By: Dr. Sam VakninFormer Economic Advisor to the Government of the Republic of Macedonia Unemployment and Inflation Another common misperception is th…
By: Dr. Sam VakninFormer Economic Advisor to the Government of the Republic of Macedonia
Unemployment and Inflation
Another common misperception is that there is some trade off between unemployment and inflation. Both Friedman and Phelps attacked this notion. Unemployment seems to have a “natural” (equilibrium or homeostatic) rate,Macedonia vs. Unemployment – Proposal Submitted to the Government – Part VI Articles which is determined by the structure of the labour market. The natural rate of unemployment is consistent with stable inflation (NAIRU – Non Accelerating Inflation Rate of Unemployment).
Making more people employable at the prevailing level of wages can lower NAIRU. This should lead to a big drop in unemployment together with a tiny increase in permanent inflation. Phelps actually sought to lower NAIRU and raise the incomes of the working poor. Stiglitz calculated that the changing demographics of the labour force and the3 competition in markets for goods and jobs reduced NAIRU by 1.5% in the USA. R. Gordon, D. Staiger and M. Watson support these findings.
It emerges, therefore, that the gap between the estimated NAIRU and the actual rate of unemployment is a good predictor of inflation.
The Rhineland Model the Poldermodel and Other European Ideas
The Anglo-Saxon variety of capitalism is intended to maximize value for shareholders (often at the expense of all others, including the workers).
The Rhineland model is capitalism with a human face. It calls for an economy of consultation among stakeholders (shareholders, management, workers, government, banks, other creditors, suppliers, etc.)
In the Netherlands there is a Social and Economic Council. Its role is advisory and it is semi-corporatist. Another institution, the Labour Foundation is a social partnership between employees and employers.
But the Netherlands succeeded in reducing its unemployment rate from 17% to less than 5% by ignoring both models and inventing the “Poldermodel”, a Third Way. Wim Duisenberg, the Dutch Banker (currently Governor of the European Central Bank), attributed this success to four elements:
Improving state finances
Pruning social security and other benefits and transfers
Flexible labour markets
Stable exchange rate.
The Dutch miracle started in 1982 with the Wassenaar Agreement in which employers’ organizations and trade unions agreed on wage moderation and job creation, mainly through decentralization of wage bargaining. The government contributed tax cuts (which served to replace forgone wage increases). This fiscal stimulus prevented a drop in demand as a result of wage moderation. Additionally, restrictions were placed on social security payments and the minimum wage. For instance, increases in wages were no longer matched by corresponding increases in minimum social benefits. Working hours, hiring, firing and collective bargaining were all opened up to labour market forces. The strict regulation of small and medium size businesses (which drove up labour costs) was relaxed. Generous social security and unemployment benefits (a disincentive to find work) were scaled back. The Netherlands did not shy from initiating public works projects, though on a much smaller scale than France, for instance. The latter financed these projects by raising taxes and by increasing its budget deficit. The result could well be a reduction in employment in the long run (the effect of taxation). In the absence of monetary instruments such as devaluation (due to the EMU), the only remedy seems to be labour market flexibility.
Such flexibility must include a substantial adjustment in sickness benefits, vacation periods, maternal leave and unemployment benefits.
The long term (more than 12 months) unemployment in Europe constitutes 40% of the total unemployment. About HALF of the entire workforce under the age of 24 is unemployed in Spain. It is about 28% in France and in Italy. Germany, Austria and Denmark escaped this fate only by instituting compulsory apprenticeship. But the young become the kernel of long-term unemployment. This is because a tug of war, a basic conflict of interests exists between the “haves” and “have-nots”. The employed wish to defend their monopoly and they form labour cartels. This is especially true in dirigiste Europe.
While in the USA, 85% of all service jobs created between 1990-5 paid more than the average salary – this was not the case in Europe. Add to this the immobility of labour in Europe and a stable geographical distribution of unemployment emerges, not ameliorated by labour mobility.
The Dutch model sought to battle all these rigidities:
The Dutch reduced social security contributions from 20% (1989) to 7.9% and they halved the income tax rate to 7% (1994).
They allowed part time workers to be paid less than full timers, doing the same job.
They abandoned sectoral central bargaining in favour of national bargaining – but more decentralized.
