte Touche Tohmatsu International - Taxation in Eastem Europe (1997), (ii) Bank of Estonia, (iii) Polish Agency for Foreign Investment, (iv) EIU (1998), and (v) Labour Regulations in Eastern Europe, Business Eastern Europe. I/ All data for 1995, except for Denmark, Ireland, Italy, Spain and Sweden (1993), and estimated data for Slovenia. 2/ Percentage of salaried workers that belong to a union. 3/ 1: less than 25% of salaried workers are covered by collective agreements, 2: between 26 and 69% are covered, 3: 70% or more are covered. 4/ Does not include Greece and Luxemburg. 5/ Average for all OECD countries in the table. 42 Table Al.6 G.DP in EU Accession Countries: Growth Rates and Levels 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Z000 Czech f:epublic Growth rate (%) -1.2 -11.6 -0.5 0.1 2.2 5.9 4.8 -1.0 -2.2 -0.2 2.7 Level (1990=100) 100 88.4 88.0 88.0 90.0 95.3 99.9 98.9 96.7 96.5 99.1 I:stonia Growth rate (%) -7.1 -8.0 -21.2 -8.4 -2.0 4.3 3.9 10.6 4.7 -1.1 5.0 Level (1990=100) 100 92.0 72.5 66.4 65.1 67.9 70.5 78.0 81.7 80.8 84.8 lHungary Growth rate (%) -3.5 -11.9 -3.1 -0.6 2.9 1.5 1.3 4.6 4.9 4.5 5.6 Level (1990=100) 100 88.1 85.4 84.9 87.4 88.7 89.9 94.0 98.6 103.1 114.6 !?oland Growth rate (%) -4.9 -7.0 2.6 3.8 5.2 7.0 6.0 6.8 4.8 4.1 2.2 Level(1990=100) 100 93.0 95.4 99.0 104.2 111.5 118.2 126.3 132.4 137.8 150.5 .3lovak Republic Growth rate(%) -2.7 -14.6 -6.7 -3.7 4.9 6.7 6.2 6.2 4.1 1.9 1.8 Level (1990=100) 100 85.4 79.7 76.7 80.5 85.9 91.2 96.9 100.9 102.8 108.3 Slovenia Growth rate (%) -4.7 -8.9 -5.4 2.8 5.3 4.1 3.5 4.6 3.9 4.9 4.5 Level (1990= 100) 100 91.1 86.2 88.6 93.3 97.1 100.5 105.1 109.2 114.6 124.8 Sources: SIMA (WDI database and Unified Survey FYO database), National Authorities, IMF, and the World Bank coantry team estimates. 43 Table AI.7 Employment in EU Accession Countries: Growth Rates and Levels 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Growth (%) -1.8 -0.9 -0.5 -0.3 1.7 -3 -1.6 -1.4 -2.3 -1.5 Republic index (1990-100) 100.0 98.2 97.3 96.8 96.5 98.2 95.2 93.7 92.4 90.3 88.9 Growth (%) -9.6 -9.3 -6.3 -2 -1.9 -0.8 -0.1 1.5 3.1 2.7 Hungary index (1990=100) 100.0 90.4 82.0 76.8 75.3 73.9 73.3 73.2 74.6 76.9 79.0 Growth (%) -2.3 -5.2 -7.5 -2.2 -5.3 -1.6 0.4 -1.3 Estonia index (1990=100) 100.0 97.7 92.6 85.7 83.8 79.4 78.1 78.5 77.5 Poland Growth (%) -5 -5.9 -4.2 -2.4 1 1.8 1.9 Z8 1.9 -0.2 -0.5 index (1990=100) 100.0 94.1 90.1 88.0 88.9 90.5 92.2 94.8 96.6 96.4 95.9 Slovak Growth (%) -1.8 -12.5 1.1 -2.6 -1 2.4 -1.4 -2.3 -1.0 -1.4 -1. I Republic index (1990=100) 100.0 87.5 88.5 86.2 85.3 87.3 86.1 83.8 82.9 81.7 80.0 Slovenia Growth (%) -3.9 -5.1 -4.1 -1.8 0.3 0.8 -0.9 0.0 0.2 1.8 1.3 index (1990=100) 100.0 94.9 91.0 89.4 89.6 90.4 89.5 89.5 89.6 91.2 92.3 Source: Employment and Labor Market country reports prepared by the European Training Foundation (1999), and EBRD Transition Report (1999). 44 Table Al.8 Employment-to-Population Ratios in EU Accession Countries (°/.) 1993 1994 1995 1996 1997 1998 1999 Czech Republic All (15-64) 71.5 69.6 69.4 68.7 67.5 65.9 Female (15-64) 66.2 61.6 60.6 60.0 58.8 57.4 Estonia All (15-64) 68.7 68.1 65.5 64.9 65.4 64.7 Female (15-64) 62.6 62.0 60.5 60.2 60.4 60.4 Hungary All (15-64) 48.2 52.9 52.7 52.7 55.3 55.7 Female (15-64) 41.9 45.9 45.5 45.5 47.3 49.0 Poland All (15-64) 58.3 58.1 58.4 58.8 58.9 Female (1541) 51.9 51.8 51.8 51.8 52 2 Slovak Republic All (15-64) 61.1 62.3 63.2 59.7 58.8 Female (15-64) 56.0 56.8 57.5 53.1 52.6 Slovenia All (15-64) 60.7 60.3 62.9 61.9 63.4 63.7 Female (15-64) 56.5 56.0 58.0 57.7 58.9 59.6 Source: Employment and Labor Market country reports prepared by the European Training Foundation (1999), Statistical Office of Estonia, and OECD Employment Outlool; (1999). 