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7 The Labour Divide
1st EDITION
Sam Vaknin, Ph.D.
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A Narcissus Publications Imprint, Skopje 2002
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Table of Contents
I. Battling Unemployment
II. The Labour Divide - I. Employment and Unemployment
III. The Labour Divide - II. Migration and Brain Drain
IV. The Labour Divide - III. Entrepreneurship and
Workaholism
V. The Labour Divide - IV. The Unions after Communism
VI. The Labour Divide - V. Employee Benefits and Ownership
VII. The Labour Divide - VI. The Future of Work
VIII. Immigrants and the Fallacy of Labour Scarcity
Battling Unemployment
A First Draft Report Presented to the
Minister of Labour and Social Policy
By: Dr. Sam Vaknin
Economic Advisor to the
Government of the Republic of Macedonia
Skopje, Republic of Macedonia
September, 1999
Contents
I. Recommendations
II. The Facts
III. Bibliography
IV. Appendix – The Keynesian view of Unemployment,
Stabilization Theory and Full Employment Budgeting
V. Appendix – Unemployment throughout the World
(Excerpts from an academic article by R.di Tella and
R. MacCullouch, 4/1999)
The author wishes to thank Mr. Rafael Di Tella from Harvard
University (Harvard Business School) for his assistance in
sharing with the author the article he has co-authored with
Mr. R. MacCullouch of Bonn University.
The author wishes to thank Ms. Lidija Rangelovska for
sharing her Country Assessment Survey results for Macedonia
with the author. Her survey was prepared in collaboration
with the Harvard Institute of International Development
(HIID).
I. Recommendations
Get the Real Picture
No one in Macedonia knows the real picture. How many are
employed and not reported or registered? How many are
registered as unemployed but really have a job? How many
are part time workers – as opposed to full time workers?
How many are officially employed (de jure) – but de facto
unemployed or severely underemployed? How many are on
“indefinite” vacations, on leave without pay, etc.?
The Statistics Bureau must be instructed to make the
gathering and analysis of data regarding the unemployed
(through household surveys and census, if necessary) – a
TOP PRIORITY.
A limited amnesty should be declared by the state on
violations of worker registration by employers. All
employers should be given 30 days to register all their
unregistered and unreported workers – without any penalty,
retroactive or prospective (amnesty). Afterwards, labour
inspectors should embark on sampling raids. Employers
caught violating the labour laws should be heavily
penalized. In severe cases, closures should be enforced
against the workplace.
All the unemployed must register with the Employment Bureau
once a month, whether they are receiving benefits, or not.
Non-compliance will automatically trigger the loss of the
status of “unemployed”. If a person did not register
without good cause, he would have the right to re-register,
but his “unemployment tenure” will re-commence from month 1
with the new registration.
I recommend instituting a households’ survey in addition to
a claimant count. Labour force surveys should be conducted
at regular intervals – regarding the structure of the
workforce, its geographical distribution, the pay
structure, employment time probabilities.
The statistics Bureau should propose and the government
should adopt a Standard National Job Classification.
The Unemployment Benefits
Unemployment benefits – if excessive and wrongly applied –
are self -perpetuating because they provide a strong
disincentive to work.
Unemployment benefits should be means tested. There is no
reason to pay unemployment benefits to the children of a
multi-millionaire. Unemployed with assets (especially
liquid assets) should not receive benefits, even if they
are otherwise eligible. The benefits should scale down in
accordance with wealth and income.
Unemployment benefits should always be limited in time,
should decrease gradually and should be withheld from
certain segments of the population, such as school
dropouts, those who never held a job, (in some countries)
women after childrearing.
Eligibility to unemployment benefits should be confined to
those released from work immediately prior to the receipt
of the benefits, who are available to work by registering
in an employment bureau, who are actively seeking
employment and who pass a means test. Benefits should be
withheld from people who resigned voluntarily or discharged
due to misconduct or criminal behaviour. In the USA,
unemployment compensation is not available to farm workers,
domestic servants, the briefly employed, government workers
and the self- employed.
Unemployment benefits should not exceed short-term sickness
benefits (as is the case in Canada, Denmark and the
Netherlands). Optimally, they should be lower (as is the
case in Greece, Germany and Hungary). Alternatively, even
if sickness benefits are earnings-related, unemployment
benefits can be flat (as is the case in Bulgaria and
Italy). In Australia and New Zealand, both sickness
benefits and unemployment benefits are means tested. It is
recommended to reduce the replacement rate of unemployment
benefits to 40% of net average monthly wages in the first 6
months of benefits and to 30% of net average monthly wages
thereafter in the next 6 months.
