Employment in Poland 2007 – security at flexible labour market

This Report is a third in the series Employment in Poland. Its subtitle, which reads Security on a flexible labour market, is a reflection of one of the key dilemmas in social and economic policy, namely the necessity to reconcile the development of effective economic structures that react in a flexible manner to changing external circumstances with the assurance of social security and stability to all citizens. In the subsequent parts of this Report we demonstrate that in many cases this conflict between flexibility and security is only ostensible and that it is therefore possible to organise the labour market institutions in such a way that thanks to greater flexibility negative disturbances, which are bound to hit this market, could be absorbed more easily and quickly and their consequences for the public would be less severe.

Similarly to its previous editions, this Report is above all a scientific paper which synthesises empirical as well as theoretical investiga- tions in the field of economics with the recent research study results obtained in the course of its preparation. This Report is primarily a product of cooperation between the Department of Economic Analyses and Forecasts of the Polish Ministry of Labour and Social Policy and the Scientific Foundation Institute for Structural Research located in Warsaw. However, it is addressed not only to social sci- entists and academics who specialise in labour economics but also to practitioners who are responsible for designing and implement- ing economic policies at national, regional and local levels. The authors of this Report hope that the presented analytical approach as well as conclusions drawn on the basis thereof can come to play an important role in the discussion on the optimal design of the Polish economic policy.

This Report consists of four Parts. In Part I, we go deeper into the macroeconomic analysis initiated in the previous edition of Employ- ment in Poland identifying key factors responsible for different evolutions of employment and unemployment in eight Central Euro- pean countries that joined the European Union in May 2004. We point out that although in the past external shocks were of foremost importance to unemployment and employment fluctuations in the region, nowadays countries vulnerability to typical macroeco- nomic shocks affecting their major trade partners in considerably smaller. At the same time, we argue that, next to cyclical fluctuations, it was wage rises – unrelated to changes in productivity, that constituted an important internal disturbance which determined the developments on the labour markets in the region. We assert that greater real wage flexibility could allow some countries, including Poland, to lower actual unemployment levels and to better absorb external disturbances in their economies. Last but not least, we em- phasise that restrictive monetary policies implemented in the past in reaction to supply shocks that affect above all the price structure and not price levels, largely intensified the negative consequences of the economic slowdown in Poland by increasing unemployment and decreasing employment.

Part II treats on the impact on market efficiency of those labour market institutions that are intended to enhance the adaptability of households and businesses to inevitable macroeconomic disturbances as well as to different functions that work serves at different stages of human and company life. What is more, in our analysis, we focus on non-standard work arrangements and indicate that in those economies where protection measures applied to the traditional employment relationship are restrictive and where the use of alternative work arrangements is hindered, the period of absorption of aggregate disturbances is longer and the reallocation of production factors is less effective than in labour markets which with less restrictive employment protection legislation. We emphasise that in all Central European countries, including Poland, the popularity of flexible employment arrangements is much less than in Western Europe. It is also highly heterogeneous. As much as in the recent years Poland has seen a dynamic spread of temporary work contracts and integration of temporary work agencies in the functioning of the labour market, the potential of atypical employment arrangements in Poland is largely unfulfilled when it comes to economic activity of people who combine work and family life or who find it difficult to work full-time due to age or health reasons.

In Part III, we look at the issue of work remuneration from macro- and micro-perspective alike. We argue that the recent rapid wage growth can be interpreted as a belated reaction to the economic upsurge which started after 2003 and that its persistence may only become adverse to the labour market when the gap between wages and labour productivity, which came into being during the period of slowdown, is fully closed. The persistent growth of wage inequalities in Poland during the transition period was due to the fact that rapid technological progress favoured some professional and social groups more than others. What is essential here is the increasing return on formal education and rising premiums on work in managerial positions as well as increasingly diverse individual and market characteristics of Polish workers. In this context, it is the public sector that stands out because it offers relatively higher wages to low-qualified workers and it pays relatively less to people with higher qualifications. Wage arrangements in the public sector are less flexible than in the private sector and therefore they are less prone to cyclical fluctuations, which leads to swings in wage at- tractiveness of this sector. Towards the end of Part III we evidence that, in international comparison, the gender wage gap in Poland is relatively small. Notwithstanding the above, even if differences in individual and employer characteristics as well as working time are taken into consideration, women still earn about ten percent less than men. At the same time, we emphasise that, based on the exist- ing databases, it is impossible to decide whether this fact reflects real barriers to the advancement of women or whether it is rather a consequence of different preferences of men and women which determine different paths of their professional careers.

Part IV focuses on one of the key instruments of the contemporary social and economic policy in developed economies, namely active labour market policies (ALMP). We describe the evolution of different types of ALMP over time in OECD and EU countries and discuss the results of international research on the effectiveness of this form of support to the unemployed and economically inactive. The main objective of this Part, however, is to assess the active labour market policies implemented in Poland. We carry out our assessment at the level of aggregates as well as based on the individual survey study of effectiveness of ALMP which we have conducted for the purposes of this Report. It is the first attempt at producing a rigorous and comprehensive evaluation of ALMP effectiveness in Poland in the recent years. Our analysis evidences that a part of resources allocated to active labour market policies does not translate into the greater chance for their beneficiaries to find a job. This concerns above all intervention and public works which turn out to be completely inefficient when it comes to opening up job opportunities to the unemployed. At the same time, however, we point out that even for those policies that are characterised by positive net efficiency, such as internships and traineeships, the deadweight loss is also high, i.e. support is extended to groups whose situation is relatively good, whereas more difficult cases are neglected. The problem of ALMP being misaddressed also affects the fact that actions undertaken by local labour offices in Poland in the area of agency and advisory support have no significant impact on the situation of unemployed people which clearly distinguishes Poland from other European countries.

The phenomena identified in particular Parts have been put together in the final Part of this Report which contains conclusions and recommendations for the labour market policy. Their objective is to provide directions for desired changes in all areas covered by the presented analyses. We put particular emphasis on the fact that interventions in one area must account for the consequences that they might cause in other areas and we indicate that labour market policies should become a part of a broader and coordinated economic policy that would enhance the security of the people as well as favour development.