Books: The Labor Divide
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Sam Vaknin >> The Labor Divide
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Most of the unemployed can be retrained, regardless of age
and level of education. This surprising result has emerged
from many studies.
The massive retraining and re-qualification programs needed
to combat unemployment in Macedonia can be undertaken in
collaboration with the private sector. The government will
train, re-train, or re-qualify the unemployed worker – and
the private sector firms will undertake to employ the
retrained worker for a minimum period of time following the
completion of his or her training or retraining. Actually,
the government should be the educational sub-contractor of
the business sector, a catalyst of skill acquisition for
the under-capitalized private sector. Small business
employers should have the priority in this scheme.
There should be separate retraining and re-qualification
programs according to the educational levels of the
populations of the trainees and to the aims of the
programs. Thus, vocational training should be separated
from teaching basic literacy and numeracy skills.
Additionally, entrepreneurship skills should be developed
in small business skill training programs and in programs
designed to enhance the management skills of existing
entrepreneurs.
All retraining and re-qualification programs should double
as advisory services. . The instructors / guides /
lecturers should be obliged to provide legal, marketing,
financial, sales-related or other consulting. Student who
will volunteer to teach basic skills will be eligible to
receive university credits and scholarships.
Entrepreneurship and Small Businesses
Small businesses are the engine of growth and job creation
in all modern economies. In the long run, the formation of
small businesses is Macedonia’s only hope. The government
should encourage the provision of micro-credits and
facilities to set up small and home-based businesses by the
banking system. In the absence of reaction from or
collaboration with the banking system, the state itself
should step in to provide these funds and facilities
(physical facilities and services – such as business
incubators).
Thus, the state should encourage small businesses through
microcredits, incubators, tax credits, and preference to
small businesses in government procurement.
II. The Facts
Labour Mobility, Unemployment Benefits and Minimum Wages
We are all under the spell of magic words such as
“mobility”, “globalization” and “flextime”. It seems as
though we move around more frequently, that we change jobs
more often and that our jobs are less secure. The facts,
though, are different.
The world is less globalized today than it was at the
beginning of the century. Job tenure has not declined (in
the first 8 years of every job) and labour mobility did not
increase despite foreign competition, technological change
and labour market deregulation. The latter led to an
enhanced flexibility of firms and of hiring and firing
practices (temporary or part time workers) but this is
because many workers actually prefer casual work with
temporary contracts to a permanent position.
Granted, people have been and are moving from failing firms
and declining industries to successful ones and booming
sectors. But they are still reluctant to change residence,
let alone emigrate. Thus, jobs remain equally stable in
deregulated as in regulated labour markets.
Yet, this phobia of losing one’s job (arising from the
aforementioned erroneous beliefs) serves to increase both
the efficiency and productivity of workers and to moderate
their wage claims.
It is safe to assume that collective bargaining led to
increased wages and, thus, to less hiring and less flexible
labour markets. It is therefore surprising to note that
despite the declining share of unionized labour in two
thirds of the OECD countries – unemployment remained
stubbornly high. But a closer look reveals why. Both France
and the Netherlands (where unionized labour declined from
35% of the actually employed to 26%), for instance,
extended the coverage of collective agreements to non-
unionized labour. It is only where both union membership
and coverage by collective agreements were both reduced
(USA, UK, New Zealand, Australia) that employment reacted
favourably. Thus, at the one extreme we find the USA and
Canada where agreements are signed at the firm or even
individual plant level. At the other pole we have
Scandinavia where a single national agreement prevails. All
the rest are hybrid cases. Britain, New Zealand and Sweden
decentralized their collective bargaining processes while
Norway and Portugal centralized it. The evidence produced
by hybrid cases is not conclusive. Decentralized bargaining
clearly reduced wage pressures but centralized bargaining
also moderated wage demands (union leaders tended to
consider the welfare of the whole workforce. Still, it
seems that it is much preferable to choose one extreme or
the other rather than opt for hybrid bargaining. The worst
results, for instance, were obtained with national
bargaining for specific industries. Hybrid Europe saw its
unemployment soar from 3 to 11% in the last 25 years. Pure
system USA maintained its low rate of 4-5% during the same
quarter century. These opposing moves cannot be attributed
to monetary or fiscal policies. This is because all
economic policies are geared towards increasing employment.
