Are Labour Markets in the New Member States sufficiently flexible for EMU?

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1 ECB/CEPR Labour Market Workshop 2005 Are Labour Markets in the New Member States sufficiently flexible for EMU? Frankfurt am Main, Eurotower June 2005 Tito Boeri and Pietro Garibaldi Fondazione RDB, IGIER and CEPR

2 ECB position ECB: broader assessment of readiness of NMS to EMU based on integration of markets, the situation and the developments of the BOP and an examination of unit labour costs Rationale in OCA theory: factor markets should absorb potential asymmetric shocks and something seems to be going wrong in NMS labour markets.

3 Once upon a time employment growth Fitted values 6 employment growth LIT EST LIT LIT ROM EST LIT SLO SLK SLO ROM SLK CZE SLO LIT CZE LIT CZE HUN SLO CZE HUN SLK HUN HUNROM EST LAT LIT EST HUN EST LAT EST EST gdp growth PRE 1997

4 .but now jobless growth employment growth Fitted values 6 employment growth ROM LIT ROM CZE EST ROM CZE SLK CZE SLK SLO SLO SLK HUN SLO HUN SLK CZE CZE LAT SLO HUN HUN LIT SLO HUN EST ROM EST EST LAT LAT LIT EST LAT LIT LAT gdp growth POST 1997

5 Jobless Growth HUN HUN SLO CZE gdp growth ALB ROM CZE SLK HUN SLO ALB ROM SLO CZESLK HUN CRO SLK HUNSLO CZE ALB ROM ALB HUN CRO SLK SLO CZE ROM ALB SLO HUN SLK CZE CRO ROM ALB SEM SLO HUN CZE TMA SLK CRO ROM ROM SEM CZE HUN SLK SLO TMA CRO SEM SLO HUN CZE TMA Graphs by year employment growth

6 Large LTU rates also among young people EU Czech Republic Hungary Poland Slovenia Slovakia Bulgaria Croatia Romania EU Czech Republic Hungary Poland Slovenia Slovakia Bulgaria Croatia Romania

7 Concentrated among the unskilled EU Czech Republic Hungary Poland Slovenia Slovakia Bulgaria Croatia Romania EU Czech Republic Hungary Poland Slovenia Slovakia Bulgaria Croatia Romania

8 Do we need a broader assessment? Yes because labour markets in NMS are not creating jobs in spite of strong output growth; large LTU rates notably youth LTU And NMS with the largest structural unemployment have large structural deficits to absorb just while making the most radical adjustments to the new monetary policy regime (they come from floating or managed float regimes). Double hurdle

9 Outline Is the labour market an additional obstacle to Euro adoption? Do NMS have flexible factor markets? a closer look at institutions evidence on wage flexibility evidence on employment flexibility Why jobless growth?

10 Minimum wages and collective bargaining Minimun wage (Euro p/month) Minimum wage Collective bargaining (% of av. wage) Union density Union coverage Czech Republic Estonia Hungary Latvia Poland Slovakia Slovenia NMS average Belgium France Greece Ireland Luxembourg Netherlands Portugal Spain EMU average

11 Unemployment benefits and taxation Unemployment benefits (100% of APW) Marginal Effective Tax Rates (Single without children) first month 60 th month 67% of APW 100% of APW 167% of APW Czech Republic Hungary Poland Slovak Republic Slovenia Estonia Latvia Lithuania NMS average Belgium France Greece Germany Ireland Italy Luxembourg Netherlands Portugal Spain EU average

12 Employment Protection Legislation (EPL) in NMS and EMU countries 5 Index of the overall strictness of EPL 4 PRT 3 FRA GRC ESP HUN CZE AUT FIN SLK NDL DEU BEL ITA 1 IRL Late 80s

13 The Trade-off between UB and EPL (late 1990s) Strictness of EPL Portugal Greece Italy Estonia Slovakia Czech Poland Spain Slovenia France Netherlands Sweden Germany R 2 = Ireland UK Belgium Austria Finland Denmark correlation UB generosity index (effective replacement rate*coverage)

14 Preliminary assessment Relatively low Kaitz indexes Low coverage of collective bargaining EPL not particularly strict And possibility to exploit the UB/EPL tradeoff to develop even more mobility friendly institutions Measurement problems though: how about the outcomes?

15 Wages, Productivity and Unit Labour Costs in the NMS (1992=100) Czech Republic Estonia Productivity Real Wages GDP Productivity Real Wages GDP Hungary Latvia Productivity Real Wages GDP Productivity Real Wages GDP

16 Wages Productivity and Unit Labour Costs in the NMS (1992=100) Lithuania Poland Productivity Real Wages GDP Productivity Real Wages GDP Slovak Republic Slovenia Productivity Real Wages GDP Productivity Real Wages GDP

17 Changes in Real Wages and Productivity in Manufacturing

18 Declining regional mismatch in selected NMS and years Year Czech Poland Slovakia Slovenia Republic ,11 0,20-0, ,08 0,03-0, ,05 0,05 0,20 0, ,06 0,06 0,07 0,16 M2=1-S (ui.vi) 1/2

19 Job Reallocation in selected NMS and EMU countries Job turnover Excess job Lilien Index reallocation Bulgaria Estonia Hungary Latvia Slovenia NMS average Belgium Germany France Ireland Italy Netherlands Finland EMU average

20 Why then Jobless Growth? Economies coming from central planning were characterised by large labour hoarding Possible that jobless is the byproduct of productivity enhancing job destruction Look at employment adjustment during expansions and contractions. Estimating

21 I II III IV positive) gdp growth 0.31** 0.35*** negative) gdp growth positive) gdp growth after negative) gdp growth after *** itted (positive) gdp growth \ * itted (negative) gdp growth \ ** itted (positive) gdp growth after 1996 \ itted (negative) gdp growth after 1996 \ *** 0.37 rimary surplus 0.19** ** 0.21** bservations ^2 IXED Effect Yes Yes Yes Yes ears

22 A pivotal role of public sector wages?

23 Policy conclusions Labour markets do not seem to be an additional hurdle on the way to Euro Tight fiscal policy not necessarily bad for employment growth Little need for Social Pacts: would centralise wage setting: not good after EMU And Euro adoption could reduce migration!

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25 Social expenditure and social security contributions in the NMS 40 Social Expenditure (% on GDP) Estonia EU AVERAGE Slovenia Romania Bulgaria Slovak Rep. Poland Czech Rep. Latvia Lithuania Hungary Payroll contribution rates (%)

26 Informal sector and social security contributions Estonia Latvia Size of Shadow Economy EU Average Slovenia Lithuania Poland Hungary Slovakia Czech Republic Social Security Contributions

27 Number of procedures Time (days) Cost (% of income per capita) Min. capital (% of income per capita) GNI per Capita (US$) Czech Republic Estonia Hungary Lithuania Poland Slovak Republic