Combining Flexibility with Security for Workers

Raymond TorresDirector of International Institute for Labour

Studies, ILO

CICERO FOUNDATION12 October 2007

Outline of presentation

2 lessons from experiences of how to combine flexibility with security

3 unanswered questions

How to reconcile job creation with social protection?

• Globalisation requires firms’ dynamism and workers’ mobility

• Welfare benefits often seen as an obstacle to adjustment…

• … and labour regulations as a rigidity

• But this is not necessarily the case –why?

1) Welfare benefits may be designed in a manner that promotes participation

High benefit levels reduce work incentives, but this can be offset by well-designed activation policies:

Activation should be part of a “mutual obligations” approach

Effective (re-)employment services are essential

Tax-benefit reform can help ensure that work pays versus benefit receipt

This may be done through well-designed in-work benefits combined with moderate minimum wages

Figure 3. High replacement rates in Nordics and the Netherlands…

Initial net replacement rate in 26 OECD counries, 2004Percentage of net earnings in work

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60

70

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90

Figure 4. … and long duration of benefits, yet high employment rates

Unemployment insurance benefit duration in 26 OECD counries, 2004Months, equivalent initial rate

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5

10

15

20

25

30

35

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45

50

2) Employment regulations can be designed in a manner which provides ‘flexicurity’

• No clear links with aggregate unemployment, though overly-strict EPL may affect adjustment to shocks and duration of unemployment

• Much depends on the design of regulations

Regular work total

-1.5

0.5

2.5

0.0 0.5 1.0 1.5 2.0 2.5

Regular work individual

Regular work total

-2.5

2.5

0.0 0.5 1.0 1.5 2.0 2.5

Temporary work

Regular work individual

0.0

2.0

0.0 0.2 0.4 0.6 0.8 1.0 1.2

Temporary work

Regular individual

-2.5

2.5

0.0 0.5 1.0 1.5 2.0 2.5

Temporary

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2003(Scale 0-6)

Protection of regular workers against (individual) dismissal Specific requirements for collective dismissal

Regulation on temporary forms of employment

EPL index, 2003 (based on Employment Outlook 2004)

Impact of EPL – theory

Positive:• EPL can make firms pay for layoff decisions (reduces

free-riding)• EPL protects against discrimination, “abuse” (good for

workers’ commitment to firms, specific human capital)

Negative:• EPL makes hiring and firing more expensive, affecting

job creation • It may reduce mobility, thus ‘rigidify’ labour markets

Impact of EPL – practice

Design of EPL matters a lot -key role of:

• protection of temporary versus permanent contracts => too much a difference leads to duality and affects productivity

• predictability of dismissal costs and simplicity of procedures => reduced uncertainty

• portability of benefits => mobility

There are ways to combining flexibility with security

a) Reducing judicial uncertainty

• limit the role of judges in deciding whether a layoff is economically justified or not (Dutch court system)

• ensure speedy and simple procedures

• avoid risk of reinstatement of the worker

• and yet penalise layoff in case of discrimination

How to combine flexibility with security? (cont’d)

b) Making severance pay more predictable to firms (Austria individual savings accounts)

• Reasonable and perfectly predictable severance pay growing with seniority, whatever the contract

• Reasonable trial period

• Portability of severance pay: key to facilitate mobility

How to combine flexibility with security? (cont’d)

c) Experience rating of unemployment benefits (US)

• Firms fund the unemployment benefit system partly depending on their layoff record

• In Europe, needs to be examined with caution given the cost of benefits and presence of temporary contracts

How to combine flexibility with security? (cont’d)

d) Danish flexicurity

Moderate EPL

High benefit levels reduce work incentives, but this can be offset by well-designed activation policies:

Activation should be part of a “mutual obligations” approach

Effective (re-)employment services are essential

Extending mutual obligations to recipients of non-employment benefits (avoid mis-use of benefits, activation, family-friendly policy)

No single road to Rome, but not every road leads to it!

