Western Balkans Labor Market Trends 2019 wiiw The Vienna Institute for International Economic Studies Western Balkans Labor Market Trends 2019 Gonzalo Reyes, World Bank Hermine Vidovic, wiiw Monika Schwarzhappel, wiiw

Western Balkan Labor Market Trends 2019: What it is A Collaboration between the World Bank and the Vienna Institute for International Economic Studies (wiiw). With the financial support of the Austrian Federal Ministry of Finance. 3rd annual publication, with data that covers back to 2010. Data provided by each Statistical Office for all Western Balkan countries and collected from Eurostat for comparator countries. Data collected by wiiw using a standard template of unique and detailed labor market indicators.

Western Balkan Labor Market Trends 2019: Contents A summary of labor market trends in the Western Balkan region between second quarter (Q2) of 2017 and Q2 2018 Population (activity) Employment (self-employment, atypical forms of employment, informal sector employment) Unemployment (long-term, youth unemployment, NEET) Wages Sub-regional labor market developments Special topic: Labor Costs, Labor taxes and Low wage earners in the Western Balkans Statistical annex

Main findings of the report Overall improvement in labor market conditions But at a slower pace than a year before, despite stronger economic growth in 2018 compared with 2017. About 68,000 new jobs between Q2 2017 and Q2 2018, compared with 231,000 a year earlier. GDP growth in the region increased from 2.5% in 2017 to 3.9% in 2018 On average, regional labor markets recorded improvements in: activity rates……………………. 0.5 pp to 62.8% employment rates……………. 1 pp to 52.9% unemployment rates……….. 0.9 pp to 15.3% youth unemployment rates. 3 pp to 34.6%

Uneven Labor Market dynamics in the region Labor Market conditions improved for women and youth… More than half of the employment increase benefited women, but they continue to be underrepresented in Western Balkan labor markets Youth unemployment decreased in all countries with the exception of Kosovo and North Macedonia The share of youth (15-24 years of age) not in employment, education and training (NEET) declined by 1.5 pp (to 22.3 %) from 2016 to 2017. …But not for low educated workers. On average, jobs were down 3.8% among workers with low level of education, while increased by 4.2% for workers with tertiary education and by 1.2% for workers with lower secondary to post-secondary education.

Working age population decreased in all Western Balkan countries and EU peer countries except Kosovo Working age population (15-64), 2017 Q2 – 2018 Q2, change in % Source: SEE Jobs Gateway Database, based on data provided by national statistical offices and Eurostat.

Rising share of employment along declining shares of inactivity and unemployment in most Western Balkan countries Working age population (15-64), 2017-2012, change in percentage points Source: SEE Jobs Gateway Database, based on data provided by national statistical offices and Eurostat.

Activity rates are increasing, but are (far) below those in the peer countries Activity rates (15-64 years), in % Source: SEE Jobs Gateway Database, based on data provided by national statistical offices and Eurostat.

Inactivity is substantially higher than elsewhere in Europe Inactivity accounted for 37% of the age group 15-64 years with the inactivity rates of females almost twice as high as for males (47.8% vs 26.6%) Care responsibilities for children and older family members are considered among the main reasons for female inactivity, but also low education, living in rural areas as well as remittances support Close to 70% or 1.5 million of young people (15-24 years) are inactive in the region 77.5% young women vs 62.1% young men This high shares might be partly explained that most young people stay longer in education. In the age group 25-29 years inactivity accounts for ‘only’ 24 percent.

Inactivity is substantially higher than elsewhere in Europe, cont‘d Half of the older age group (55-64 years) is inactive (63.1% of older women and 36.3% of older men) (Early) retirement, but also health problems and family responsibilities (women) are the most frequent reasons for inactivity in this age group Low-educated people (close to 60%) are more likely to be inactive than high- and medium-educated people The urban/rural divide appears also to be important

Employment growth highest for females, the young and the high- educated Employment growth, 2017 Q2–2018 Q2, in % Gender Age Education Total Male Female 15–24 25–54 55–64 Low Medium High Western Balkans 1.1 0.9 1.4 6.7 0.1 2.1 -3.8 1.9 4.2 Albania 3.3 1.6 5.4 24.6 -2.7 10.0 0.6 5.6 5.2 Bosnia and Herzegovina 0.8 1.2 0.2 12.8 0.0 -12.2 4.0 Montenegro 4.8 28.2 4.4 11.4 2.6 1.8 North Macedonia 3.0 -6.2 6.0 3.2 -2.9 Serbia 0.5 -1.1 -6.4 5.8 Kosovo -4.5 -4.4 -4.7 -20.1 -0.7 -29.1 -3.1 10.5   Austria 1.3 2.0 -2.3 0.4 9.0 Bulgaria -0.4 -0.2 -14.2 -0.5 3.4 -1.0 -1.5 Croatia 2.2 3.7 -12.6 8.5 6.1 8.4 Hungary 1.5 Source: SEE Jobs Gateway Database, based on data provided by national statistical offices and Eurostat.