They cut sickness benefits, unemployment insurance (benefits) and disability insurance payments (by 10% in 1991 alone – from 80% to 70%).
They made it harder to qualify for unemployment (in 1995 no benefits were paid to those who chose to remain unemployed).
The burden of supporting the sick was shifted to the employer / firm. In 1996, the employer was responsible to pay the first year of sickness benefits.
Even the Dutch model is not a success. More than 13% of the population is receiving disability benefits. Only 62% of the economically active population is in the workforce (the rest dropped out of it).
But compare its experience to France, for instance.
The LOI ROBIEN prescribes that companies should be spared social security obligations for 7 years if they agree to put workers on part time work instead of laying them off. Firms abused the law and restructured themselves at the government’s expense.
The next initiative was to reduce the working week to 35 hours. This was based on the “Lump of Labour Fallacy” – the idea that there is a fixed quantity of work and that reducing the working week from 39 to 35 hours will create more jobs. In reality, though, labour demand changes only in response to changes in productivity and in the workings of the labour market itself (rigidities). A cut in the working week reduces productivity and destroys jobs rather than foster job formation.
In Spain, a permanent employee fired is entitled to receive up to 45 days’ pay multiplied by his or her tenure in years. The result is that firms are afraid to hire or fire workers. The government – faced with more than 22% unemployment – permitted part time contracts with less job protection. Today, 30% of all employed Spaniards work this way. Yet, this led to the creation of a two-tiered workplace where it is easier to fire the part-timer (even if he is valuable) rather than the permanent (and better earning) worker. Additionally, wages are thus disconnected from productivity.
As privatization progressed (however flawed in concept and in implementation), unemployment rose. It was the result of redundancies, bankruptcies and restructuring of the new private enterprises. By 1998, more than 92,000 workers were involved in direct privatization. There were more than 210,000 workers involved in all enterprises privatized.
The unemployment rate shot up from 23.5% in 1990 to more than 41% (foreign estimates) today (or 34% officially).
While officially the labour-force stands at c. 800,000 people, in reality it comprises only 600,000 (down from 680,000 in 1990). The number of central government employees has remained fairly stable at c. 17,000. About 2,400 are employed in cooperatives, another 22,600 in the pure private sector and c. 92,000 in firms with mixed ownership.
About 4000 are in government subsidized retraining programs at any given moment. Others are retrained within the Labour Redeployment program run by the Agency of Privatization.
Unemployment compensation recipients rose from 5,400 in 1990 to more than 50,000 in 1997.
Mandatory employer payroll tax contribution is 20% (pension) and the employee pays 8% to the Health Fund.
Numerous laws and legal instruments govern employment and unemployment in Macedonia. Among them:
The Law on Labour Relations, the Law on Employment, the Collective Bargaining Agreement, the Law on Pension and Disability Insurance, the Law on Health Protection at Work, the Law on Labour Inspection, the Law on Industrial Action and the July 1997 Law on Employment and Insurance in the case of Unemployment (now largely defunct).
The most important law by far is the Law on Labour Relations. It regulates the terms and manner of entering employment, the rights of employees, job positions, salaries and other compensation. Unfortunately, it is an extremely general and vague law. The collective agreements, the second most important legal instruments, are as general and, in any case, they pertain mainly if not solely to their signatories.
The collective agreements usually provide for an “employment trial period”. But the law itself equates the rights of the temporarily employed to those of the permanently employed.
The 1997 law allowed the hiring of workers without the assistance or approval of the Employment Bureau. It demanded that the unemployed should actively seek gainful employment to qualify to receive unemployment benefits. It reduced both the amount and the duration of unemployment benefits payable to certain groups of unemployed workers.
It introduced payments of pension contributions and health care fund contributions of registered unemployed workers who are not covered elsewhere (for example, by their parents, or their spouse).
The law eliminated special one-time payments to the unemployed who could claim a right to a pension equal to 40% of the average monthly net wages.
It mandated the monthly registration of recipients of benefits and the bi-annual registration of all other unemployed.
Under this law, workers with 15 years of participation in the workforce and contributions to the fund will receive unemployment benefits for 6 months. Those with more than 25 years will receive unemployment benefits indefinitely.