Unemployment benefits should be limited in time. In
Bulgaria, they are limited to 13 weeks, in Israel, Hungary,
Italy and the Netherlands to 6 months and in France,
Germany, Luxemburg and the United Kingdom – 12 months. Only
in Belgium are unemployment benefits not limited in their
duration. In most of these, countries, though, social
welfare payments replace unemployment benefits following
the prescribed period of time – but they are usually lower
than the unemployment benefits and serve as a disincentive
to remain unemployed rather than employed. It is
recommended to limit the duration of unemployment benefits
to 12 months.
No health insurance should be paid for those unemployed for
more than 6 months.
No unemployment benefits should be paid to a person who
refuses work offered to him or her on any grounds, except
on medical grounds.
I recommend a few pilot projects with the aim of
implementing them nation-wide, should they prove
successful:
A pilot project should be attempted to provide lump sum
block grants to municipalities and to allow them to
determine eligibility, to run their own employment-
enhancement programs and to establish job training and
child care assistance. An assessment of the success or
failure of this approach in a limited number of
municipalities can be done after one year of operation.
The unemployed worker, who participates in the second pilot
project, should be provided with a choice. He could either
receive a lump sum or be eligible for a longer period of
unemployment benefits. Alternatively, he can be provided
with a choice to either receive a larger lump sum or to
receive regular unemployment benefits. In other words: he
will be allowed to convert all or part of his unemployment
benefits to a lump sum. The lump sum should represent no
more than 9 months of unemployment benefits reduced to
their net present value (NPV).
The third pilot project involves the formation of private
unemployment insurance plans to supplement or even replace
the insurance (compensation, benefits) offered by the
Employment Fund. In many countries, private unemployment
insurance is lumped together with disability and life
insurance – all offered by the private sector within one
insurance policy.
The fourth and last pilot project involves the formation of
“Voucher Communities”. These are communities of unemployed
workers organized in each municipality. The unemployed
exchange goods and services among themselves. They use a
form of “internal money” – a voucher bearing a money value.
Thus, an unemployed electrician can offer his services to
an unemployed teacher who, in return will give the
electrician’s children private lessons. They will pay each
other with voucher money. The unemployed will be allowed to
use voucher money to pay for certain public goods and
services (such as health and education). Voucher money will
not be redeemed or converted to real money – so it has no
inflationary or fiscal effects, though it does increase the
purchasing power of the unemployed.
Encouraging Employers to Hire the Unemployed
The principle governing any incentive scheme intended to
encourage employers to hire hitherto unemployed workers
must be that the employer will get increasing participation
in the wage costs of the newly hired formerly unemployed
workers – more with every year the person remains employed.
Thus, a graduated incentive scale has to be part of any law
and incentive plan. Example: employers will get increasing
participation in wage costs – more with every 6 months the
person has been unemployed by them.
Additionally, employers must undertake to employ the worker
a number of months equal to the number of months they
received benefits for the worker and with the same salary.
It would be even better if the incentives to the employer
were to be paid for every SECOND month of employment. Thus,
the employer would have an incentive to continue to employ
the new worker.
Employers will receive benefits for a new worker only if he
was registered with an unemployment office for 6
consecutive months preceding his new employment.
I recommend linking the size of investment incentives
(including tax holidays) to the potential increase in
employment deriving from the investment project.
Encouraging Labour Mobility
Workers must be encouraged to respond promptly and
positively to employment signals, even if it means
relocating. We recommend obliging a worker to accept any
job offered to him in a geographical radius of 100 km from
his place of residence. Rejection of such work offered (“it
is too far”) should result in a loss of the “unemployed”
status and any benefits attaching thereof. On the other
hand, the Employment Bureau should offer financial and
logistical assistance in relocation and incentives to
relocate to areas of high labour demand. The needs of the
unemployed worker’s family should also be considered and
catered to (kindergarten or school for his children, work
for his wife and so on).
Fixed term labour contracts with a lower cost of dismissal
and a simplified procedure for firing workers must be
allowed (see details below).
I recommend altering the Labour Relations Law to allow more
flexible hiring and firing procedures. Currently, to
dismiss a worker, the employee has to show that it has
restricted hiring, applied workforce attrition and reduced
overall overtime prior to dismissing the worker. The latter
has recourse to the courts against the former. This
recourse should be eliminated and replaced with
conciliation, mediation, or arbitration (see below for
details).
Reforms in the Minimum Wage
The minimum wage is an obstacle to the formation of new
workplaces (see analysis in the next chapter). It needs to
be reformed.
I propose a scaled minimum wage, age-related and means
tested and also connected to skills.
In other words, the minimum wage should vary according to
age, other (non-wage) income and skills.
Administrative Measures: Early Retirement
Macedonia must allow the employer to encourage the early
retirement of workers which otherwise might be rendered
technologically redundant. Early retirement is an efficient
mechanism to deal with under-employment and hidden
unemployment.
