Economic Survey of the Slovak Republic 2007: Improving employment prospects: building on past reforms

 

Contents | Executive Summary | How to obtain this publication | Additional information

The following OECD assessment and recommendations summarise Chapter 2 of the Economic survey of the Slovak Republic published on 5 April 2007.

Contents                                                                                                                           

Despite a pick-up in job creation, unemployment for some groups remains high while obstacles to participation persist

Strong economic growth has begun to feed through to the labour market, and high demand for skilled workers has led to widening wage differentials. However, job prospects for the most vulnerable groups remain poor. The long-term unemployment rate is the highest in the OECD, and is especially high for youth. To some extent, long-term unemployment can be expected to decline as the impact of strong growth and past reforms of welfare and employment protection legislation work through. However, low regional worker mobility contributes to keeping the duration of unemployment high. At the same time, the overall employment rate is low, with particularly weak labour market participation among older workers and young women. Policies addressing these issues are needed and would also positively impact on poverty.

Employment rates
% of 15-64 aged population, 2005

Source: OECD Labour Force database and OECD calculations.
 

Labour market policies addressing income inequality need to support employment growth

The government has decided on a number of measures aimed at distributing more of the fruits of high economic growth to low-income earners. It has: increased the minimum wage over and above average wage growth and the government manifesto envisages further such increases; reintroduced legal extension of nation-wide sectoral wage agreements but with the possibility for individual employers to request exoneration from the government on grounds of differences in socio-economic conditions; and proposed changes to the labour code that somewhat tighten employment protection legislation (EPL). Significant further increases in the minimum wage relative to average wages should be avoided as they would harm employment prospects of the low-skilled and consequently fail to reduce income inequality. Similarly, the authorities should make liberal use of their powers to accept requests for exoneration from legal extension so as to limit the loss of responsiveness of wages to local conditions, which would aggravate unemployment in eastern regions. By contrast, some of the planned changes in EPL would not harm employment and would promote equity. Indeed, abolishing exemptions from normal EPL provisions for part-time workers would improve their career prospects. All such exemptions should be abolished. At the same time, tightening general EPL provisions, which would significantly increase employment costs, should be avoided.

High social security contributions still weigh on employment of workers with relatively low earnings potential. As in other countries, disincentives to work inherent in the tax-benefit system are more pronounced in households with children than in other households. An in-work benefit, which would both support the expansion of employment and reduce poverty, should be considered. Such a benefit should rise with the number of children, should be conditional on a minimum threshold for hours worked and should be phased out above a poverty threshold for household income.

The pension system generates poverty traps for low skilled workers

There is a substantial risk that many workers with modest earnings potential accumulate pension entitlements in the reformed pension system which will fall short of social assistance entitlements. Pensions will be strictly proportional to contributions in the reformed pension system in most cases and social assistance will continue to be withdrawn rapidly as pension income rises, generating poverty traps and disincentives to work in the legal economy. In the mandatory funded second pillar pension system, risk and return characteristics may in future be impaired by the requirement to invest 30% of asset portfolios in domestic assets, increasing the proportion of pensioners with pension entitlements that fall below social assistance. While this requirement does not at present appear to be binding, it may restrict financial investment choices once the second pillar system matures. To reduce the risk of poverty traps in the pension system a number of measures should be taken:

  • The existing redistribution mechanism in the reformed pension system could be reviewed for possible extension. In this regard, mandatory pensions, which are currently not subject to taxation (i.e., exempt-exempt-exempt(EEE) arrangements) could be subject to personal income tax (either EET or TEE) and resulting revenues be used to raise 1st pillar pensions, leaving the average net pension unchanged.
  • The rate at which social assistance payments to pensioners are withdrawn as pension income rises should be lowered with budget costs financed by cutting the tax advantages for voluntary third-pillar pension saving schemes.
  • The requirement that 30% of financial investments in the second-pillar pension scheme be directed to domestic assets should be lifted.

Activation of the long-term unemployed needs to improve further

Active labour market policies (ALMPs) are heavily geared towards large-scale job creation programmes. Such programmes have proven ineffective in lowering long-term unemployment. Resources for placement services are not yet allocated in a fully effective manner. Improving ALMPs would also have benefits in terms of making wages more responsive to labour market disequilibria. Training measures for the unemployed should be expanded, especially for the young unemployed, while subsidized job creation should be more narrowly targeted. The capacity of PES to provide effective job-search assistance and monitoring needs to be strengthened.

Regional disparities in labour market performance need to be reduced

The virtual absence of a private-rental-housing market, despite some recent improvement, is a barrier to regional labour mobility, contributing to persistently low employment rates in eastern regions, high structural unemployment and a slow transition of youth from education into jobs. Government policies are focussed on construction of subsidised public sector rental housing, for which waiting lists are long, discouraging mobility, and on providing subsidies for households purchasing their own homes. Priority should be given to removing hurdles to the development of the private rental market, reviewing regulation and improving law enforcement. Public sector housing construction should be targeted to regions where housing demand is the strongest, with public-sector rents for middle and high income households set in line with market rental rates. When the conditions for private rental market development are in place, subsidies for public sector housing construction should be replaced by a cash housing benefit.

Obstacles to labour market participation of older workers and young women need to be eliminated

Participation rates of older workers are still low, despite recent increases, and participation of young women has been falling markedly. The dramatic impact of demographic ageing on labour supply growth expected from 2030 onwards further raises the need to take steps to improve labour utilisation.

  • The statutory retirement age is 62 years for men and will reach this age for women by 2014. This age is relatively low, reflecting lower life expectancy that in other OECD countries; although life expectancy is likely to rise in line with improving living standards. The statutory retirement age should be indexed to gains in life expectancy once the increase in the retirement age for women has been phased in.
  • Pension adjustments for retirement before or after the statutory retirement age (6 per cent per year) are still lower than implied by actuarial neutrality ( around 8 per cent per year). Pension discounts for retirement before the statutory retirement age and supplements for retirement after the statutory retirement age should be raised to actuarially neutral rates.
  • Experience across OECD countries shows that while parental leave helps parents reconcile family and work life, excessively long such leave harms mothers’ career prospects. The duration of parental leave should be shortened from the current three years with the benefit for the remaining period up to three years being paid in the form of subsidies for childcare.
  • A high tax wedge on second earners, relative to the main earner, in two earner households discourages female labour supply, which is more sensitive to variations in the net wage than men’s. This tax wedge should be eliminated.

How to obtain this publication                                                                                      

The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations but not all of the charts included on the above pages.

The complete edition of the Economic survey of the Slovak Republic 2007 is available from:

Additional information                                                                                                  

For further information please contact the Slovak Republic Desk at the OECD Economics Department at eco.survey@oecd.org. The OECD Secretariat's report was prepared by David Carey and Andres Fuentes under the supervision of Patrick Lenain.

 

 

 

 

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