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In the labour market, more ‘administrative extensions’ in wages could damage competitiveness
In wage setting, an otherwise flexible system could be challenged by administrative extensions and there are worrying intentions to widen the scope of legislation to include more sectors of the economy. Widening the extensions would bring even more sectors of the economy under the risk of excluding low skill workers from employment. This should be an important consideration in proposals to introduce discretionary extensions of sectoral collective agreements.
Recent reform of the system of sick-leave payments should help labour-market efficiency
The system of state subsidy of sick-pay has contributed to high, and rising, levels of sick leave. Employers have little incentive to check the authenticity of sick leave and, reportedly, sick leave is often encouraged when business is slack so as to cut back on labour costs. Cuts in the state payouts made this year should ease the problem. Plans to make employers entirely responsible for the first two week’s of sick-pay and to increase the strictness on medical certificates would also be positive steps. Provisions to successfully prevent abuse are, however, weak and should be strengthened together with the implementation of the planned reform.
Workers have to move more easily between locations…
Unemployment is highly regionalised, partly because of wide geographic diversity in structural change and economic growth, but also because of weak labour mobility. Problems in the rental market for housing are an important factor constraining mobility. More than one quarter of households live in rent controlled apartments and account for most of the rental market These households remain effectively protected by old rent-control rules that cap rents and are reluctant to terminate the contracts; this contributes to high prices and limited turnover in the open market. In addition, the subsidised mortgages increase the transaction costs of moving house. Final steps to liberalise the rental market need to be taken. Welfare issues caused by rising rent costs for poorer households should be dealt with through compensatory measures in state benefits. At the same time, support for home ownership should be reduced.
…as well as between jobs
Stringent employment-protection legislation is weakening demand for labour. Employers wanting to dismiss individual workers face a cumbersome process to prove unsatisfactory performance that strongly protects the employee and instead will typically justify dismissal on the basis of re-organisation, even though this means paying redundancy. Czech redundancy rules require the same payout no matter how long the worker’s tenure making dismissal costs a significant share of labour costs when employment is short. The rules on redundancy payments should be brought in line with typical practice elsewhere, with payments linked to tenure. More generally, the legislation on dismissals for those on standard contracts should be eased. Such measures could, for example, be incorporated in the Government’s intended new labour code.
Alternative contracts are used to avoid taxes and regulation
Unlike developments in some other countries, the strict rules protecting workers on standard contracts have not brought widespread use of temporary contracts, despite light regulation. Instead, employers find a variety of other arrangements preferable. Most notable is a practise of subcontracting with “self employed” workers, which not only avoids dismissal regulation but typically entails lower tax and social-security costs for both the employer and employee. The recently adopted employment act offers better opportunities for employers to hire from temporary work agencies and is a welcome development. In addition, the draft labour code aims at lighter rules on standard contracts and tightening up on abuse of alternative arrangements, better aligning social contributions across the different types of contract.
Cuts in the tax wedge are needed to boost both demand and supply of labour
The use of subcontracting arrangements reflects strong incentives to evade paying the tax wedge on labour; fiscal revenue demands combined with pressures for competitive corporate taxation mean personal-income tax and both employee and employer social contributions bear a heavy burden. This is particularly hampering formal employment at the low end of the labour market, where social benefits limit wage flexibility and poverty traps are widespread. In addition, grey sector activities are increasing -- partly in response to the high tax wedge -- and are further diminishing the tax base. Therefore cutting back the wedge should be a general priority for the Government in the process of fiscal consolidation. Opportunities and scope for such cuts could be created by more fully exploiting under-utilised tax bases – properly designed property and environmental taxation in particular. The recent introduction of caps on social security contributions has cut the tax wedge for better-paid workers. However, given the concentration of unemployment among the low-skilled, cuts at the lower-end of the labour market are more urgently needed in order to reduce poverty traps.
Average tax wedge for a single person, 2003 (1)
Per cent of labour costs
1. The tax wedge is the ratio of income tax plus employee and employer social security contributions less cash benefits as a percentage of labour costs. The tax wedges have been calculated at different percentages of the average production worker wage (APW). Data are ranked by the wedge for 67 per cent of the average wage level.
Source: OECD, Taxing Wages 2002-2003.
Poverty traps for the unemployed still need to be tackled
The welfare system has long since given financial support to the non-employed, particularly to families, that is generous in relation to earnings prospects and often given without strict application of eligibility conditions, allowing distorting grey-sector activity. The Government should not hesitate in implementing plans to use variation in the social assistance system to strengthen implementation of entitlement criteria. The introduction of joint income taxation would increase the incentives to take up work in families that do not have any earned income. However, in designing the tax schedule for joint income taxation the authorities should ensure that it does not create disincentives for second earners to take up work in particular through interaction with the transfer system. As a general strategy, the gap between the average wage and the minimum subsistence amount should be allowed to widen over time. Such a move could be made more effective by strengthening activation measures, in particular by putting more weight on placement services.
The basic education of the workforce is sound but tertiary education needs to be more responsive to skills required on the labour market
Results of the OECD’s PISA survey suggest the Czech workforce has good levels of basic education, and this is a plus for the business profile of the country. However, beyond basic levels, the education system has not evolved rapidly enough to match changing labour market demands. The system is geared towards vocational qualifications and the share of those with non-degree level, post-secondary education is above the EU-15 average. However vocational qualifications have not always kept pace with changing demand. In addition, the tertiary enrolment rate for degree-level courses has only recently risen to a level comparable with other OECD countries and attainment in the population as a whole is very low in international comparison. Though the rise in tertiary enrolment is encouraging, the system does not encourage a rapid enough reaction of students and public universities to changing opportunities and returns in the labour market from different degree-level courses. Resource allocation within the public university system entails a large element of supply side flexibility, but demand prospects for future skill requirements have insufficient weight in programme development. The introduction of tuition fees for students in public universities that at least partially reflect the cost of tertiary courses would make for better decision making by students and faster reaction of universities to changing vocational demands. If fees are introduced a system of income-contingent student loans should be considered so as to ensure accessibility to tertiary education.
Percentage of the population that has attained tertiary education, 2001 (1)
1. Countries are ranked in descending order of the percentage of 25-34 year-olds who have attained tertiary education.
Source: OECD, Education at a Glance.
…and poor education is a major factor behind the economic and social problems of the Roma
As in other countries, widespread social exclusion prevents the Roma population from accumulating labour market relevant skills and contributes significantly to very high unemployment and low incomes among this ethnic minority. Better education needs to be a key element of a long-term comprehensive strategy to cope with this challenge. A draft school act proposes to take a positive step by eliminating the system of special schools that the majority of Roma children attend. The special schools are not in fact aimed at catering for the Roma and have contributed to poor education outcomes and weak integration into mainstream Czech society. With the closure of the special schools, more special teaching assistance and adaptation of curricula and teaching methods is needed to make primary education more inclusive for Roma children. Inclusion and education prospects would also be helped if more Roma children went to kindergarten and the Government proposal for one year of compulsory pre-school is therefore welcome. The scheme of financial support for Roma going to secondary school has been reasonably successful at encouraging enrolment and similar support should be considered in tertiary education. In terms of general support to the Roma, the development of policy is often hindered by a lack of information. In particular, census data on individual ethnic background is not representative. One possible solution is a ‘mapping’ of Roma communities (as opposed to individuals) similar to that carried out in Slovakia though the Czech Republic’s relatively dispersed Roma population may require adjustment of survey techniques. This would assist in providing the much-needed deepening of targeted inclusion policies for the Roma.
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