Enhancing Job Opportunities in Transition Economies of Europe ...

Enhancing Job Opportunities in Transition Economies of Europe ...

Europe and Central Asia Region Bosnia and Herzegovina Labor Market Update The Role of Industrial Relations December 2005 The World Bank The World Bank Human Development Sector Unit Europe and Central Asia Region Europe and Central Asia Region What is the aim of this report? The World Bank Update the analysis of the 2002 World Bank Labor Market Study based on 2003 and 2004 LSMS and compare with countries in the region Review in-depth the system of industrial relations and their impact on labor market outcomes Propose concrete labor market policy directions to make the labor market in BH more dynamic Enhancing Job Opportunities 2 2 Europe and Central Asia Region Employment and unemployment

Enhancing Job Opportunities 70 60 Unemployment percent 50 40 Employment 30 Labor Force Participation 20 10 0 2001 2002 2004 Source:Ow n calculations and World Bank (2005) based on LSMS Unemployment by age 70% 60% 50% Percent The World Bank BH has strong economic growth but insufficient to make a dent into continued

high unemployment Already very high youth unemployment has increased further But gains in labor force participation and employment Increase in hours worked Still overstaffing in State-owned sector unproductive and fictitious employment 40% 2001 30% 2002 20% 10% 0% 15-18 19-24 25-34 35-44 54-54 55-64 Source: Ow n calculations, based on LSMS 3 3 Europe and Central Asia Region

the informal sector The World Bank Enhancing Job Opportunities Employment by sector, in percent of total employment P ercent Much of the employment creation happens in the fast growing informal sector Informal sector dominated by employment in agriculture and selfemployed and contributing family members Falling share of small business in informal employment 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Informal sector Formal sector 2001

2004 Ow n calculations and World Bank (2005), based on LSMS Distribution of Informal Sector Employment 2004 Agriculture Construction Manufacturing Other Trade Hotels and Restaurant Utility 4 4 Europe and Central Asia Region wages and productivity Net wage/GNI per capita, 2004 Percent Formal sector wages are high relative to productivity in a regional comparison And in RS they are growing fast relative to productivity 200.0 180.0 160.0 140.0 120.0 100.0 80.0 60.0 40.0

20.0 0.0 Net wage/GNI per capita Wage and Productivity Growth Average Net Monthly Wages in EUR, 2000 and 2004 EURO 250 The World Bank 600 500 400 300 200 100 0 200 2000 2004 FBH wage 150 FBH prod RS prod 100 RS wage 50 Source: World Bank staff calculations

Enhancing Job Opportunities 0 1999 2000 2001 2002 2003 2004 5 5 Europe and Central Asia Region and the payroll tax burden The World Bank The payroll contribution and wage tax burden as evident in the tax wedge is not excessive in a regional context, but there is room for improvement The effective burden is equal between RS and FBH But what differs is the taxable base: FBH excludes wage allowances Systems remain nonharmonized ECA tax wedge on labor, 2003

70 60 50 40 30 20 10 0 Source: World Bank (2005b) and ow n calculations Shares of take-home pay and payroll deductions in total labor cost 100% Wage Tax 80% Social Insurance contributions RS Take-home pay 60% 40% FBH Allow ances nontaxable FBH Base Wage 20% 0% FBH RS Source: Ow n calculations Enhancing Job Opportunities 6 6 Europe and Central Asia Region

Industrial Relations are evolving The World Bank Historically, collective bargaining dominated by Government and public sector trade unions, with Government extending collective agreement coverage across the economy While FBH just adopted first new GCA since 2000, RS GCA has remained unchanged for years Recent strengthening of private sector employers associations in collective bargaining, but still limited representativeness Trade union density on the decline and little penetration of the new private sector Strengthening of tripartism in Economic and Social Councils at Entity and possibly State level Enhancing Job Opportunities 7 7 Europe and Central Asia Region Impact of labor regulations on labor market outcomes: Main Findings The World Bank Mixed message: the labor market in BH is more dynamic than often assumed, but constraints remain Although substantial aspects of labor regulations are rigid on paper (particularly in the collective agreements) they do not appear to have the expected negative effect on the labor market at large in practice Evidence of non-enforcement of collective agreement

provisions across the economy as a whole, but application in some sectors Improving job opportunities requires continued strong growth, wage restraint, improvements in the business environment and a careful look at labor regulations Data are often inconsistent and of low quality Enhancing Job Opportunities 8 8 Europe and Central Asia Region The FBH minimum wage is not fully binding The World Bank Enhancing Job Opportunities Share of formal sector employees reporting earnings below 50 percent of the average wage 20 15 Percent 20 percent of formal sector employees in FBH report earnings less than the minimum wage Share of employees reporting less than 50 percent of the average wage are almost similar between SR and FBH, despite different MW levels

FBH 10 RS 5 0 2001 2002 2003 Source: Ow n calculations based on LSMS,Note: (a) Earnings are for w orkers aged 15 and older; (2) Averages are calculated from the LSMS and are based on usual earnings. 9 9 Europe and Central Asia Region FBH wage indexation mechanism has not led to higher wage growth The World Bank FBH minimum wage remains high in a regional context, which may undermine compliance However, minimum wage - average wage spiral in FBH has not led to higher wage growth Wages have been growing faster in RS, where there is no automatic indexation

mechanism Minimum/average wage ratio, 2002 (% ) Lith FBH Mac Ukr Sloven Hung Slovak Czech Lat Pol Rom Bulg Est RS Arm Mold Russia Belar Azer 0 10 20 30 40 50 60 70 Source: World Bank (2005) and ow n calculations Average net wage growth, 1997=100 300 250 200