Romania ameliorated its unemployment problem largely
through early retirement.
Offering a severance package, which includes a handsome up-
front payment combined with benefits from the Employment
Fund, can encourage early retirement. A special Early
Retirement Fund can be created by setting aside receipts
from the privatization of state assets and from dividends
received by the state from its various shareholdings, to
provide excess severance fees in case of early retirement.
Administrative Measures: Reduction of Working Hours
Another classic administrative measure (lately implemented
in France) is a reduction in the standard working week (in
the number of working hours). For reasons analyzed in the
next chapter, we recommend NOT to implement such a move,
despite its obvious (though false) allure.
Administrative Measures: Public Works
All the medically capable unemployed should be compulsorily
engaged in public works for a salary equal to their
unemployment benefits (Workfare). A refusal by the
unemployed person to be engaged in public works should
result in the revocation of his “unemployed” status and of
all the benefits attaching thereto.
Generally, we would not have recommended public works.
From the Encyclopedia Britannica:
“The weakness in the proposal to use disguised unemployment
for the construction of social overhead capital projects
arises from inadequate consideration of the problem of
providing necessary subsistence funds to maintain the
workers during the long waiting period before the projects
yield consumable output. This can be managed somehow for
small-scale local community projects when workers are
maintained in situ by their relatives – but not when
workers move away. The only way to raise subsistence funds
is to encourage voluntary savings and expansion of
marketable surplus of food purchased with these savings.”
But public works financed by grants or soft loans can serve
as an interim “unemployment sink” – a buffer against wild
upswings in unemployment.
The situation in Macedonia is so extreme, that it is
comparable only to the Great Depression in the USA.
In the USA, in 1932, the Civilian Conservation Corps (CCC)
was established to tackle nature conservation work for the
young and unmarried men. They planted trees, erected flood
barriers, put out forest fires and constructed forest roads
and trails. They lived in work camps under a semi-military
regime. They were provided with food rations and a modest
monthly cash allowance, medical care and other necessities.
The CCC employed 500,000 people at its peak – and 3 million
people throughout its existence.
In any case, there is always the danger that public works
will simply displace existing employment. Labour union and
local municipality endorsements should, therefore, be
strictly observed.
Administrative Measures: Public Education and Dissemination
of Information – The Functioning of the Employment Bureau
The dissemination of information regarding employment
practices, opportunities, market requirements, etc. should
be a prime component of the activity of the Employment
Bureau. It must transform itself from a mere registry of
humans to an active exchange of labour. This can be done
through computerized employment exchanges and
intermediation.
To change the image of the Employment Bureaus from places
where the unemployed merely registers and receive benefits
to a labour exchange can be done by publishing examples of
successful job placements.
I recommend to prominently display and disseminate
information regarding the rights of the unemployed, their
obligations and services available to them and to publish
weekly or daily employment bulletins.
To organize seminars to the unemployed and to employers in
which the rights of the unemployed, their obligations and
the services offered to them and to their potential
employers will be described. This can be combined with
employment fairs. Separately, the unemployed should be
taught in these seminars how to find a job, prepare a
curriculum vita (biography), entrepreneurial skills,
preparation of business plans, marketing plans, feasibility
studies, credit applications and interview skills.
The Employment Bureaus in collaboration with the local
authorities should organize job clubs, labour exchanges and
employment fairs – places where employers can meet
potential employees, currently unemployed.
I recommend to oblige the mass media by law to dedicate at
least an hour weekly (could be broken to as many as 4
segments of 15 minutes each) to unemployment: disseminate
information, organize a televised labour exchange, a
televised entertainment show (where employers will offer a
job to a winner) and so on.
I recommend to link by a Wide Area Network (WAN) or
Intranet with firewalls the National Employment Bureau, the
Health Fund, the Pension and Disability Insurance Fund and
the Social Security Office. To cross and compare
information from all these bureaus on a real time basis (to
specifically cater to the needs of an unemployed person)
and on a periodical basis for supervision and control
purposes.
The National Employment Bureau should maintain a regular
presence in employment fairs abroad. Many fairs are global
and work can be obtained in them for Macedonian workers
(especially the more skilled).
A National employment Contract
A “National Employment Contract” should be signed between
the government, the trade unions, the employers (Chamber of
Commerce) and the Central Bank. All parties will have to
concede some things.
The Employers will guarantee the formation of new work
places against a freeze on employee compensation, a
separate treatment of part time labour (exclusion from
collective bargaining), flexibility on minimum wages and
with regards to job security, hiring and firing procedures,
social and unemployment benefits, indexation of wages and
benefits, the right to strike and the level of salaries.