45 Table Al.9 Unemployment Rates in EU Accession Countries (%) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Czech Republic Survey 3.9 3.8 4.1 3.9 4.8 6.5 8.8 Registered 4.1 2.6 3.5 3.2 2.9 3.5 5.2 7.5 9.6 Estonia Survey' 0.6 1.5 3.7 6.5 7.6 9.7 10.0 9.7 9.9 11.7 Registered 4.4 4.1 4.4 4.0 3.7 5.1 Hungary Survey 9.8 11.9 10.7 10.2 9.9 8.7 7.8 7.1 Registered 1.4 7.4 12.3 12.1 10.4 10.4 10.5 10.4 8.8 Poland Survey 14.9 16.5 15.2 14.3 11.5 10.6 12.0 Registered 6.5 12.2 14.3 16.4 16.0 14.9 13.2 10.3 10.4 11.5 SlovakRepublic Survey 12.2 13.7 13.1 11.1 11.6 12.5 17.1 Registered2 1.5 11.8 10.4 14.2 14.6 13.1 128 13.4 16.4 19.2 Slovenia Survey 9.1 9.0 7.4 7.3 7.1 7.9 Registered 4.7 8.2 11.5 14.4 14.5 14.0 13.9 14.4 14.5 EU-15 Average Survey 7.0 7.7 8.9 10.1 10.3 9.8 9.8 9.2 8.3 7.6 EU- Group I (North)2 Survey 4.9 5.9 7.5 9.2 9.5 8.5 8.3 7.5 6.7 6.0 EU- Group 2 Survey 7.6 8.0 8.7 8.5 9.0 8.9 9A 9.7 9.5 8.8 (Central)3 EU- Group3(South)4 Survey 10.2 10.6 11.5 13.2 13.6 12.9 127 11.8 10.5 12.45 United states Survey 5.6 6.8 7.5 6.9 6.1 5.6 5.4 4.9 4.5 4.2 Source: Employment and Labor Market country reports prepared by the European Training Foundation (1999), EBRD Transition Report (1999), Central Bank of Estonia, and OECD Employment Outlook (1999). I / Data from Social Policy (1998), Ministry of Labor, Family and Social Affairs. 2/ Includes Finland, Sweden, Denmark, United Kingdom, and Benelux. 3/ Includes Germany, France, Austria and Italy. 4/ Includes Portugal, Spain, Greece and Ireland. 5/ Only Portugal and Spain. 46 Table Al.10 Unem loyment inflows and Outflows in EU Accession Countries (i/@) 1991 1992 1993 1994 1995 1996 Cqzech Republic Annual average inilow rate' 0.9 0.9 0.7 0.6 0.6 0.6 Annual average outflow rate2 17.1 26.6 22.0 21.3 21.3 19.3 Estonla3 Annual average in:flow rate Annual average outflow rate Hungary Annual average inflow rate 0.9 1.3 1.1 1.0 1.3 Annual average outflow rate 6.6 7.7 9.1 7.9 9.4 Poland Annual average inflow rate 0.9 1.1 1.2 1.3 1.2 Annual average outflow rate 4.3 4.8 6.2 8.0 8.2 Slovak Republic Annual average inflow rate 1.3 1.1 1.5 1.3 1.4 1.4 Annual average outflow rate 4.8 10.2 7.8 7.4 9.5 10.0 Slovenia Annual average inflow rate4 6.7 8.4 9.0 Annual average outflow rate4 9.8 6.9 9.7 Source: Terrell (1999) and Employment and Labor Market country reports prepared by the European Trainiing Foundation (1999). 1/ Average annual rates of the number flowving into unemployment divided by the number employed and multiplied by 100. 2/ Average annual rates of the number flowving out of unemployment divided by the number unemployed and multiplied by 100. 3/ Data not available. 4/ Average annual rates for the number flowing in and out of unemployment divided by the number unemployed and multiplied by 100 (based on monthly rates). 