Job creation mainly in industry and services, job losses in agriculture Major fields of job creation by countries Albania: industry and services Bosnia and Herzegovina: industry and services, decline in agriculture Kosovo: services (e.g. trade, financial activities, ICT, public sector), decline in agriculture, industry and construction Montenegro: agriculture, industry, services (e.g. transport, scientific and techn. Activities, public sector) North Macedonia: construction, industry, services (e.g. tourism, scientific and techn. activities) Serbia: industry, decline in agriculture

Despite declining, informal sector employment remains at high levels Share of informal employment in total employment, in % Source: SEE Jobs Gateway Database, based on data provided by national statistical offices and Eurostat.

The informal sector still accounts for a large share of employment The number of informally employed showed an uneven development in 2017 Q2 vs 2018 Q2: + 10,600 in Albania + 12,600 in North Macedonia - 30,000 in Serbia … but the share in total employment remained almost unchanged at close to 20% both in North Macedonia and Serbia and 37% in Albania as total employment rose faster than informal employment Since 2014 visible improvement in Albania - by about 17 pp, while it decreased by 2 pp in North Macedonia and remained almost unchanged in Serbia Young men, older women and low and medium-educated are more likely being informal employed In agriculture unpaid family work and self-employment are the most common types of informal employment; in the non-agricultural sector wage work w/o contract and self-employment are the prevailing forms

Despite declining, long-term unemployment remains a key challenge in the Western Balkans Long-term unemployment, share in total unemployment (15+), in % Source: SEE Jobs Gateway Database, based on data provided by national statistical offices and Eurostat.

Long-term unemployed – characteristics The number of long-term unemployment fell to 776,000 (10.5% of the labor force) in 2018 Q2, starting from a peak of 1.5 million in 2011. More than two thirds (68%) of all unemployed were long-term unemployed as compared to 45% in EU countries Men accounted for the bulk (60%) of the long-term unemployed The risk of long-term unemployment was on average highest for those with medium levels of education, but there were key differences across countries More than half of the young unemployed people were long-term unemployed, in Bosnia and Herzegovina close to 70%

The labor force participation of young people (15-24 years) was low (30%) by European standards (41%) and remained almost unchanged in recent years Also the employment rate (20%) was far below that of the same age group in the EU (35%) Young people were more likely to be working on temporary contracts than adults Source: SEE Jobs Gateway Database, based on data provided by national statistical offices and Eurostat.

A high share of young people (15-24 years) was left with informal sector employment leaving them excluded from benefit systems Share of informal employment in total employment, in % Source: SEE Jobs Gateway Database, based on data provided by national statistical offices and Eurostat.

Youth unemployment rate declining faster than overall unemployment in WB-6 but levels remain high Youth and total unemployment, 2016 Q2-2018 Q2 Source: SEE Jobs Gateway Database, based on data provided by national statistical offices and Eurostat.

Youth unemployment declining, but still high compared to peer countries Youth unemployment rate (15-24 years) in % Source: SEE Jobs Gateway Database, based on data provided by national statistical offices and Eurostat.

Despite a slight decline, more than one fifth of young people (15-24 years) are identified as NEETs - young people neither in employment nor in education and training Source: SEE Jobs Gateway Database, based on data provided by national statistical offices and Eurostat.

Western Balkan countries Wage levels differ within the region and in comparison to the peer countries Average monthly gross wages, Austria=100 (PPP EUR based) Western Balkan countries EU peer countries Note: Wage data refer to register-based survey data for the Western Balkans and peer countries, except Austria which is based on gross wages of National Accounts. Albania: methodological break 2013/2014. Source: SEE Jobs Gateway Database, based on data provided by national statistical offices and Eurostat, own calculations.

