RECENT LABOUR MARKET DEVELOPMENTS AND POLICY REFORMS Structural Challenges of the Slovenian Economy 8th July 2014 Sandrine Cazes Senior Economist Employment, Labour and Social Affairs OECD

2 1.Latest developments in the labour market situation in OECD countries 2.A key challenge: growing labour market segmentation 3.Recent reforms to employment protection legislation 4.Policy options 5.Concluding remarks Outline

3 The labour market impact of the crisis and recovery has been highly uneven across countries Unemployment rate, percentage of the labour force Source: OECD Short-Term Labour Market Statistics Database (Cut-off date: 5 March 2014 ).

4 Labour market conditions vary dramatically within the Euro area Unemployment rate, percentage of the labour force Source: OECD Short-Term Labour Market Statistics Database (Cut-off date: 5 March 2014 ).

5 Unemployment has been rising in Slovenia

6 Long-term unemployment account for more than one in three unemployed persons in the OECD area a,b Percentage of the unemployed Note: Countries are shown by ascending order of the incidence of long-term unemployment in Q a)Data are not seasonally adjusted but smoothed using three-quarter moving averages. OECD is the weighted average of 32 OECD countries excluding Chile and Korea. b)2012 for Israel. Source: OECD calculations based on quarterly national Labour Force Surveys (Cut-off date: 5 March 2014 ).

7 Youth unemployment has reached very high levels in some OECD countries Percentage of youth (aged 15-24) labour force, Q a - Q b Note: Countries shown in ascending order of the youth unemployment rates in Q a) Q for Switzerland. b) Q for Estonia, Greece, Turkey and the United Kingdom. Source: OECD Short-Term Labour Market Statistics Database (Cut-off date: 5 March 2014 ).

8 Temporary work has been growing in EU countries

9 Temporary workers tend to cumulate unfavourable conditions  Less job protection and security  Wage penalty  Lower access/exclusion to social security schemes and pensions or other working conditions (De Jure/de Facto)  Temporary workers may not have access to credit, housing, etc. …and those disparities likely to generate persisting divides  Lower transition to permanent contracts  Temporary workers receive less training (on average probability of receiving employer-sponsored training - 14%) …reducing job quality

10  Equity issue, but not only  Efficiency as well  Depress productivity growth  Excessive adjustment at the margin (volatility)  Reduce the labour market divide and alleviate contractual labour market segmentation  Avoid “excessive” use of temporary (non-regular) employment Costs of labour market segmentation

11 EPL & LM segmentation, Argument:  Reform of EP via asymmetric liberalisation of temporary contracts (e.g. while maintaining regular EP for permanent workers) leads firms to substitute temporary for permanent workers--increase in the % of workers on fixed-term contracts (Boeri and Garibaldi, 2007; Bentolila et al., 2008)  In addition, a large asymmetry between the EP provisions applying to the two types of contracts will reduce the conversion rate of fixed- term contract into permanent ones (Boeri, 2011) A key structural reform response: employment protection legislation

12  Main focus is on reducing regulation on permanent contracts, contrast with “two-tier” reforms of the 1990s and early 2000s: –Reduction in up-front severance costs and compensation for unfair dismissal –Expansion of definition of fair dismissal, alongside improvements in functioning of courts should allow firms to make dismissals for economic reasons more easily –Extension of trial period for new hires, likely to be an important measure for encouraging hiring of youth  Different approaches to the gap between temporary and permanent workers  Some countries (GRC, PRT and ESP) also reduced scope, cost or complexity of collective dismissals Recent reforms to Employment Protection

13 Main elements of the EPL reforms in Greece, Portugal, Spain and Italy GRCPRTESPITA Reduce severance pay for permanent contractsXX Reduce red tape for individual dismissalsXX Extend probation period for new hiresXX Expand the definition of fair dismissalXX Improve functioning of courts in dismissal casesXX Reduce compensation for unfair dismissalXX Reduce regulation on collective dismissalsXXX Reduce regulation on non-permanent contractsXXX Increase regulation on non-permanent contractsXX

14  Make hiring on temporary contract more difficult & costly  Restricting renewals, duration and/or scope of use of FT. Difficult to enforce May be counterproductive if too restrictive No evaluation yet  Reduce the wedge between termination costs of regular and non-regular contracts  Single Employment Contract or Unified contract proposals have been put forward (mostly in Europe) Risk of introducing excessive rigidity in hiring decision, could even lead to employment losses & displacement on DSEWs (Single Contracts) Important reforms of judicial review necessary (Single Contracts, Unified Contracts) Difficult to implement Policy options

15  Enhance convergence between contracts (more homogeneous employment protection, notably in terms of termination costs)  Few examples of countries with same termination costs  As well as in more protective countries  Convergence of EP regime likely to reduce duality without negatively affecting efficient reallocation of resources, but will not eliminate all forms of duality (e.g. differences across social security contributions create incentives to employ those under more favourable regime, DSEW) Policy options

16 Over the past decades, many OECD countries have introduced reforms to foster LM flexibility and “activate” the unemployed Several different options to reform EP as part of a comprehensive package Very important to evaluate the impacts of those recent reforms (for ex Spanish labour market reform seems to be a significant step in the right direction according to preliminary assessment, but further monitoring will be necessary) Concluding remarks

17 Thank you Contact: OECD Directorate for Employment, Labour and Social Affairs, via OECD Employment Outlook, via OECD Employment database, via

18 Protection of permanent workers against individual and collective dismissals, 2008 and 2013

Stefano Scarpetta, OECD Slide title Slide title can be extended to two lines 19 All data for 2008 unless otherwise noted. * PRT for 2013 is an estimate based on proposed changes.

20 Estimation strategy: Regression-discontinuity model –joint effect of all the provisions included in the reform by comparing labour market performance (wages, worker flows, etc) before and after February 2012 (discontinuous patterns occurring at the time of its enforcement) –the business-cycle is modelled through observable controls and non-linear time trends. Robustness tests undertaken using fictitious placebo reforms taking place in a earlier date Not possible to distinguish the impact of the reform from other changes in February 2012 or from subsequent policy adjustments (underestimation?) The labour market impact of the 2012 reform