47 Table AI.11 Unemployment Rates in Selected OECD Countries (%) 1993 1994 1995 1996 1997 1998 1999 1993-98/99 Austria Survey 4.0 3.8 3.9 4.4 4.5 4.7 3.7 4.1 Belgium Survey 8.9 10.0 9.9 9.7 9.2 8.8 9.0 9.4 Denmark Survey 10.1 8.2 7.3 6.8 5.6 5.1 5.2 6.9 Finland Survey 16.4 16.8 15.3 14.6 12.7 11.4 10.3 13.9 France Survey 11.7 12.3 11.7 12.4 12.3 11.7 11.3 11.9 Germany Survey 7.9 8.4 8.2 8.9 9.9 9.4 8.7 8.8 Greece Survey 8.6 8.9 9.2 9.6 9.6 10.7 9.4 Ireland Survey 15.6 14.3 12.3 11.6 9.9 7.8 11.9 Italy Survey 10.3 11.4 11.9 12.0 12.1 11.9 11.4 11.6 Luxemburg Survey 2.7 3.2 2.9 3.0 2.8 2.8 2.3 2.8 Netherlands Survey 6.6 7.1 6.9 6.3 5.2 4.0 3.3 5.6 Portugal Survey 5.7 7.0 7.3 7.3 6.8 4.9 4.5 6.2 Spain Survey 22.7 24.1 22.9 22.2 20.8 18.8 15.9 21.0 Sweden Survey 9.1 9.4 8.8 9.6 9.9 8.2 9.2 United Kingdom Survey 10.5 9.6 8.7 8.2 7.0 6.3 6.1 8.0 United States Survey 6.9 6.1 5.6 5.4 4.9 4.5 4.2 5.4 EU-15 Average Survey 10.1 10.3 9.8 9.8 9.2 8.3 7.6 9.3 Source: OECD Employment Outlook (1999). 48 Table AI.12 Short and Long-Term Unemployment in Selected OECD Countries (%) 1993 1994 1995 1996 1.997 1998 1999 Austria SRU' 3.1 2.9 3.3 3.2 3.3 2.5 LTU2 -- 0.7 1.0 1.1 1.3 1.4 1.2 % LTU3 -- 18.5 25.6 25.6 28.7 30.2 31.7 Belgium SRU 4.2 4.2 3.7 3.8 3.6 3.3 3.6 LTU 4.7 5.8 6.2 5.9 5.6 5.5 5.4 % LTU -53.0 58.3 62.4 61.3 60.5 62.6 60.5 Denmark SRU 7.6 5.6 5.3 5.0 4.1 3.6 4.1 LTU 2.5 2.6 2.0 1.8 1.5 1.5 1.1 % L1U 25.1 32.1 27.9 26.5 27.2 28.7 20.5 Finland SRU 11.4 -- 9.5 9.6 8.9 8.3 7.3 LTU 5.0 -- 5.8 5.0 3.8 3.1 3.0 % LTU 30.6 -- 37.6 34.5 29.8 27.5 29.6 France SRU 7.7 7.6 6.8 7.5 7.2 6.5 6.7 LTU 4.0 4.7 4.9 4.9 5.1 5.2 4.6 % LTU 34.2 38.3 42.3 39.5 41.2 44.1 40.3 Germany SRLI 4.7 4.7 4.2 4.6 4.9 4.5 4.2 LTU 3.2 3.7 4.0 4.3 5.0 4.9 4.5 % LTU 40.0 43.9 48.7 47.8 50.1 52.2 51.7 Ireland SRLJ 3.8 6.0 4.7 4.6 4.9 - - LTUJ 11.8 8.3 7.6 6.9 5.6 - % LTU 75.9 57.8 61.4 59.5 57.0 - - Italy SRIJ 4.4 4.5 4.3 4.1 4.1 4.1 4.4 LTIJ 5.9 6.9 7.6 7.9 8.0 8.1 7.0 % LTU 57.3 60.8 63.6 65.6 66.3 68.1 61.4. Netherlands SRIJ 3.6 4.0 3.7 3.2 2.6 2.1 1.9 LTU 3.0 3.1 3.2 3.2 2.6 1.9 1.4 % I.TU 45.4 43.5 46.8 50.0 49.1 47.9 43.5 Portugal SRU 3.7 4.1 3.6 3.4 3.0 2.7 2.6 LTU 2.0 2.9 3.7 3.9 3.8 2.2 1.9 % ILTU 32.5 41.8 50.9 53.1 55.6 44.6 41.2 Spain SRU 11.3 10.6 9.9 9.8 9.3 8.6 7.7 LTU 11.4 13.5 13.0 12.4 11.5 10.2 8.2 % LTU 50.1 56.1 56.9 55.7 55.5 54.1 51.3 Sweden SR.U 8.1 7.8 6.4 6.7 6.6 5.5 - L1'U 1.0 1.6 2.4 2.9 3.3 2.7 - % LTU 10.9 17.2 27.8 30.1 33.4 33.5 - United kingdom SFU 6.0 5.2 4.9 4.9 4.3 4.2 4.3 LTU 4.5 4.4 3.8 3.3 2.7 2.1 1.8 % LTU 42.5 45.4 43.6 39.8 38.6 33.1 29.8 United states SRU 6.1 5.4 5.1 4.9 4.5 4.1 3.9 LTU 0.8 0.7 0.5 0.5 0.4 0.4 0.3 % LTU 11.5 12.2 9.7 9.5 8.7 8.0 6.8 Source. OECD-CCET Labor Markel Database 1990-1997, and OECD Employment Outlook (1999, 2000). --Data not available. 1/ Short-term unemployment. 2/ Long-term unemployment. 3/ Percentage of total unemployment due to long-tern unemployment. 49 Table AI.13 Labor Force Participation Rates in Selected OECD Countries. 1994 1995 1996 1997 1998 EU-15 Average All (15-64) 60.1 61.1 61.4 62.0 63.0 Female (15-64) 57.1 57.6 58.3 58.7 59.4 Austria All (15-64) ... 68.4 67.3 67.2 67.4 Female (15-64) 62.3 61.8 61.8 62.5 Belgium All (15-64) 55.7 56.3 56.3 57.0 57.3 Female (15-64) 51.2 51.7 52.0 52.9 53.8 Denmark All (15-64) 72.4 73.9 74.0 75.4 75.3 Female (15-64) 73.8 73.3 73.6 74.2 75.0 Finland All (15-64) 60.7 61.9 62.8 63.6 64.8 Female (15-64) 69.1 69.5 69.9 69.5 69.7 France All (15-64) 58.3 59.0 59.2 58.8 59.4 Female (15-64) 59.2 59.8 60.3 60.1 60.8 Germany All (15-64) 64.7 64.7 64.1 63.6 64.1 Female (15-64) 61.4 61.3 61.3 61.8 60.9 Greece All (15-64) 54.1 54.4 54.9 54.8 54.9 Female (15-64) 43.2 44.3 45.8 46.0 48.2 Ireland All (15-64) 52.3 53.8 54.8 56.1 59.8 Fcmalc (15-64) 46.9 47.0 48.8 49.7 52.1 Italy All (15-64) 50.9 50.5 50.6 50.5 50.8 Female (15-64) 42.2 42.5 43.3 43.6 43.9 Luxemburg All (15-64) 60.2 58.5 59.1 59.9 60.2 Female (15-64) 47.0 