Budget cuts, for instance, depress demand and job formation
in the short term but, by lowering real interest rates,
they encourage investment and job formation in the longer
term.
The cycle is:
Employment protection laws make it hard to fire workers and
hard for fired workers to find new jobs. The longer one is
unemployed, the lesser the chances of employment. Skills
rust and the long term unemployed become the unemployable.
Gradually, desperation sets in and the unemployed stop
looking for a job. Their absence is conspicuous in that
they do not restrain the wages paid to the employed. They
have become part of the structural unemployment.
Blanchard and Wolfers studied 20 countries between the
years 1960-96. They applied 8 market rigidities to their
subjects. The average unemployment increased by 7.2% in
this period. But in countries with strict employment
protection unemployment rose by double the amount in
countries with lax labour legislation. The country with the
most generous unemployment benefits saw its unemployment
rate grow by five times the rate of the stingiest country.
And in countries with highly coordinated wage bargaining,
unemployment has grown by four times its growth in
countries with decentralized bargaining.
It is difficult to isolate these parameters from the
general decline in productivity, the increase in real
interest rates and technological change and restructuring.
Still, the results are fairly unequivocal. Other research
(the 1994 OECD one year study, the DiTella-MacCullouch
study) seems to support these discoveries:
That flexibility is a good thing. It encourages employment,
it leads to higher output and to a higher GDP per capita.
The reason a transition from a rigid to a flexible labour
market does not yield immediate results is that it
increases the participation in the labour force. The rate
of unemployment is, thus, affected only later, it lags the
changes. But flexibility leads to lower rates of unfilled
vacancies and to a lower persistence of unemployment over
time.
Unemployment in Europe is structural (in Germany it has
been estimated to be as high as 8.9%). It is the cumulative
result of decades of centralized wage bargaining, strict
job protection laws, and over-generous employment benefits.
The IMF puts structural unemployment in Europe at 9%. This
is while the USA’s structural rate is 5-6% and the UK
reduced its own from 9% to 6%. The remedies, though well
known, are politically not palatable: flexible wages,
highly mobile labour, flexible fiscal policy.
Deregulation makes labour markets more flexible because it
forces the worker to accept almost any job. Cutting or
limiting jobless benefits has largely the same effect.
Employers feel more prone to hire people if they can
negotiate their wages with them directly and on a case-by-
case basis and if they can fire them at will. Hence the
debilitating effect of minimum wages and other wage
controls as well as of job protection laws.
But all these steps must be implemented together because of
their synergy. Research has demonstrated the impotence and
inefficacy of half hearted half measures.
Some hesitant steps have been adopted by the governments of
Germany and France (which trimmed jobless benefits), by
Italy (which stopped linking benefits to inflation), by
Belgium, Spain and France, which reduced the minimum wage
payable to young people. Spain established two classes of
workers with an increased bargaining power granted to those
with permanent employment. Yet, some measures yielded quite
unexpected and unwanted results. France legislated a
reduced working week. Other countries imposed a freeze on
hiring with the aim of attrition of the workforce through
retirement. Yet, these last two remedies led to an increase
in the bargaining power of the remaining workers and to
real wage increases.
The only clear causal relationship is between unemployment
benefits and the level of employment. The lower the
unemployment benefits, the more people seek work and wages
decrease. As a result, firms hire more workers. But, firms
hire even more when dismissing workers is made easier and
cheaper.
