Dealing with jobless growth and poverty in SEE Tito Boeri Università Bocconi and Fondazione Rodolfo Debenedetti Conference on Labor Markets Growth and Poverty Reduction Strategies World Bank June 27, 2005 Piece of applied economic research, which addresses a question that is in our view relevant from a policy perspective Barriers to migration of labour and other persons will be eliminated in the course of Eastern Enlargement Countries can use transitional periods up to a maximum of seven years However, political decision makers face high uncertainty on the consequences of free movement for two reasons: the income gap is larger than in past accession rounds; present migration stocks from the CEE countries are fairly low relative to the high income gap.

Outline Output and Employment Developments in the CEEs and SEEs Recent strong recovery … but jobless growth Profiles of Inequality and Long-term Unemployment Strategies reconciling social protection with a higher (formal) job content of growth.

A fast growth area in Europe…

…but since 1997 with low job content (at least formal jobs) Pre 1997 Post 1997 employment growth gdp growth Fitted values -34.1163 11.0447 -12 -6 3 6 LIT EST BUL ROM CZE HUN SLO POL LAT SLK employment growth gdp growth Fitted values -4.57327 8.52944 -12 -6 3 6 ROM LIT CZE EST POL SLK SLO BUL HUN LAT

Jobless Growth

Outline Inequality and Long-term Unemployment Output and Employment Developments in the SEEs Recent strong recovery … but jobless growth Inequality and Long-term Unemployment Strategies reconciling social protection with a higher (formal) job content of growth.

Non-employment and Inequality

Gini coefficients AL BH SR PT EE LV LT SK PL MA CY CZ HU SI 20 22 24 26 28 30 32 34 36 38 1994 1995 1996 1997 1998 1999 2000 2002 2003 PT GR ES UK IR IT EU15 FR LU NL DE DK SE SF AT BE PL MA CY CZ HU SI EE LV LT SK AL BH SR

SEE Risk of Poverty Rate 2000 SK MT PL CY LT EE LV 5 10 15 20 25 SE DK SF DE NL LU AT BE FR EU15 UK IT ES PT EL IR % below 60% median in Member State CZ SI MT PL CY LT EE LV SK SEE

Stagnant unemployment pools (incidence of LTU) SEE

Long term unemployment by age 15 - 24 2000 2001 2002 2003 2004 EU15 26.1 26.9 25.1 Czech Republic 38.2 38.6 33.5 30.9 37.1 Hungary 37.2 35.3 35.7 33.8 34.2 Poland 35.2 40.9 47.4 45.9 43.9 Slovenia 46.9 44.1 52.9 45.1 Slovakia 43.7 48.9 53.9 55.4 53.1 Bulgaria 52.1 51 54.7 54.4 46.7 Croatia 16.2 15.4 Romania 39.4 36.3 48.4 51.1 46.4 40 - 59 2000 2001 2002 2003 2004 EU15 49.9 51.6 52.1 Czech Republic 57.4 59.1 60.5 57.9 Hungary 52.8 50.5 51.5 47.3 51.3 Poland 50.6 56.7 60.7 61.6 61.3 Slovenia 78.4 77.4 69.9 64.4 64.2 Slovakia 60.8 65.1 69.3 71.5 69.5 Bulgaria 60 66.9 71.2 71.4 61.2 Croatia 20.7 22.3 Romania 53.6 66.3 68.2 65.7

Unemployment and the unskilled 15 – 24 2000 2001 2002 2003 2004 EU15 19.5 17.7 18.2 19.6 21.5 Czech Republic 44.2 41.1 40.6 48.7 53.8 Hungary 21.3 19.3 21 26.4 25.6 Poland 37 38.2 43.2 38.7 41.6 Slovenia 26.2 25.2 25.8 26.1 18 Slovakia 77.2 80.3 75.1 69.6 73.7 Bulgaria 44.7 59.5 51.9 41.4 37.5 Croatia 34.1 42.2 Romania 11.6 12.1 15.3 20.9 40 – 64 2000 2001 2002 2003 2004 EU15 8.7 7.3 7.8 8.1 Czech Republic 16.6 15 14.7 15.8 19.2 Hungary 8.4 8 8.5 Poland 17.2 19 21.6 21.4 23 Slovenia 6.7 5.8 9.3 Slovakia 31.4 32.3 36.2 37.6 43.1 Bulgaria 20 26.6 24.1 20.9 16.9 Croatia 10.2 10.9 Romania 2.7 2.8 4.2 3.5 4.6

SEE Need of better data on unemployment duration and characteristics of jobseekers. Also surveys eliciting holding of jobs in the informal sector (ex. EGB Brazilian survey). Lower educational attainments than in CEEs and emigration with brain drain. Poverty and unemployment strictly related with educational attainments.

Summarising Jobless growth in the CEEs associated with widening income inequalities Not yet in the SEEs; lower relative (but larger absolute) poverty rates than in CEEs Unemployment strongly correlated with poverty, but also working poor increasing in SEE. Even more so with widening wage inequality.

Summarising (/…) Stagnant unemployment pools are building up, involving mainly older workers and the unskilled; but also youth unemployment can be long-term Jobless growth in the SEEs likely to be due to reduction labour hoarding, mismatch, shadow economy, pivotal role of public sector wages.

Outline Output and Employment Developments in the SEEs Recent strong recovery … but jobless growth Profiles of Inequality and Long-term Unemployment Strategies reconciling social protection with a higher (formal) job content of growth.

Caveat Problems mainly on the demand side Improve environment in which firms operate (corruption, crime, judiciary, regulations) On the supply side, important to invest in increasing enrolment rates. Investment will also be repaid in terms of a larger tax base. Higher education means a smaller shadow economy

Dealing with shadow economies Repression (tighter controls) by itself may end up increasing even further unemployment. Increase controls together with: lower labour costs (higher net wages) for low productivity jobs enforce entitlement rules to unemployment benefits (cum health ins.)

Acting on labour costs Two strategies: Employment-conditional incentives (ECI) (at low wages) Wage subsidies (WS) or social security reductions for low-wage jobs WS better than ECI insofar as low wage dispersion at the low-end

Employment Conditional Incentives

Entitlement Effects Less incentives to be in the shadow sector if it does not provide entitlement to unemployment (health) insurance Need to enforce entitlement rule also by applying activation strategies Job search assistance and tests Job counselling Controls and sanctions

Activation strategies Mixed results from evaluation literature, but generally effective Job search and work test at earlier stages of unemployment spell. Importance of the definition of a suitable job offer (how many hours a day of commuting should be tolerated?) Need of quickly enforceable sanctions

Final Remarks Many problems not strictly related to labour market policy (education, business environment) Good policies require good data Income support to the unemployed and to working poor can be reconciled with more jobs by expanding the tax-base Muscular approach to shadow economy would not work Better wage subsidies to low-paid jobs together with activation policies enforcing entitlement to unemployment insurance