44.1 45.7 47.1 47.6 Netherlands All (15-64) 36.0 34.2 66.2 68.1 69.8 Female (15-64) 57.3 59.1 60.2 61.9 62.9 Portugal All (15-64) 62.9 62.5 62.3 63.4 66.8 Female (15-64) 58.8 59.1 59.5 60.3 61.9 Spain All (15-64) 46.5 47.4 48.2 49.4 51.2 Female (15-64) 45.4 46.2 47.0 48.0 48.7 Sweden All (15-64) 71.5 72.2 71.6 70.7 71.5 Female (15-64) 77.0 77.2 77.1 76.3 75.5 United States All (15-64) 76.7 76.9 77.1 77.4 77.4 Female (15-64) 69.4 69.7 70.1 70.7 70.7 Souirce: OECD Employment Outlook (1999) 50 Annex II. Construciting the Employment Protection Legislation Inidex Since the late 1980s, the OECD has been interested in analyzing the relationship between employment prot(,ction legislation (EPL) and labor market flexibility (and perforrnance). While, the first round of studies used an EPL index based solely on permanent and temporary employment regulation, this index was later updated to accoun: for regulation concerning collective dismissals. The methodology described here corresponds to the nmost recent version of the EPL index. This, index is constructed as a weighted average of 22 different indicators describing various aspects of both permanent and temporary employment, as well as collective dismissals. Although some of these indicators are readily available from the country's labor code (e.g. notice period, severance payment, max imum duration of temporary contracts), most of them need to be constructed using different sources of information, together with some subjective aggregation method. Table AII.1 contains a detailed description of all 22 indicators classified in three groups (level 3): (i) indicators describing legislation for regular of permanent contracts (RC), (ii) indicators capturing the natire of temporary employment legislation (TC), and (iii) indicators for the strictness of collective dismissal procedures (CD). These broad groups can then be broken up into more narrowly defined sub- groups (level 2). For instance, when looking at temporary employment legislation, indicators for the nature and characteristics of fixed-term contracts (TC1) and temporary work agencies (TC2) are cor.sidered separately. Finally, each subgroup may contain one or more individual indicators, such as "Valid cases other than objective" (TCIA) and "Maximum number of successive contracts" (TC1B) in the case of fixed-term contracts legislation (level 1). Table AII.1 Employment Protection Index: Selection of Indicators and Weigbting Scheme Level 4 Level 3 Level 2 Level 1 RCI Procedures (1/2) Procedural Inconveniences (1/3) Delay to start a notice (/2) RC 9 months (1/7) Regular RC2 Notice period after 4 years (1/7) contracts Notice and severance 20 years (1./7) (5/12) pay for no-fault individual 9 months (41/21) dismissals (1/3) Severance pay afler 4 years (4/21) ___________________ .20 years (Xl/2 1) RC3 Definition of unfair dismissal (1/4) EPL Overall Difficulty of dismissal (1/3) trial period (1/4) Summary Indicator compensation (1/4) ____________________ reinstatement (1/4) TC TCI valid cases other than objective (1/2) Temporary Fixed-tern contracts (1/2) max number of successive contracts (1/4) contracts max cumulated duration 1/4) (5/12) TC2 types of work for which is legal (1/2) Temporary Work Agency restrictions on number of renewal (1/4) (1/2) max cumulated duration (1/4) definition of collective dismissal (1/4) additional notification requirements 1 /4) CD Collective Dismissals (2/12) adtoa easivle 14 additional delays involved 0; /4) other