Paradoxically, the easier it is to fire workers, the more
workers firms are willing to take on and the more secure
workers feel knowing that their chances of being hired are
better. They look harder for work and find it, reducing the
level of unemployment and the costs to the state of jobless
benefits. Having to spend less on unemployment benefits,
the government can either cut taxes of improve the
allocation of its resources. In both cases the economy
improves and provides an added incentive to work. This is
because, in a vigorous growth economy, the value of an
extra worker is higher than the combined costs of his
hiring and firing. This is especially true since the
reservoir of the unemployed is comprised of the unskilled,
the young and women, whose remuneration is closer to the
minimum wage. In the USA the minimum wage is 35% of the
average wage (in France, it is 60%, in Britain it is 45%
and in the Netherlands it is declining relative to the
median salary). It is a fact that when wages are downward
flexible – more lowly skilled jobs are created. A 1% rise
in the minimum wage reduces the probability of finding a
job by 2-2.5%.
There is a debate raging between the proponents of minimum
wages (they reduce poverty and increase the equality of
wealth distribution) and their opponents (they destroy
jobs). The OECD stated clearly that wage regulation
couldn’t deal with poverty. The reason is that, as opposed
to common opinion, few low paid workers live in low-income
households and few low-income households have low paid
workers. Thus, the benefits of the minimum wage, such as
they are, largely bypass the poor.
Again, it is important to realize that unemployment is not
a universal phenomenon. It is concentrated among the young
and the unskilled. 11% of all people under the age of 25 in
the USA are unemployed, almost three times the national
average. A shocking 28% of those under the age of 25 are
unemployed in France. The OECD says that a 10% rise in the
minimum wage reduces teenage employment by 2-4% in both the
high and low minimum wage countries.
In view of these facts, many countries (USA, UK, France)
introduce “training wages” – actually, minimum wage
exemptions for the young. But the minimum wage is still a
high percentage of mean youth earnings (53% in the USA and
72% in France) and thus has a prohibitive effect on youth
employment.
There is no disputing the facts that minimum wages compress
the earnings distribution and reduce wage disparities
between ages and sexes but they have no effect on
inequality and the reduction of poverty among households.
In US households with less than half the median household
income only 33% of the adults have a low paid job (The
equivalent figure in the Netherlands is 13% and in the UK –
5%). In most poor households no one is employed at all. On
the other hand, many low earners have high paid partners.
In the USA only 33% of earners of less than two thirds of
the median wage live in households whose income is less
than 50% of the national median household income. In the UK
the figure is 10% and in Ireland – 3%. In each 5-year
period only 25% of low paid Americans are in a poor family
at some point (the figure is 10% in the UK).
These statistics show that minimum wages hurt poor families
with teenagers (by making teenage employment prohibitive)
while benefiting mainly the middle class.
Unemployment and Inflation
Another common misperception is that there is some trade
off between unemployment and inflation. Both Friedman and
Phelps attacked this notion. Unemployment seems to have a
“natural” (equilibrium or homeostatic) rate, which is
determined by the structure of the labour market. The
natural rate of unemployment is consistent with stable
inflation (NAIRU – Non Accelerating Inflation Rate of
Unemployment).
Making more people employable at the prevailing level of
wages can lower NAIRU. This should lead to a big drop in
unemployment together with a tiny increase in permanent
inflation. Phelps actually sought to lower NAIRU and raise
the incomes of the working poor. Stiglitz calculated that
the changing demographics of the labour force and the3
competition in markets for goods and jobs reduced NAIRU by
1.5% in the USA. R. Gordon, D. Staiger and M. Watson
support these findings.
It emerges, therefore, that the gap between the estimated
NAIRU and the actual rate of unemployment is a good
predictor of inflation.
The Rhineland Model the Poldermodel and Other European
Ideas
The Anglo-Saxon variety of capitalism is intended to
maximize value for shareholders (often at the expense of
all others, including the workers).
The Rhineland model is capitalism with a human face. It
calls for an economy of consultation among stakeholders
(shareholders, management, workers, government, banks,
other creditors, suppliers, etc.)
In the Netherlands there is a Social and Economic Council.
Its role is advisory and it is semi-corporatist. Another
institution, the Labour Foundation is a social partnership
between employees and employers.
But the Netherlands succeeded in reducing its unemployment
rate from 17% to less than 5% by ignoring both models and
inventing the “Poldermodel”, a Third Way. Wim Duisenberg,
the Dutch Banker (currently Governor of the European
Central Bank), attributed this success to four elements:
Improving state finances
Pruning social security and other benefits and transfers
Flexible labour markets
Stable exchange rate.
