The Labor Market and Education and Training in the...

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The Labor Market and Education and Training in the Western Balkans A Policy Note1

June 2007

1. Introduction Job creation is a major priority throughout the Western Balkans. Even in countries with fairly strong economic growth this decade (e.g., Albania, Serbia), labor market performance has been sluggish. In the other countries where growth has been slower, outcomes are even worse. No country in the region, for example, is even close to the EU Lisbon employment standard of 70% (Table 1). Macedonia has the lowest employment rate in ECA with Montenegro and Bosnia and Herzegovina near the bottom. Unemployment is high in all countries throughout the region, and most unemployment is of a long-term nature. The exception, as far as aggregate employment and unemployment rates are concerned, is Albania, where the large agricultural sector absorbs many job-seekers, although in low-quality, low-earnings positions. Informal employment is a prominent feature of the labor markets in all countries, especially Albania. Table 1: GDP growth and key labor market indicators (%),Western Balkans, latest year, 1

GDP

growth2 Employ-ment rate

Unemploy-ment rate

Long-term unemployment3

Informal employment

rate4 Albania 6.0 57 6.3 73 75 Bosnia and Herzegovina 3.8 46 22 42

Macedonia 0.8 35 39 32 Montenegro 2.1 41 31 85 27 Serbia 5.2 51 22 79 43

1. Excludes Kosovo. Labor market indicators are for 2005 except for Bosnia and Herzegovina which is 2004. 2. GDP growth rates are annual averages for 2000-2004. 3. Share of unemployed with duration of 12 months or more. For Montenegro, based on registered unemployed. 4. Definitions vary by country. Sources: World Bank estimates based on LSMS (Albania and Bosnia and Herzegovina) and LFS (Macedonia, Montenegro, and Serbia) Improving this employment performance will require actions on many fronts including but going well beyond the labor market.2 Certainly, maintaining and improving economic growth is a necessary condition. This will require sound macroeconomic policies as well as an acceleration and completion of the transition to market institutions and policies. In many respects, the Western Balkan countries continue to lag behind the leading reformers in the ECA region. As a group,

1 This note has been prepared by a team including Gordon Betcherman, Martin Godfrey, Shweta Jain, Arvo Kuddo, Toby Linden, and Keiko Miwa. It has benefited from comments by Milan Vodopivec and Mamta Murthi. 2 This multi-sector approach has been conceptualized through the Bank’s MILES framework for employment incorporating Macroeconomic policy, the Investment climate, Labor market policies, Education and skills, and Social protection. For an example of how this framework can be used to analyze employment trends and identify policy priorities, see the recent World Bank labor market assessment for Serbia (World Bank 2006b).


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their average score for the EBRD transition index3 for 2006 puts them towards the bottom of the ECA ranking. Macedonia does best, with a score (out of a maximum of 4.00) of 2.90, followed by Albania (2.69), Bosnia and Herzegovina (2.57), Serbia (2.54) and Montenegro (2.38).In comparison, the average for the four front-running Central European countries is 3.71. An important dimension of the reform process – and a key to job creation – is to establish a more favorable climate for business investment. Here, too, the Western Balkan countries do not fare well, judging from the 2007 World Bank Doing Business Index.4 Out of 175 countries in the world that are covered, Serbia was the highest ranked at 68th, followed by Montenegro (70th), Macedonia (92nd), Bosnia and Herzegovina (95th) and Albania (120th). Labor market and social protection reforms are also needed to improve employment performance. Recent studies by the World Bank for the ECA region (World Bank 2005a) and more specifically for Bosnia and Herzegovina, Albania, and Serbia (World Bank 2005b, 2006a, 2006b) have identified a number of labor market and social policy reform priorities to enhance job opportunities. These include reforms in the areas of labor market regulation, wage setting, labor taxation, and active and passive employment programs. Better education and skills development will be critical for the countries in the Western Balkans to not only create jobs but to create the kinds of jobs that will raise productivity and living standards in the future. This policy note argues that, while the supply side may not be the most important binding constraint to job creation in the region right now, a better educated and more skilled workforce will be essential if the Western Balkans economies are going to become more productive and move into higher value-added goods and services that will generate more and better jobs. Research from other regions shows that education -- especially when coupled with technological innovation -- can make a major contribution both to productivity gains within industries as well as to shifting labor and other production factors towards higher-productivity sectors (e.g., de Ferranti et al. 2003). Given regional and global economic trends, basing competitiveness on low costs and unskilled labor-intensive activities will not be a viable strategy for the Western Balkans and certainly will not move these countries far along the path of convergence to EU members. In fact, our analysis of household surveys shows that the region’s economies are already rewarding human capital and are often excluding the poorly educated. While skill differentials were minimal in the pre-transition era, our analysis shows that labor market outcomes – both in terms of employment and earnings – increase substantially with education. As the region’s economies continue to urbanize (especially the case for Albania), there will be less and less opportunity in the labor market for workers without at least secondary schooling. Education will be a particularly key determinant of labor market prospects for women. Increasing post-basic and higher education enrolment and completion rates will be important but not enough. Quality must also improve. Students in countries that have participated in standardized international tests perform below the standards for the EU and other developed countries. At the same time, surveys of enterprises indicate that competitive pressures are increasing the premium on skills. Although the data do not indicate widespread skill shortages or skills mismatches, this does not mean that the education and training systems are fully meeting the