The employers will obligate themselves to fixed
quantitative targets over a number of years against the
receipt of the unemployment benefits of the newly hired (or
another form of subsidy or tax incentive) and/or a discount
in social contributions.
The National Employment Contract should aim to constrain
inflation by limiting wage gains to productivity gains (for
instance, through dividends on the shareholdings of the
workers or through stock options schemes to the workers).
In return, the trade unions will be granted effective
control of the shop floor. This is the neo-corporatist
approach.
It means that the tripartite social contract will increase
employment by moderating wage demands but the unions will
control policies regarding unemployment insurance,
employment protection, early retirement, working hours, old
age pensioners, health insurance, housing, taxation, public
sector employment, vocational training, regional aid and
subsidies to declining and infant industries.
In Sweden and Germany there is co-determination. Workers
have a quasi-constitutional shop floor representation even
in non-wage related matters (such as the work
organization).
Many countries instituted an “Incomes Policy” intended to
ensure that employers, pressurized by unions, do not raise
wages and prices. In Sweden, for instance, both labour and
management organizations are responsible to maintain price
stability. The government can intervene in the negotiations
and it can always wield the whip of a wage freeze, or wage
AND price controls. In Holland the courts can set wages.
Wages and unemployment benefits are perceived as
complementary economic stabilizers (contra the business
cycle).
Another possibility is a Guaranteed Wage Plan – Employers
assure minimum annual employment or minimum annual wages or
both to those employees who have been with the firm for a
minimum of time.
Firms and trade unions must forego the seniority treatment
(firing only the newly hired – LIFO, last in first out).
The firm should be given a free hand in hiring and firing
its employees regardless of tenure.
Labour Disputes Settlement
The future collective agreements should all be subordinated
to the National Employment Contract. All these agreements
should include a compulsory dispute settlement through
mediation and arbitration. All labour contracts must
include clear, compulsory and final grievance procedures.
Possibilities include conciliation (a third party bring
management and labour together to try and solve the
problems on their own), mediation (a third party makes
nonbonding suggestions to the parties) and arbitration (a
third party makes final, binding decisions), or Peer Review
Panels – where the management and the employees together
rule on grievances.
I recommend allowing out of court settlement of disputes
arising from the dismissal of employees through
arbitration, an employees' council, trustees or an
employer-employee board.
Unconventional Modes of Work
Work used to be a simple affair of 7 to 3. It is no longer
the case.
In Denmark, the worker can take a special leave. He
receives 80% of the maximum unemployment benefits plus no
interruption in social security providing he uses the time
for job training, a sabbatical or further education, or a
parental leave. This can be extended to taking care of old
people (old parents or other relatives) or the terminally
ill – as is the case in Belgium (though only for up to 2
months). It makes economic sense, because their activities
replace social outlays.
In Britain, part time workers receive the same benefits in
case of layoffs and wrongful dismissals and in Holland, the
pension funds grant pensions to part time workers.
Special treatment should be granted by law and in the
collective agreements to night, shift and weekend work (for
instance, no payment of social benefits).
All modes of part-time, flextime, from home, seasonal,
casual and job sharing work should be encouraged. For
example: two people sharing the same job should be allowed
to choose to be treated, for tax purposes and for the
purposes of unemployment benefits, either as one person or
as two persons and so should shift workers. In Bulgaria, a
national part time employment program encouraged employers
to hire the unemployed on a short term, part time basis
(like our Mladinska Zadruga).
Macroeconomic Policies
The macroeconomic policies of Macedonia are severely
constrained by its international obligations to the IMF and
the World Bank. Generally, a country can ease interest
rates, or provide a fiscal boost to the economy by slashing
taxes or by deficit spending.
Counter-cyclical fiscal policies are lagging and as a
result they tend to exacerbate the trend. Fiscal boosts
tend to coincide with booms and fiscal contraction with
recessions.
In view of the budget constraints (more than 97% of the
budget is “locked in”), it is not practical to expect any
employment boost either from the monetary policy or from
the fiscal policies of the state in Macedonia.
What I do recommend is to introduce a “Full Employment
Budget” (see details in Appendix number I). A full
employment budget adjusts the budget deficit or surplus in
relation to effects of deviations from full or normal
unemployment. Thus, a simple balanced budget could be
actually contractionary. A simple deficit may, actually, be
a surplus on a full employment basis and a government can
be contractionary despite positive borrowing.
Apprenticeship, Training, Retraining and Re-qualification
The law should be amended to allow for apprenticeship and
training with training sub-minimum wages. Mandatory
training or apprenticeship is a beneficial rigidity because
it encourages skill gaining. Germany is an excellent
example of the benefits of a well-developed apprenticeship
program.
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