The Dutch miracle started in 1982 with the Wassenaar
Agreement in which employers’ organizations and trade
unions agreed on wage moderation and job creation, mainly
through decentralization of wage bargaining. The government
contributed tax cuts (which served to replace forgone wage
increases). This fiscal stimulus prevented a drop in demand
as a result of wage moderation. Additionally, restrictions
were placed on social security payments and the minimum
wage. For instance, increases in wages were no longer
matched by corresponding increases in minimum social
benefits. Working hours, hiring, firing and collective
bargaining were all opened up to labour market forces. The
strict regulation of small and medium size businesses
(which drove up labour costs) was relaxed. Generous social
security and unemployment benefits (a disincentive to find
work) were scaled back. The Netherlands did not shy from
initiating public works projects, though on a much smaller
scale than France, for instance. The latter financed these
projects by raising taxes and by increasing its budget
deficit. The result could well be a reduction in employment
in the long run (the effect of taxation). In the absence of
monetary instruments such as devaluation (due to the EMU),
the only remedy seems to be labour market flexibility.
Such flexibility must include a substantial adjustment in
sickness benefits, vacation periods, maternal leave and
unemployment benefits.
The long term (more than 12 months) unemployment in Europe
constitutes 40% of the total unemployment. About HALF of
the entire workforce under the age of 24 is unemployed in
Spain. It is about 28% in France and in Italy. Germany,
Austria and Denmark escaped this fate only by instituting
compulsory apprenticeship. But the young become the kernel
of long-term unemployment. This is because a tug of war, a
basic conflict of interests exists between the “haves” and
“have-nots”. The employed wish to defend their monopoly and
they form labour cartels. This is especially true in
dirigiste Europe.
While in the USA, 85% of all service jobs created between
1990-5 paid more than the average salary – this was not the
case in Europe. Add to this the immobility of labour in
Europe and a stable geographical distribution of
unemployment emerges, not ameliorated by labour mobility.
The Dutch model sought to battle all these rigidities:
The Dutch reduced social security contributions from 20%
(1989) to 7.9% and they halved the income tax rate to 7%
(1994).
They allowed part time workers to be paid less than full
timers, doing the same job.
They abandoned sectoral central bargaining in favour of
national bargaining – but more decentralized.
They cut sickness benefits, unemployment insurance
(benefits) and disability insurance payments (by 10% in
1991 alone – from 80% to 70%).
They made it harder to qualify for unemployment (in 1995 no
benefits were paid to those who chose to remain
unemployed).
The burden of supporting the sick was shifted to the
employer / firm. In 1996, the employer was responsible to
pay the first year of sickness benefits.
Even the Dutch model is not a success. More than 13% of the
population is receiving disability benefits. Only 62% of
the economically active population is in the workforce (the
rest dropped out of it).
But compare its experience to France, for instance.
The LOI ROBIEN prescribes that companies should be spared
social security obligations for 7 years if they agree to
put workers on part time work instead of laying them off.
Firms abused the law and restructured themselves at the
government’s expense.
The next initiative was to reduce the working week to 35
hours. This was based on the “Lump of Labour Fallacy” – the
idea that there is a fixed quantity of work and that
reducing the working week from 39 to 35 hours will create
more jobs. In reality, though, labour demand changes only
in response to changes in productivity and in the workings
of the labour market itself (rigidities). A cut in the
working week reduces productivity and destroys jobs rather
than foster job formation.
In Spain, a permanent employee fired is entitled to receive
up to 45 days’ pay multiplied by his or her tenure in
years. The result is that firms are afraid to hire or fire
workers. The government – faced with more than 22%
unemployment – permitted part time contracts with less job
protection. Today, 30% of all employed Spaniards work this
way. Yet, this led to the creation of a two-tiered
workplace where it is easier to fire the part-timer (even
if he is valuable) rather than the permanent (and better
earning) worker. Additionally, wages are thus disconnected
from productivity.