special costs to employers 1 /4) Source: Authors' Calculations. T iis classification is rather important, since the EPL methodology relies heavily on it to move from the individual indicators to the overall index. In particular, the EPL calculation is organized in 3 steps, 51 each of them aggregating information from one level to the next (e.g. level 1= level 2, level 2 > level 3, etc.) and using a different set of weights (in parentheses in Table AII.D). It is important to notice that different indicators are expressed in different units, making standardization necessary in order to aggregate them in a comprehensive manner. For this purpose, all indicators are re-scaled according using a common ranking, from 'O' (very flexible legislation) to '6' (very strict legislation), in the way described in Table AII.2 below. Table AHI.2 Employment Protection Index: Conversion into a Common Scale Code Original Unit 0 1 2 3 4 5 6 Individual dismissals RCIA Scale 0-3 Scale (0-3)*2 RCIB Days 0-2 <10 <18 <26 <35 <45 245 RC2AI Months 0 s 0.4 S 0.8 s 1.2 < 1.6 < 2 2 2 RC2A2 Months 0 s 0.75 5 1.25 < 2 < 2.5 < 3.5 2 3.5 RC2A3 Months <3 s 2.75 s5 5 7 s 9 >11 <11 RCBI Months 0 s 0.5 s 1 s 1.75 s 2.5 < 3 2Ž3 RCB2 Months 0 s0.5 s I s 2 s 3 < 4 2Ž4 RCB3 Months 0 s3 s 6 s 10 512 S18 > 18 RC3A Scale 0-3 Scale (0-3)*2 RC3B Months 2 24 > 12 >9 >5 > 2.5 > 1.5 < 1.5 RC3C Months S13 s8 s12 S18 S24 S30 >30 RC3D Scale0-3 Scale (0-3)*2 Temporary dismissals T(' IA Scale 0-3 Scale (0-3)-2 TCIB Number Noliniit 25 24 23 22 21.5 <1.5 TCIC Months Nolimit Ž36 Ž30 Ž24 Ž18 212 <12 TC2A Scale 0-4 Scale (0-4)06/4 TC2B Yes/no No Yes or TC2A=O TC2C Months Nolimit Ž36 224 218 212 >6 s6orTC2A=O Collective dismissals CDI Scale 0-4 Scale (0-4)*6/4 CD2 Scale 0-2 Scale (0-2)03 CD3 Days 0 <25 < 30 < 50 < 70 < 90 > 90 CD4 Scale 0-2 Scale (0-2)*3 Source: Authors' Calculations. In sum, the EPL index is constructed as follows: - Calculation of individual indicators (see Tables AII.3-AII.5 below) - Re-scaling of individual indicators using the conversion presented in Table AII.2 - Aggregation in 3 steps from levels 1 to 4 using the weights described in Table AII. 1. As a result of this methodology, the countries with very flexible employment protection regulation have a low overall EPL index (close to 0 or 1), and those with very strict legislation will have a high index (close to 5 or 6). 52 Table AII.3 EPL Index: Dismissal Regulation for Permanent Employees (12 indicators) Regular Notice and severance pay for Difficulty of procedures 'no-fault' Individuals dismissal Delay to Notice period Severance pay Deflnition of Trhl period Compensation Extent start after after unfair before at 20 of re- Procedure of notice 9m 4m 4y 9 y 20y disissal eligibility of tenure admission Scale 0 to 3 Days Months Czech Republic 2.0 7.0 2.0 2.5 2.5 1.0 1.0 1.0 2.0 3.0 8.0 2.0 Esionia 2.0 1.0 2.0 2.0 4.0 2.0 2.0 4.0 1.5 1.0 6.0 3.0 Hl ngary 1.0 13.0 1.0 1.2 3.0 0.0 1.0 5.0 0.0 3.0 10.0 20 Poland 2.0 13.0 1.0 3.0 3.0 0.0 0.0 0.0 0.0 1.8 3.0 2.0 Sliovak Ri public 1.