Reducing labour market segmentation is vital
Labour market reforms would have a positive effect on productivity performance. One of the most harmful features of the labour market affecting productivity is its segmentation between permanent workers, who are protected by very high severance payments, and a large number of temporary workers with little employment stability. This duality not only raises equity issues, but also limits productivity gains as both job training for temporary workers and incentives to become more efficient for permanent workers are low. Although fixed term contracts have contributed to job creation, segmentation also generates incentives for developing low-technology sectors, which are those that benefit most from temporary employment, and can discourage re-organisation within firms to exploit new technologies. Hence, the long overdue task of reducing labour market segmentation by lowering the cost and uncertainty of employment protection for permanent workers remains crucial, and should be accompanied by efforts to apply current legal limits for the renewal of temporary contracts, which are abused in practice. The existing subsidies for many new permanent contracts are expensive as they incur a high deadweight loss and should be seen, at best, as a temporary solution.
Enhancing the education system remains a priority
Human capital is also key for lifting future productivity growth. Educational attainment has improved dramatically over the past two decades, suggesting that the potential for higher growth is there. While rigidities in the labour market impede the full exploitation of human capital, there is also much scope for further improvement in several areas. Early childhood education is limited for very young children and could benefit from additional public help in the form of fiscal incentives, which would also encourage participation of women in the labour market and higher fertility rates. In compulsory schooling, poor quality has been highlighted by the OECD’s international PISA tests. Addressing poor education outcomes is the main objective of ongoing school reforms. Apart from pedagogic changes, priority should be given to measures that grant greater autonomy to schools, allowing them to experiment and adapt to local conditions and sharpening incentives, including economic incentives for teachers linked to training and performance. Participation in upper secondary education is low, especially in low-income regions. Lifting the liquidity constraint that affects the less well off students would help to raise participation and would accelerate convergence across regions. Vocational training is also underdeveloped and needs a decisive push to increase its prestige, while also raising resources, including more enterprise-based training. In university education, there is little competition for excellence across university departments, while selection mechanisms for teaching staff tend in some cases to favour internal candidates. Linking university financing to clear performance criteria instead of block grants should improve education and research quality, and in this respect the newly created agency for the evaluation of universities could be a useful tool. A sizeable rise in university fees, while providing flexible payment mechanisms for students with liquidity constraints, such as income-contingent loan repayments, would not only be justified by equity reasons, but would also provide more resources for universities and introduce incentives for students to make the most of their studies.
Better framework conditions would boost the adoption of new technologies and strengthen the efficiency of R&D spending
Convergence would also be fostered by a more rapid take-up of new technologies. The share of output of high-tech sectors is low and the export structure of the new EU (European Union) countries is approaching that of Spain. Investment in ICT (Information and communication technology) equipment, which is a potent driver of productivity improvements within firms, is weak, while other ICT indicators are also relatively poor. Increasing the use of ICT in the private sector would probably require enhancing human capital and fostering R&D activities, which have complementarities with the use of new technologies. R&D spending and output indicators are well below those of the best-performing OECD countries, especially in the private sector. The authorities are aware of these shortcomings, and have programmed substantial increases in public funds for R&D for the coming years. However, it is also important to establish better framework conditions to make the most of public R&D spending:
First, public funds for R&D should be scrutinised regularly to assess their potential social returns and to redefine priorities, so that public money funds R&D activities with clear and high externalities rather than providing mere industrial subsidies with weak links to R&D. An independent agency could play this role.
Second, an adequate financial and tax framework for risky R&D projects has been implemented, but venture capital for technology start-ups has not taken off and requires the development of a better financial and management culture. Government equity programmes that allocate some public funds to these projects could help to develop this culture.
Third, encouraging further the formation of clusters for technology firms as intended by the authorities, is a cheap and effective way of promoting R&D activities, especially for small firms.
Fourth, the status and remuneration of young researchers should be raised, while job mobility and flexibility should be improved to increase the links between private and public research.
Other labour market reforms are required to raise labour utilisation further
Although job creation has been very rapid over the past ten years, the unemployment rate remains high and requires other labour market reforms. In this respect, improving active labour market policies and the public employment service should become a priority. This should be accompanied by continuous efforts to provide adequate resources to employment services, improve the efficiency of counselling and training measures for the unemployed and undertake independent evaluation of different policies. At the same time, conditionality of unemployment benefits on participation in active job search, which is required by law but only loosely applied, should be enforced to reduce unemployment spells. To increase female participation, work schedules should be better aligned with family needs, i.e. by promoting flexibility in timetables, part time contracts and substitution of split-shifts by a continuous working day. These reforms, together with those of the wage bargaining framework and employment protection, should be designed in a comprehensive way so as to take advantage of political economy aspects of reform. In this regard, the “Declaration in favour of social dialogue” signed in July 2004 by the government, employers and unions provides a window of opportunity to make further progress with labour market reforms.
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