MACEDONIA
Summary
As privatization progressed (however flawed in concept and
in implementation), unemployment rose. It was the result of
redundancies, bankruptcies and restructuring of the new
private enterprises. By 1998, more than 92,000 workers were
involved in direct privatization. There were more than
210,000 workers involved in all enterprises privatized.
The unemployment rate shot up from 23.5% in 1990 to more
than 41% (foreign estimates) today (or 34% officially).
While officially the labour-force stands at c. 800,000
people, in reality it comprises only 600,000 (down from
680,000 in 1990). The number of central government
employees has remained fairly stable at c. 17,000. About
2,400 are employed in cooperatives, another 22,600 in the
pure private sector and c. 92,000 in firms with mixed
ownership.
About 4000 are in government subsidized retraining programs
at any given moment. Others are retrained within the Labour
Redeployment program run by the Agency of Privatization.
Unemployment compensation recipients rose from 5,400 in
1990 to more than 50,000 in 1997.
Mandatory employer payroll tax contribution is 20%
(pension) and the employee pays 8% to the Health Fund.
Numerous laws and legal instruments govern employment and
unemployment in Macedonia. Among them:
The Law on Labour Relations, the Law on Employment, the
Collective Bargaining Agreement, the Law on Pension and
Disability Insurance, the Law on Health Protection at Work,
the Law on Labour Inspection, the Law on Industrial Action
and the July 1997 Law on Employment and Insurance in the
case of Unemployment (now largely defunct).
The most important law by far is the Law on Labour
Relations. It regulates the terms and manner of entering
employment, the rights of employees, job positions,
salaries and other compensation. Unfortunately, it is an
extremely general and vague law. The collective agreements,
the second most important legal instruments, are as general
and, in any case, they pertain mainly if not solely to
their signatories.
The collective agreements usually provide for an
“employment trial period”. But the law itself equates the
rights of the temporarily employed to those of the
permanently employed.
The 1997 law allowed the hiring of workers without the
assistance or approval of the Employment Bureau. It
demanded that the unemployed should actively seek gainful
employment to qualify to receive unemployment benefits. It
reduced both the amount and the duration of unemployment
benefits payable to certain groups of unemployed workers.
It introduced payments of pension contributions and health
care fund contributions of registered unemployed workers
who are not covered elsewhere (for example, by their
parents, or their spouse).
The law eliminated special one-time payments to the
unemployed who could claim a right to a pension equal to
40% of the average monthly net wages.
It mandated the monthly registration of recipients of
benefits and the bi-annual registration of all other
unemployed.
Under this law, workers with 15 years of participation in
the workforce and contributions to the fund will receive
unemployment benefits for 6 months. Those with more than 25
years will receive unemployment benefits indefinitely.
Additionally, employers were allowed to use up to 18 months
of unpaid payroll taxes to subsidize the wages of
previously unemployed workers hired by them. This provision
has been eliminated.
Analysis
There are a few statistical methods used to gauge
employment-related data. The easiest, most immediate but
least reliable way is to count the number of people
registered with the Employment Bureau (“claimants”). A
claimant count tends to underestimate unemployment by up to
50% (!) because many people are so desperate that they do
not bother to register with the unemployment bureau.
The second method which is more demanding, resource
consuming and has a time lag – is also more rigorous and a
much better gauge of reality. It is the household survey.
Britain, for instance, estimates unemployment using BOTH
methods.
The Statistical Bureau in Macedonia defines and Employee as
someone who is employed at least one hour in the week prior
to being sampled, whether in a part time job or in a
permanent, full time one. People attending an
apprenticeship program or sentenced to correctional labour
are excluded (unlike in Germany, Austria or Denmark).
It follows that the unemployed are people seeking
employment. Anyone without a job, but previously employed
and recorded in an employment office is defined as an
“earlier employed person”. Applicants who held no job
before are “first time applicants”.
Self-employed workers are all people included in TRUD-15, a
quarterly report filed with the Pension and Disability
Fund. This report includes only those currently insured and
it, too, does not cover vocational students and
apprentices. It is, therefore, safe to assume that the
number of the self employed in Macedonia is larger than
reported.
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