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 1.0 1.0 6.0 3.0 Sl venia 2.0 9.0 6.0 6.0 6.0 0.0 2.0 10.0 2.5 2.0 10.0 3.0 SI3venia 2.0 9.0 1.0 2.0 4.0 0.0 0.8 6.7 2.0 1.3 12.0 2.0 Sceurce: OECD Employment Outlook (1999), Labor Code of Estonia, Labor Code of Slovenia (current and proposed), and Libor Code of Slovak Republic. I/ All indicators based on proposed Labor Code. 53 Table AI.4 EPL Index: Regulation of Temporary Forms of Employment (6 indicators) Fixed-Term Contracts, Temporary, Work Agencies Valid reasons for Maximum Types of Maximum use other than number of Maximum activities for accumulated 'temporary consecutive accumulated which agency can Restriction duration of activity" contracts duration be hired on renewals contracts Scale 0-3 Number Months Scale 0-4 Yes/No Months Czech Republic 2.5 no limit no limit 4 No No limit Estonia 1.0 no limit 60 4 No No limit Hungary 2.5 -no limit 60 4 No No limit Poland 3.0 2 no limit 4 Yes No limit Slovak Republic 1.0 no limit 36 4 No No limit Slovenia 1.0 no limit no limit I No 2 months Slovenia2 2.5 no limit 36 4 No No limit Source: OECD Employment Outlook (1999), Estonian Labor Code, Slovene current and proposed Labor Codes, Slovak Labor Code. 1/ Temporary activities include specific projects, seasonal work, replacement of temporarily absent permanent workers (on sickness and maternity leave), and exceptional workload 2/ Based on proposed law. 54 Table AII.5 EPL Index: Procedures and Standards for Collective Dismissals (4 iindicators) Definition of Additional notification Additional delays Other special collective dismissil requirements involved costs to employers Scale 0-4 Scale 0-2 Days Scale 0-2 C'zech Republic 4 2 83 0 E,stonia 3 2 46 1 Hlungary 3 2 47 0 f'oland 3 1 32 2 Slovak Republic 2 2 60 1.5 Slovenia 3 2 60 1.5 Slovenia" 4 2 45 1.5 .'ource: OECD Employment Outlook (1999), Estonian Labor Code, Slovene current and proposed Labor Codes, and Slovak l.abor Code. I / Based on proposed code. 55 Annex III. Trade Unions and Collective Bargaining in the EU Accession Countries The Czech Republic There are currently two main trade unions, and two main employer associations in the country. All of them operate on the basis of free association; that is, agreements signed between unions and employer associations are only binding for union workers and firms belonging to the employer association (i.e. if a firm disagrees with a certain industry-level agreement, it is free to leave the employer association and ignore such agreement). Labor unions in the Czech Republic are very weak, with the exception of those in sectors where the presence of public enterprises is still substantial. As a consequence, union coverage is limited, with only 30% of the work force being covered by the 1,222 collective agreements signed in 1998, and the number of new unions in privatized and new companies is low. Wage bargaining occurs at multiple levels. First a tripartite body, composed of representatives from trade unions, employer associations, and the Ministry of Labor and Social Affairs, determines aggregate wage growth and basic working conditions (provided the government is willing to participate in the negotiations). Second, there are industry- and firm-level negotiations between employers and unions. During these, however, wages are de facto set by employers, with the exception of the public where negotiations must comply with a pre-set wage grid. Finally, although initially the tripartite body was responsible for the determination of the minimum wage, since the mid-1990s adjustments are made unilaterally by the ministry of Labor when considered necessary. Estonia During the 1 990s, union membership declined in Estonia from almost 100 to 30%. This decrease was mainly due to the privatization process, together with the increasing importance of small and foreign firms, where union presence is generally weak. In addition, the bulk of economic