"Market-reliant" countriesa Other successful performersb Other OECD countriesc

Note: The indicators shown in this figure refer to 2003; 2002 for active labour market programmes.

b) Includes Austria, Denmark, Ireland, the Netherlands, Norway and Sweden. The average employment rate for this group in 2003 was 71.9%.c) The average employment rate for this group in 2003 was 61.2%.d) For each of the indicators, OECD average is equal to one.

a) Includes Australia, Canada, Japan, Korea, New Zealand, Switzerland, the United Kingdom and the United States. The average employment rate for this group in 2003 was 70.9%.

0.0

0.5

1.0

1.5

2.0

2.5

Product market regulation Tax wedge Employment protection legislation

(permanent workers)

Generosity ofunemployment benefit system

Active labour market programmes

Ratio to OECD averaged

…but they differ vis-à-vis other policy settingsSuccessful performers have competitive product markets...

Unanswered questions: 1) how to fund flexicurity?

• Problem of overall costs and their effects on the economy:– Are work incentives affected? – Does this lead to emigration of the ‘talented’?

• Problem of structure of financing – How to tax labour vis-à-vis capital?– How to reduce the risk that domestic producers are

penalised vis-à-vis foreign producers?

2000 2005

Australia 25.4 24.8Austria 43.2 42.5Belgium 51.3 49.1Canada 29.0 28.2Czech Republic 41.4 42.1Denmark 41.2 39.3Finland 43.0 39.5France 47.4 41.4Germany 48.6 46.7Greece 35.5 34.4Hungary 48.5 40.8Iceland 19.7 23.6Ireland 18.1 19.9Italy 43.1 41.7Japan 23.4 26.5Korea 14.9 15.6Luxembourg 32.5 29.8Mexico 11.0 14.1Netherlands 42.0 41.3New Zealand 18.5 18.9Norway 35.1 34.3Poland 42.2 42.4Portugal 33.2 31.7Slovak Republic 40.6 35.3Spain 34.7 35.7Sweden 48.6 46.5Switzerland 27.3 26.7Turkey 39.1 41.9United Kingdom 28.3 29.9United States 27.2 26.7

Total tax wedge for a single without children for a 67% AW income earner, 2000-05

Percentage of labour cost

67% AW

Source: EULFS.

Unanswered: 2) How do deal with rising sickness and disability incidence?

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4

6

8

10

12

1990 1992 1994 1996 1998 2000 2002 2004

Norway Netherlands Sweden United Kingdom OECD

A significant proportion of working-age individuals move into disability benefits every year

New disability benefit claimants, per thousand of working age population

Source: National insurance authorities: NIA (Norway), IV (Switzerland) and ZUS (Poland).

19

95

19

99

19

99

19

99

19

99

20

05

20

05

20

00

20

05

0

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6

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12

Norway Poland Switzerland Netherlands Sweden UnitedKingdom

And few people on disability benefits go back to work

% of disability benefit recipients that recover and leave these benefits

Source: National Labour Force Surveys.

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6

Note: Data refer to 2004 for Norway, Poland and Switzerland and 1999 for the other countries

Trend rise in spending on disability and sickness

Spending on incapacity benefits (% of GDP)

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1

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4

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7

8

1990 1992 1994 1996 1998 2000 2002

Norway Sweden Netherlands Poland UK OECD-28

Situation will become economically unsustainable…

Trend rise in sickness and disability spending is problematic

More is spent on these benefits than on education

Labour shortages will intensify with ageing

… and is also socially unfair

27% of inactive disabled people would like to work (and most of them had worked in the past)

If nothing changes, benefits of disabled people who can’t work will have to be cut

Why is a change needed?

Unanwered: 3) older workers

• Obstacles to employment of older workers need to be addressed…

• … But:– How to change work practices (mandatory retirement,

mentality of older workers themselves, etc.)– How to take into account long careers, tough jobs,

differences in life expectancy– How to change mentality of public employment

services