Main findings 68,000 jobs created between 2017 Q2 and 2018 Q2, largest share due to increasing female employment Activity and employment rates increased, but remained low compared to EU countries - especially among women and the young Unemployment decreased by 65,000 (from 16.2% to 15.3% of labor force), reaching all time lows in some countries. But, long-term unemployment is high and persistent Youth unemployment fell faster than overall unemployment, but remained high compared to EU countries; NEETs account for one fifth

The Vienna Institute for International Economic Studies wiiw The Vienna Institute for International Economic Studies Western Balkans Labor Market Trends 2019 Special Topic: Labor costs, labor taxes and low-wage earners in the Western Balkans Main authors: Mihail Arandarenko and Dragan Aleksic, University of Belgrade Presentation by: Gonzalo Reyes, World Bank

Motivation Need to reassess labor costs and the level and structure of labor taxes, as institutional features that have been identified as the most likely causes for the poor performance of Western Balkan labor markets. Data drawn from two EU-wide labor market surveys: the Labor Cost Survey (LCS) and the Structure of Earnings Survey (SES) This enables comparability between the region and the EU.

What is included in Labor Costs Costs faced by firms in relation to the employment of workers Total compensation of employees: Net (take home) wage Personal income tax (PIT) Employee social security contributions Employer social security contributions. Costs related to the employment of employees: Costs of vocational education and training Other expenses such as recruitment costs Taxes on wage bills or payroll. Employment subsidies are treated as negative labor costs

Total Labor Costs in the Western Balkans are low in absolute terms… …But high when taking into account level of GDP per capita. Labor costs per hour for the business economy (B–N), 2016, in EUR, at current exchange rates Annual labor costs (B-S_X_O) per full-time-equivalent employee as a % of GDP per capita, 2016, in current Euros A sign of low competitiveness

Labor Taxation in the region: Similarities and differences across countries Recently the variability in taxation rules and tax wedges across the region has increased. Common, long-standing characteristics, remain: social security contributions as the main component of labor taxes low progressivity of labor taxation Individual income tax system (all), Personal tax-free allowance (except Montenegro). Tax-free allowance for dependents only in BiH. Direct progressivity only in Albania and Kosovo, but top tax rates still low (especially in Kosovo at 10%)

Tax Wedges Measure the proportion of labor taxes on total labor costs. The higher the tax wedge, the greater is both the disincentive for someone to work and the disincentive for an employer to hire a worker. In most jurisdictions, tax wedges vary by wage level, family composition and other sources of income  OECD methodology for international comparisons based on “representative” workers. Bosnia and Herzegovina, Montenegro and Serbia appear as high tax wedge countries. Tax wedge increases only slightly with income in the Western Balkans (between 0.8 and 3 pp in 5 of the 56 countries compared with 8.2 in OECD). Only Albania shows progressivity levels that are close to OECD or EU. Labor tax wedges in Western Balkans for a single worker at 67%, 100%, and 167% of average wage, in a comparative perspective

Tax wedge for workers with families is even larger in comparative perspective Comparison based on single earner tax wedges may be misleading for the Western Balkans. Absence of family allowance implies higher tax wedge for worker with dependents in the Western Balkans compared with EU. Comparison of tax wedge for a single worker (100%) and one-earner couple with two children (100+0%)

Low wage earners Low-wage earners are internationally defined as those who make less than two thirds of the median wage in their country. The 3 W.B. countries that participated in SES 2014 have high incidence of low-wage earners, Montenegro with the highest and North Macedonia 3rd among all SES countries. (Serbia is above average) Furthermore, SES likely underestimates incidence of low wage/income earners, since its sample covers formal firms with at least 10 employees. Low wage earners are more likely to be women (except Montenegro), low educated (especially MNE) and in temporary contracts.

Tax burden for Low wage earners Tax wedge of minimum wage and progressivity between minimum and average wage High tax wedge and low progressivity Low-wage, high-tax trap for low-skilled workers means less incentives to: (1) work, especially in formal sector (on the supply side) (2) hire low-wage workers and invest in labor-intensive low-wage sectors (on the demand side) Compared with median wage workers, low wage workers are at a further disadvantage in the Western Balkans in terms of the labor costs associated with them

Conclusions and Policy implications The progressivity of PIT is non-existent or very modest. The structure of labor taxes is tilted heavily toward contributions in almost all WB countries. Relatively high tax wedge for low wage workers perpetuates informality and hinders investment in labor intensive sectors. Main considerations for labor tax reform in the region: (1) Increase of the income tax rates (2) Introduction of direct progressivity (3) Reduction of the social security contributions. The reform should be undertaken in parallel with the reform of social insurance system, in the first place pension system. Political economy concerns should be addressed

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