activity shifted from manufacturing, where traditionally unions were strong, to services. The level of coordination among employers is not high either. They are represented, only on a voluntary basis, by a single employer association that covers around 6,000 firms or 200,000 employees (out of a total of approximately 640,200). As a consequence of the weakness of social partners, the government plays a major role in shaping industrial relations, the basis of which are then laws rather than agreements. Both unions and employers are invited to participate in the design of such laws throughl tripartite negotiations. Discussions, however, focus on working conditions l-ather than wages. These are generally determined unilaterally by the employers, at the finn level, or by the government in the case of public-sector workers. 56 Hungary After transition, trade unions have been mainly relegated to operate in new]ly-privatized state firms, since they have gained little representation in new companies. This implies that unions are strong in heavy industries and weak in the expanding service sector. General economic policy issues and labor matters are discussed in two different forumns. The first is the Economic Council, a consultative body composed of different organizations including trade unions and employer organizations, multinational investors, the Hungarian National Bank and the Hungarian government. The second forum is the National Labor Council, a tripartite council for consultation and negotiation on labor issues including employment legislation, industrial relations and social policy, training, wages, work-place safety regulalions, etc. Although the National Labor Council is also empowered to set the national mtinimum wage and recommend wage increases, centralized collective bargaining has never been very important in Hungary. Wage deregulation had began already before the transition, and during the privatization period most private-sector wrages became freely negotiable at the industry- and firm-level. Hence, it is only in the public sector, regulated through a strict wage tariff system, that some form of collective bargaining is still binding. Poland Unlike its Central European neighbors, one of Poland's labor market main features is the large number of labor organizations that operate in it. Trade unions and other employee organizations, which started and acceleratedl the transition process, still play an important role. Currently, the two most important trade uwion confederations are Solidarity and the Organization of Post- Communist Trade Unions (OPZZ), but there are also another nine smaller nationwide union confederations, 273 national trade union organizations, and about 24,000 local trade unions, organized by enterprise, industry, or region. Similarly, there are more tham 1,000 employer organizations across the country. Unions enjoy by law extensive power in the areas of worker rights, wage policy, and social benefits. In contrast they have no control over managerial decisions regarding company strategy and ownership transformatiorts. A fact that in the past has led them to initiate numerous strikes to express dissatisfaction with the privatization process. In the last few years, constant growth in the numbers of small and medium enterprises (e.g. 90% of all firrns outside the agriculture sector have five or fewer employees, and 89% of these are sole proprietorships) has eroded union power, so that most of their current activity