FBH 150 RS 100 50 0 1997 1998 1999 2000 2001 2002 2003 2004 Source: FBH and RS Statistical Institutes Enhancing Job Opportunities 1010 Europe and Central Asia Region Many collective agreement provisions have no significant impact on wages The World Bank Length of employment (seniority) has no significant impact on earnings This is opposed to what the Branch Collective Agreements wage coefficient systems would

predict Returns to education weaker than in many other countries, despite rigid education coefficients in the collective agreements While in theory covering the entire economy, de facto coverage is limited, especially in the de novo private sector Enhancing Job Opportunities 1111 Europe and Central Asia Region But. Flexibility through non-enforcement of labor regulations is undesirable, as it leads to informality, creates uncertainty and undermines worker protection Collective agreements remain broad in scope and rigid and, while being partly evaded, can still have negative effect in some sectors There are obstacles to labor adjustment due to gaps in legislation and regulations The World Bank Enhancing Job Opportunities 1212 Europe and Central Asia Region Collective agreement rigidities The World Bank Automatic extension of collective agreement coverage to companies not represented in bargaining Collective agreement duration open-ended while FBH has just adopted a new GCA (the

first since 2000), the RS GCA remains unchanged since 2000 Transferable seniority premium in wage determination in RS Education coefficients in wage determination Caps on temporary and part-time employment Long maternity leave provisions Enhancing Job Opportunities 1313 Europe and Central Asia Region Obstacles to temporary and part-time employment The work book system is not geared towards temporary and part-time employment Doing Business: BH scores worse than regional comparators on an index of hiring difficulty due to caps on temporary employment Employment Rigidity in 2005 60 Index 50 The World Bank 40 Bosnia and Herzegovina 30 Region 20 OECD

10 0 Difficulty of Hiring Index Enhancing Job Opportunities Rigidity of Hours Index Difficulty of Firing Index Rigidity of Hiring cost Firing costs Employment (% of salary) (w eeks of Index w ages) 1414 Europe and Central Asia Region Long maternity leave BHs maternity leave extends to 1 year substantially longer than in many European and OECD countries Continued low female employment and labor force participation rates BH Labor Market Outcomes and Gender, 2004 Maternity Leave - Duration in Weeks Bosnia and Herzegovina Norw ay Albania Macedonia Croatia Czech Republic

Bulgaria Hungary Italy Estonia UK Ireland Finland Denmark Greece Canada Romania Pe rcent 80 The World Bank Sw itzerland 70 Spain 60 Poland Netherlands 50 Men 40 Women 30 Luxembourg Austria Belgium

Germany 20 US 10 Turkey 0 Portugal unemployment employment labor force participation Enhancing Job Opportunities 0 10 20 30 40 50 60 Weeks 1515 Europe and Central Asia Region Regulatory Gaps

The World Bank Representativeness criteria for social partners in collective bargaining Legal framework for firm-level bargaining Alternative to employee work book system to keep records for social insurance contribution Insurance of employers for wage payment obligations in cases of natural disaster and disability No system to deal with temporary lay-offs to prevent re-emergence of fictitious worker problem Enhancing Job Opportunities 1616 Europe and Central Asia Region Policy directions for a more dynamic labor market Create a leaner but more enforceable set of labor regulations The World Bank Allow for a gradual reduction of the minimum wage as a share of the average wage in the FBH Introduce a youth minimum wage Rationalize and simplify the system of coefficients and other aspects of wages, employment and benefit determination Allow for wage restraint Reduce the duration of maternity leave and pay maternity benefits through the social insurance system Enhancing Job Opportunities

1717 Europe and Central Asia Region Policy directions for a more dynamic labor market Review the system of payroll contributions The World Bank Integrate non-wage benefits into the taxable base in the FBH Harmonize systems of payroll social insurance contributions and rates between the Entities Allow for reductions in payroll contribution burden by identifying savings in the health, pension and unemployment insurance system and by introducing limited general revenue financing Enhancing Job Opportunities 1818 Europe and Central Asia Region Policy directions for a more dynamic labor market Review systems of collective bargaining and wage determination The World Bank Separate public sector wage determination from that in other sectors Limit collective agreement coverage to those enterprises that are represented in bargaining Define criteria for representation of social

partners involved in tripartite bargaining Create a State-level Economic and Social Council as a forum to discuss medium-term labor market and collective bargaining reforms Enhancing Job Opportunities 1919 Europe and Central Asia Region Policy directions for a more dynamic labor market Facilitate labor adjustment and stop the flow of new fictitious workers The World Bank Promote enterprise restructuring and free up labor currently held up in fictitious and unproductive employment Develop an alternative to employee workbooks to promote labor mobility Introduce legislation to address temporary layoffs Enhancing Job Opportunities 2020 Europe and Central Asia Region Policy directions for a more dynamic labor market Improve the statistical basis for labor market analysis Introduce an annual Labor Force Survey, complemented by enterprise surveys Increase capacity of the statistical offices to collect more accurate data from enterprises

The World Bank Enhancing Job Opportunities 2121 Europe and Central Asia Region Thank You The World Bank World Bank Bosnia and Herzegovina Country Office Fra Anela Zvizdovia 1 71000 Sarajevo www.worldbank.ba

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