Experience of Slovak Labour Market Reform Peter Goliaš INEKO – Institute for Economic and Social Reforms 30 November, 2007 Belgrade, Serbia

(Un)Employment in Slovakia Source: Statistical Office of the SR

FDI and GDP growth Automobile producers: PSA, KIA Source: Statistical Office of the SR (GDP), ING Bank (FDI)

Sources of GDP growth Tax reform (2004) 21% Privatisation by foreign investors ( ) 17% Entry to the EU (2004) 12% Labour Code Amendment (2003) 10% Reforms before % Pension reform ( ) 4% Other sources 26% Source: INEKO survey among 12 local economists, March 2007

Labour Code Before After 2007 Firing costs3+2 months2 or 3 months2+2 or 3+3 months Extension of term contractsNoIndefiniteUp to 3 years Overtime yearly150 hours400 hours Approval by union for group dismissals and firing workers YesNo Retraining before dismissalYesNo Union approval for flexible work time Yes No within 4- month period Yes Basic features of 2003 reform: More flexibility Less coercive character – setting only basic standards Weaker trade unions

Labour Code Source: The World Bank Doing Business in 2005

Social welfare reform Basic features: “It pays off to work” principle Activation benefits: 30% of social benefits conditional upon activity More frequent visits at the Labour offices The reform addressed trade-off between reducing benefit dependency and risk of poverty. Poverty risk rate %11.6% Source: Ministry of Labour Source: Headquarters of Labour, Social Affairs and Family

Unemployment trap Source: Eurostat More low income workers are eligible for social benefits (25% of a worker’s salary can be deducted for the purpose of determining whether a household is eligible for social benefits) Low income workers pay lower taxes (The basic tax allowance deductible from the tax base went up almost three-fold) Definition: The unemployment trap measures the % of gross earnings which is “taxed away” through higher tax and social security contributions and the withdrawal of unemployment and other benefits when an unemployed person returns to employment.

Child benefits Child benefits before 2004: (1) Flat benefit (270 SKK per child, monthly) – universal, regardless the income (2) Means-tested benefit (210 SKK – 620 SKK per child, monthly) (3) Tax base bonus (16,800 SKK per child, yearly) –deductible from the tax base Child benefits after 2004: (1) Flat benefit (SKK 500 per child, monthly) – universal, regardless the income (2) Tax bonus (SKK 400 per child, monthly) – bonus deductible from the income tax, conditional on at least one parent being employed. If the tax is lower than the tax bonus, the family receives the difference. Source: OECD Taxing Wages

Challenges for future reforms Higher qualification Source: Statistical Office of the Slovak Republic Flexible immigration policy Lower taxes on labour (Social security)

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