Employment in Poland 2006 – productivity for jobs

This book constitutes a follow-up and extension of the publication of the Ministry of Economy and Labour entitled Employment in Poland 2005. In the pages of this report, we discuss problems which were not addressed, or which were merely touched upon, in the previous issue and which are of particular importance as from the beginning of the year 2007 which saw the emergence of new chal- lenges for the Polish economy and for the Polish labour market. These challenges are brought about by the process of globalisation and of European integration. Hence, we have put a lot of focus on the aspect of demand in the labour market and especially so from the macroeconomic and regional perspectives. Moreover, we have looked at how increasing productivity and competitiveness of Polish companies shape various unemployment, employment and remuneration trends. We also address the issue of labour supply which we analyse not only from the macroeconomic and regional points of view but which we assess with an emphasis on such cur- rent matters as migration or work in the non-observed economy.

Similarly to preceding issue, this issue of Employment in Poland is above all a scientific paper which synthesises empirical and theore- tical macroeconomic evidence with recent findings of relevant empirical research. It was completed thanks to the cooperation of the Department of Economic Analyses and Forecasts of the Ministry of Labour and Social Policy, on the one hand, and the Institute for Structural Research, on the other. It is addressed, however, not only to researchers working in the field of macroeconomics but also policy-makers, who shape and implement economic policies, including the labour market policy, at national, regional and local levels. The authors hope that the analytical framework presented in the report as well as the conclusions relevant for the labour market, which were formulated on the basis of this framework, will be considered a valuable contribution to the discussion on the optimal extent and scope of public intervention in Poland.

This report consists of four parts. In the first part, we look at the Polish economy from the macroeconomic point of view and analyse the labour markets in eight – out of ten – states which joined the European Union in May 2004. In this venture, we focus on identifying those aggregate disturbances which had a decisive influence on the economic fluctuations within the CEE region in the period 1994- -2005, and we assess to what extent these disturbances are responsible for different dynamics of unemployment and employment trends in the examined countries and to what extent different fiscal and monetary approaches adopted at that time contributed to remedy these disturbances. The key finding resulting from this analysis is that the relatively most significant decrease in employment and increase in unemployment levels in Europe, which came about in Poland after the year 2000, are due to the idiosyncratic, i.e. limi- ted to only one country, decrease in return on capital and total factor productivity [TFP] dynamics. We evidence in this report that other countries in the CEE region managed to swiftly eliminate the negative effects that the financial crises of the late 1990s exerted on their economies, whereas Poland was not able to overcome the economic slow-down or to improve the situation in its labour market in the period 2001-2002 without an earlier large-scale reallocation of resources in the entire economy. We also postulate that, although the policy-mix adopted in the above period was not the immediate cause for the economic decline, its role in accommodating the shock was probably moderately negative. One important conclusion of this part is that evolving employment and unemployment trends for prime-aged individuals are determined above all by economic factors whereas the participation rate for over-55-year-olds in Poland – the lowest in Europe – is due to the social policy model adopted in Poland. Hence, if this model is not essentially modified, Poland will not be able to catch up in terms of employment levels not only with the old EU member states but also with most of the new ones.

Part II is devoted to the analysis of regional differences in the labour market in Poland in the period 2000-2005. We look at six internally homogeneous groups of poviats (NUTS4 regions) which we symbolically label as follows: Development Centres (Centra rozwoju), Sub- urbs (Suburbia), Towns (Miasta), Former state farms (Byłe PGR), Low-productivity agriculture (Niskoproduktywne rolnictwo) and Agricultural and Industrial (Rolniczo-przemysłowe). On the one hand, we analyse aggregate data, on the other, we identify microeconomic factors affecting trends in job creation and destruction. It ensues from our analysis that in the period 2000-2005 no significant changes in the labour market indicators occurred either between particular groups or between voivodeships (NUTS2 regions). This is so because the direction and depth of fluctuations on the regional scale were generally shaped by aggregate shocks which affected the economy as a whole. Moreover, the above period saw a greater differentiation in terms of productivity and thus, in most parts of Poland, increasing employment and unemployment rates are due to the development of labour-intensive manufacturing. Development centres together with their surrounding Suburbs constitute one positive exemption. Poviats from the above groups not only exhibit relatively good the situation in the labour market but they also experience the fastest modernisation of the economic structure and the highest pro- ductivity, and therefore also wage dynamics. We argue that, for the time being, it is only the largest urban conglomerations that have adopted the development model which increases the probability of maintaining fast economic growth in medium and long term. Therefore, the Polish labour market as a whole remains very vulnerable to economic fluctuations.

In Part III we focus on spatial mobility of population. Firstly, we discuss important – from the local and regional points of view – pheno- mena such as internal migration and commuting, and secondly, we look at the increasingly relevant phenomenon Europe-wide, na- mely international migration. In both cases we demonstrate that economic determinants are of key significance when decisions about changing place of residence are made and that the key incentive to migrate is higher wages in the destination location and a relatively worse situation in the labour market in the region of origin. Part III also presents our estimates of the scale of international migration in Poland, which indicate that the number of people who stayed abroad for more than two months in the year 2005 was higher by approximately 165,000-379,000 thousand compared to the situation before the EU enlargement in 2004. However, this abrupt increase in the number of emigrants was to be observed only immediately after Poland’s accession to the EU. Moreover, we point out in Part III that irrespective of the fact that international migration is mostly seasonal and that emigrants retain strong ties with their homeland, for years Poland has been a country from which relatively numerous groups of young people depart for long periods to work abroad. The only effective remedy to stop this process is a rapid increase in productivity and income levels in Poland and a dynamic moder- nisation of the Polish economy. As for internal migration, we argue that its aggregate intensity is neither the highest in Europe nor as low as it is often claimed to be. Furthermore, we emphasise that although the general model of population movements from smaller to larger conglomerates remains valid, the limited intensity of these movements results in the process of urbanisation being slow and in Development Centres and Suburbs being less numerous in terms of population than in other EU member states. In the long run, this may constitute an obstacle for real convergence to the most developed EU countries.

Part IV looks at the problem of work in the non-observed economy (NOE). Considering that it is de facto impossible to precisely measu- re the non-observed economy and that various methods lead to different outcomes, which value the NOE output at 15-30 per cent of the GDP, our analysis focuses on presenting factors that lead to the emergence of undeclared work and on the consequences that this phenomenon has on the economy and on the labour market on micro- and macro scale. We attach particular attention to the fact that NOE can be perceived both positively and negatively. On the one hand, undeclared work means jobs for those who want to work but who cannot, for various reasons, find work in the official market. On the other hand, however, undeclared work is a cause for high tax rates imposed on those legally employed. Moreover, it enhances the free-rider effect and thus renders difficult the implementation of social policy aimed at helping those who really have no source of income. The most important conclusion of Part IV is that the reasons for the existence of the grey economy are to be sought both in the overly burdensome fiscal policy of the state and in economic regu- lations which are not only excessive but above all unsuited to social expectations. Therefore, one way to reduce the extent of the grey area is to eliminate these obstacles.

The phenomena identified in particular parts are juxtaposed in the final part of this report, in the conclusions and implications for the labour market policy. These findings are intended to indicate possible directions of desired change in all areas, to the extent that these proposals are sufficiently supported by the presented analyses. Particular emphasis is placed on demonstrating links between such se- emingly distant areas as macroeconomics, regional development, migration policy and campaign against the black economy, as well as on the fact that any intervention in one area must account for consequences that it may cause in another one, which means that it is necessary to look at labour market policy from the angle of broader coordinated and development oriented economic policy.