Additionally, employers were allowed to use up to 18 months of unpaid payroll taxes to subsidize the wages of previously unemployed workers hired by them. This provision has been eliminated.
There are a few statistical methods used to gauge employment-related data. The easiest, most immediate but least reliable way is to count the number of people registered with the Employment Bureau (“claimants”). A claimant count tends to underestimate unemployment by up to 50% (!) because many people are so desperate that they do not bother to register with the unemployment bureau.
The second method which is more demanding, resource consuming and has a time lag – is also more rigorous and a much better gauge of reality. It is the household survey. Britain, for instance, estimates unemployment using BOTH methods.
The Statistical Bureau in Macedonia defines and Employee as someone who is employed at least one hour in the week prior to being sampled, whether in a part time job or in a permanent, full time one. People attending an apprenticeship program or sentenced to correctional labour are excluded (unlike in Germany, Austria or Denmark).
It follows that the unemployed are people seeking employment. Anyone without a job, but previously employed and recorded in an employment office is defined as an “earlier employed person”. Applicants who held no job before are “first time applicants”.
Self-employed workers are all people included in TRUD-15, a quarterly report filed with the Pension and Disability Fund. This report includes only those currently insured and it, too, does not cover vocational students and apprentices. It is, therefore, safe to assume that the number of the self employed in Macedonia is larger than reported.
If the index representing total employment in Macedonia in 1989 was 100.3 – it was 62 in 1997. The figure for women was marginally higher.
Total employment in the economic sector went down by more than 40% between 1989-97.
The strongest declines were in trade and in tourism and catering. But severe drops were registered in mining and industry, agriculture and fisheries, forestry (which was already depressed in 1989). Only water treatment and management and crafts and trades – actually increased. But construction, transport and communications, and, to a lesser extent, housing, utilities, landscaping, financial, technical and business services also declined.
Total employment in the non-economic sector was almost unaffected !!!
Even in sectors such as education, science, culture and information and healthcare and social services, the effects were minimal.
And in administration and politics there was actually an INCREASE.
The total employed declined from c. 517,000 (1989) to less than 320,000 in 1997.
The total in the economic sectors declined from 430,000 to 270,000.
The total in the non-economic sectors declined from c. 90,000 to 84,000.
The female population reacted more strongly to the trend. Female employment declined from 133,000 in 1995 to less than 122,000 in 1997.
Less than 73,000 women were employed in the economic sector in 1997, compared to more than 84,000 in 1995. In the non-economic sector, the figures are 49,000 and 49,000 respectively (in other words, employment in the non economic sector remained stable while even as it declined strongly in the economic sector).
In 1997, all employed people numbered c. 319,453 (of whom 121,666 were women).
In the economic sector: 235,206 (72359)
In companies with social ownership: 185522 (70,094), of which 121,663 were in the economic sector (30,835 women).
In privately owned firms the figure is – 22, 593 (of whom 21,910 in the economic sector). Women accounted for 10,492 (10,252 in the economic sector) of this number.
2414 workers (629 women) worked in cooperatives (all part of the economic sector).
Firms with mixed ownership employed 91,988 (31,854 women).
Of these employees, 88,799 (30,548) were in the economic sector.
State owned firms, institutions and organs employed 16,936 workers (8,597 women). Of these only 420 were engaged in economic activities (95 women).
The (monthly) demand for workers declined from 6,619 in 1989 to 1,907 in 1996. Concurrently, monthly layoffs doubled from 1,408 to 2,805. First time applicants for unemployment benefits peaked monthly at 3,847 in 1992 and declined to 2,073 in 1996. This is a bad sign – it indicates growing desperation among the long term (more than 12 months) unemployed.
New hiring virtually collapsed from 1,506 monthly in 1989 to 972 in 1997. Yet, this grim picture has to be balanced by mentioning that many people are unofficially employed and not registered anywhere.
The total number of employment seekers (in parentheses – the number of women) has gone up from 150,400 (78,075) in 1989 to c. 253,000 (115,000) in 1997. But this is misleading because fully 200,000 people have dropped from the workforce and have given up seeking employment.
First time applicants went up from 116,000 to 186,000 in the same period.
In 1989 only 75,000 unskilled workers were jobless. In 1997 the number almost doubled to 133,000.