Tighter fiscal policy as recommended above, by providing a more stable macroeconomic environment and allowing interest rates to fall, should make investment more affordable, thereby speeding capital accumulation and contributing to increasing the rate of growth of potential output. Nevertheless, additional and far reaching structural reforms will also be required to raise employment and productivity levels and speed the pace of convergence. The potential benefits from reform are enormous. Unless policies change, the OECD estimates that even 50 years from now, Poland will not have achieved average OECD income levels. In contrast, if Poland adopts the kind of reforms described below, convergence could be achieved as early as 2030.
Can labour market performance be improved?
With almost 50 per cent of working age individuals out of work, improving labour market performance represents an essential and daunting challenge for Poland. While some of today’s joblessness is cyclical in nature, most of it is structural. Fast growth during the mid 1990s served to partially mask high structural unemployment, whose full extent only became clear during the recent growth slowdown. Implementing reform on the scale required to relieve this burden will be extremely difficult and will require that measures be taken simultaneously to increase individuals’ willingness to take up available jobs, and to reduce firms’ costs so as to increase overall labour demand at given activity levels.
Employment rates by age
Per cent of population age group
In order to increase effective labour supply, policy needs to sharply reduce the passive income support provided to able-bodied individuals through the disability system and various premature labour-market withdrawal schemes. A number of existing proposals and initiatives are designed to rationalise personal transfer spending and reduce inactivity traps, which are impeding labour market adjustment. These include plans to roll-back early-retirement schemes; restrain access to the disability system and rationalise its benefits; increase resources to more targeted schemes such as social assistance and harmonise financial incentives between the farmers’ and general social insurance schemes.While all of these are appropriate directions for reform, if Poland is to successfully break the current dependency cycle, these first steps will have to be extended by more substantial reforms. In particular, plans to reassess disability pensioners and limit new access to such programmes need to be strengthened so that only those who really have a diminished working capacity continue receiving benefits. Moreover, as planned, benefit levels should be realigned with individuals’ ex ante earnings capacity. Beneficiaries currently comprise more than 13 per cent of the working-age population – more than twice the OECD average – and their after-tax benefits, when combined with other forms of social assistance, are, in many cases, twice as high as the after-tax earnings from a minimum wage job. In order to ease the adjustment of those who lose access to benefits, a transitional and time-limited scheme should be implemented, including reduced benefit levels, training and placement assistance as well as in-work benefits. Such a system should be supplemented by a reinforced and means-tested social assistance scheme, capable of providing those who fail to find work following the expiration of the transitional scheme with a socially and fiscally acceptable level of support.
Disability benefit recipiency rate (1)
Percentage of 20-64 population, 1999
1. Data are corrected for persons receiving both contributory and non-contributory benefits, except for Canada (unknown).
2. Average of contributory and non-contributory benefits for the 20 OECD countries for which data are available.
Source: OECD database on programmes for disabled persons.
Ongoing efforts to reduce the cost to firms of hiring low-skilled workers also need to be extended so that the additional effective labour supply is met with increased employment opportunities. Here, existing schemes allowing firms to hire youth and new entrants at a discount to the minimum wage, which is a binding constraint for low-skilled and young workers, should be opened up to the long-term unemployed and those coming off disability pensions. In-work benefits could be used to ensure that low-paid workers receive adequate incomes. Labour costs would also be made less of an impediment to hiring the low-skilled, if the tax wedge on low-paid workers were reduced by cutting earmarked payroll contributions and financing associated programmes from general revenues. Revenue shortfalls could be made up by a restructured personal income tax, which kept average rates paid by low-income earners low, thereby reducing the tax wedge on the low-skilled. Such a move would also eliminate the pro-cyclical bias in the financing of active labour market policy, thereby facilitating a necessary increase in the quality, targeting and number of places that are offered. In combination with welcome proposals to improve the national coordination of local public employment offices and a more stringent enforcement of jobsearch requirements, such steps could go a long way to improving the systems’ overall job-matching record and overcome the tendency for local job markets to be isolated from each other.
Regional incidence of the minimum wage (1)
1. Per cent of employed with population group earning less than 110 per cent of the minimum wage.
Source: OECD calculations based on Central Statistical Office data.
Firms’ willingness to take on additional workers would also be enhanced if rules and regulations governing employment contracts and remuneration were made more flexible. Here, recent reductions in obligatory overtime pay premia go in the right direction, but at between 50 and 100 per cent they remain too high. Similarly, required notice periods for economic layoffs are among the longest in the OECD and rules governing who may be let go are among the most constraining. While originally designed to deter layoffs, such rules raise labour costs, prolong unemployment spells, reduce employment and increase the inherent risk associated with hiring new and untried staff, thereby slowing employment growth and contributing to the development of a dualistic labour market.
The full edition of the OECD Economic Survey for Poland is available from:
Return to the OECD Economic Survey - Poland 2004 homepage
A printer-friendly Policy Brief (pdf format) may also be downloaded. The Policy Brief contains the OECD assessment and recommendations, but does not include all of the charts available from the above pages