1. Combining Flexibility with Security for Workers Raymond Torres Director of International Institute for Labour Studies, ILO CICERO FOUNDATION 12 October 2007

2. Outline of presentation 2 lessons from experiences of how to combine flexibility with security 3 unanswered questions

3. How to reconcile job creation with social protection? Globalisation requires firms dynamism and workers mobility Welfare benefits often seen as an obstacle to adjustment… … and labour regulations as a rigidity But this is not necessarily the case –why?

5. 1) Welfare benefits may be designed in a manner that promotes participation High benefit levels reduce work incentives, but this can be offset by well-designed activation policies: Activation should be part of a mutual obligations approach Effective (re-)employment services are essential Tax-benefit reform can help ensure that work pays versus benefit receipt This may be done through well-designed in-work benefits combined with moderate minimum wages

8. 2) Employment regulations can be designed in a manner which provides flexicurity No clear links with aggregate unemployment, though overly-strict EPL may affect adjustment to shocks and duration of unemployment Much depends on the design of regulations

9. EPL index, 2003 (based on Employment Outlook 2004)

10. Impact of EPL – theory Positive: EPL can make firms pay for layoff decisions (reduces free-riding) EPL protects against discrimination, abuse (good for workers commitment to firms, specific human capital) Negative: EPL makes hiring and firing more expensive, affecting job creation It may reduce mobility, thus rigidify labour markets

11. Impact of EPL – practice Design of EPL matters a lot -key role of: protection of temporary versus permanent contracts => too much a difference leads to duality and affects productivity predictability of dismissal costs and simplicity of procedures => reduced uncertainty portability of benefits => mobility

12. There are ways to combining flexibility with security a)Reducing judicial uncertainty limit the role of judges in deciding whether a layoff is economically justified or not (Dutch court system) ensure speedy and simple procedures avoid risk of reinstatement of the worker and yet penalise layoff in case of discrimination

13. How to combine flexibility with security? (contd) b)Making severance pay more predictable to firms (Austria individual savings accounts) Reasonable and perfectly predictable severance pay growing with seniority, whatever the contract Reasonable trial period Portability of severance pay: key to facilitate mobility

14. How to combine flexibility with security? (contd) c)Experience rating of unemployment benefits (US) Firms fund the unemployment benefit system partly depending on their layoff record In Europe, needs to be examined with caution given the cost of benefits and presence of temporary contracts

15. How to combine flexibility with security? (contd) d ) Danish flexicurity Moderate EPL High benefit levels reduce work incentives, but this can be offset by well-designed activation policies: Activation should be part of a mutual obligations approach Effective (re-)employment services are essential Extending mutual obligations to recipients of non- employment benefits (avoid mis-use of benefits, activation, family-friendly policy)

16. No single road to Rome, but not every road leads to it!

17. Unanswered questions: 1) how to fund flexicurity? Problem of overall costs and their effects on the economy: –Are work incentives affected? –Does this lead to emigration of the talented? Problem of structure of financing –How to tax labour vis-à-vis capital? –How to reduce the risk that domestic producers are penalised vis-à-vis foreign producers?

19. Source: EULFS. Unanswered: 2) How do deal with rising sickness and disability incidence?

20. A significant proportion of working-age individuals move into disability benefits every year New disability benefit claimants, per thousand of working age population Source: National insurance authorities: NIA (Norway), IV (Switzerland) and ZUS (Poland).

21. And few people on disability benefits go back to work % of disability benefit recipients that recover and leave these benefits Source: National Labour Force Surveys. Note: Data refer to 2004 for Norway, Poland and Switzerland and 1999 for the other countries

22. Trend rise in spending on disability and sickness Spending on incapacity benefits (% of GDP)

23. Situation will become economically unsustainable… Trend rise in sickness and disability spending is problematic More is spent on these benefits than on education Labour shortages will intensify with ageing … and is also socially unfair 27% of inactive disabled people would like to work (and most of them had worked in the past) If nothing changes, benefits of disabled people who cant work will have to be cut Why is a change needed?

24. Unanwered: 3) older workers Obstacles to employment of older workers need to be addressed… … But: –How to change work practices (mandatory retirement, mentality of older workers themselves, etc.) –How to take into account long careers, tough jobs, differences in life expectancy – How to change mentality of public employment services