is concentrated in large, heavy industry firms yet to be privatized. This has led niany to blame unions for the inefficiencies that plague these large enterprises. Since 1995, industrial relations are organized through the Tripartite Commission, which includes representatives of the government, employers associations and trade unions. Other smaller, more localized organizations - composed of trade unions, local government officials, employers associations and groups of unemployed workers - serve as consultative and advisory bodies to the heads of general administrative organs. 57 Wages negotiations between employers and workers can take place at the industry and the fim levels. However, collective agreements can be adopted only when a union is present. This implies that, in practice, collective agreements cover mostly state-owned or big privatized companies, rather than newly created private firms. As a consequence, the average pay in the public sector has remained significantly higher than that in the private sector during the last decade. Slovak Republic Union coverage is fairly extensive in Slovak Republic. Moreover, unions play an important role in the design of industrial relations since the Employment Act (1997) stipulates that they be represented as a social partner at all levels of the National Labor Office and its organs. The Confederation of Trade Unions, composed of 42 independent groups, is the largest union, while the two most important employer organizations are the Association of Employers and the Association of the Slovak Republic, with 27 member organizations. Slovak Republic adopted a tripartite system to regulate labor and industrial affairs in 1990. For this purpose, the Council of Economic and Social Agreement was created, comprising a total of 21 representatives from trade unions, employer associations and the government. Among other functions, the Council decides on the minimum wage and the Minimum Living Standard (i.e. poverty line), and further wage negotiations are conducted at the industry and firm level. Such negotiations, as well as the organization of strikes, are regulated through the Act on Collective Bargaining. Slovenia There are 130 national trade unions in Slovenia operating along industrial and occupational lines. Although there are no official figures on membership, 21 out of these 130 unions are considered 'representative' (i.e. membership represents at least 15% of all employees in the particular industry/occupation the union operates in). Employers, on the other hand, are organized in three different associations, and their interests are also represented by the Chamber of Commerce, to which membership is compulsory. According to the current labor legislation, collective agreements are a main instrument for determining specific rights and duties between employers and employees.'6 Consultations occur first at the national level, resulting in (i) a collective agreement for the private sector which determines base wages and adjustment factors for 26 industries and 9 educational levels, and (ii) a collective agreement for the non-market sector. Both agreements constitute the biasis for all other contracts, thus limiting wage variation across industries and firms. 16 The proposed new labor legislation will determine most of the rights of employees at a minimum level, thus the conclusion of collective agreements will no longer be obligatory. 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