Economics Department

Economic Survey - Slovak Republic 2004: What can be done to reduce unemployment?

 

Strong incentives are being introduced to stimulate work …

Major reforms have been introduced to sharpen the incentives to work. The welfare system is being overhauled, cutting benefits by one half for the able‑bodied citizens who remain voluntarily unemployed. Slovakia still remains the country with the highest unemployment rate for the low-skilled in the OECD area (at close to 40 per cent), and with the lowest employment rate of the population aged 55 to 64 (at close to 20 per cent). The pension reform voted in 2003 directly links benefits to contributions and thereby improves work incentives. Child and family benefits are also being reformed and will be distributed partly as tax bonuses in order to reward earned incomes. Registration for unemployment, a condition for getting access to welfare benefits, is also being made tighter in order to exclude employees working in the informal economy. These measures can be expected to substantially increase the willingness to work. To enhance the employability of the jobless and upgrade employment services, new measures have been voted by the Parliament and further initiatives are under way. The efficacy of such policies is particularly important for the Roma minority which represents about 8 per cent of the total population but 50 per cent of the long‑term unemployed, partly as a result of functional illiteracy related to inadequate basic education. While international experience is that the returns to basic education for adults is low, substantial investment in adult education and training seems warranted in the Slovak context.

Private services and self employment

In per cent of total employment, 2001

1.     

1. Include wholesale and retail trade, hotels and restaurants, financial intermediation and real estate renting and  business activities, ISIC REV 3 G+H+J+K.

Source : OECD

…and labour demand.

Major reforms have also been launched to activate labour demand. Changes introduced recently in the labour code have simplified procedures for hiring, firing and re‑assigning employees and facilitate temporary and overtime work. Further cuts in social contribution rates, which remain among the highest in the OECD area and bear heavily on the low‑skilled, must be a priority for future changes in the tax‑benefit system. As a proxy for such cuts, targeted employment subsidies amounting to 30‑40 per cent of total employment costs have been announced for enterprises hiring the long‑term unemployed in high‑unemployment regions. This measure is welcome, and sufficient funding should be secured in order to cope with a hopefully positive response by the private sector. Additional reforms broaden further the basis of growth beyond the FDI‑core sector, by encouraging self‑employment and small scale businesses in job‑intensive service activities. While a key stimulus is provided by the tax reform, a simplified legal framework for enterprise registration is being introduced and reformed collateral rules should facilitate credit provision to small firms. Public procurement and competition policies are also being strengthened to create a level‑playing field for all enterprises. It is intended to equalise business conditions ‑‑ and improve tax collection ‑‑ by prosecuting unregistered economic activities. This makes the reform of the social contribution system all the more important: entrepreneurs moving out of the informal sector can survive if their formal obligations remain commensurable with their ability to pay; some transition measures to assist such move could be contemplated.

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The complete version of the OECD Economic Survey for the Slovak Republic  is available from:

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