3 The EBRD transition index is the unweighted average of indices of: large-scale privatization; small-scale privatization; enterprise restructuring; price liberalization; trade and foreign exchange systems; competition policy; banking reform and interest rate liberalization; securities markets and non-bank financial institutions; and overall infrastructure reform (EBRD 2006). 4 Scores are available at http://www.doingbusiness.org/


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needs of the labor market. There is some evidence that faster-growing and more innovation-oriented firms require higher skills and find it somewhat difficult to meet their skill requirements. With ongoing technological change and regional and global economic integration, competitiveness pressures will increase the demand for skills outside of sectors where success is based on low costs alone. The education systems in the region will need to respond quickly to this fast-changing environment. But so will employers. The enterprise surveys indicate that employers in the Western Balkan countries train considerably less than their counterparts in the new EU member countries. Given their aging populations, the Western Balkan countries will need to ensure that labor force entrants have the skills to ensure strong productivity growth. Between 2005 and 2025, the countries in the Western Balkans will age significantly – the median age will increase between four and seven years depending on the country.5 All countries are projected to have smaller populations 20 years from now, with the exception of Albania which will remain at roughly its current level. With potentially shrinking labor supplies, there is a risk that economic growth will be negatively affected unless productivity growth is strong. This will require a more skilled, innovative, and productive workforce which, in turn, will place a premium on education reform.6 This policy note identifies a set of reforms to improve human capital formation in the Western Balkans region and to better prepare for the workforce that will be needed in the future when skills be at an increasing premium. These reforms need to be part of a broad, comprehensive approach to improve employment. Certainly, there are country-specific issues and policy priorities; however, looking across the region, a number of common themes emerge. One fundamental issue throughout the Western Balkans is the relatively low secondary and postsecondary enrollments. These need to rise and this will require a number of measures influencing both supply and demand. Improving quality and relevance is a priority. Additional spending may help, though the priority should be on improving the efficiency of existing spending. In general, secondary education should primarily provide the generic skills required to navigate in the emerging labor market. Vocational and general secondary education need to be on a convergence path. Specific occupational skills should be provided either at the post-secondary level or through training, preferably in the workplace. Currently, training efforts are relatively low throughout the region and reforms are needed to improve the functioning of the training market and to create incentives for employers and workers to train. This will be essential for building the lifelong learning framework that will be essential in the future. 2. How labor market outcomes vary by education Educational attainment is strongly correlated with higher employment and lower unemployment. The analysis in this section is based on household survey data for Albania, Bosnia and Herzegovina, Macedonia, Montenegro, and Serbia. Throughout this section, the data presented exclude agriculture.7 More detail on the data sources is presented in Box 1. Figure 1 5 These projections are based on the United Nations World Population Prospects, 2006 revision (medium variant). Data are available at http://esa.un.org/unpp/. 6 For a discussion of the implications and policy demands of population aging in Eastern Europe, see World Bank (2007). 7 The exclusion of agriculture is based on the very different nature of employment in that sector compared to the rest of the economy. In agriculture, there is generally very high (sometimes subsistence) employment, with little unemployment. This reflects the nature of family-based agricultural production in the region. Since most rural adults have only primary schooling or less, and since employment rates are so high in agriculture, aggregate education-employment correlations can be negative – especially in a country like Albania where the majority of the workforce is still engaged in farming. This muddies the picture of


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shows the overall employment and unemployment rates for the five countries according to level of education. The differences by education in employment are clearly large everywhere. Even in Bosnia and Herzegovina where differences are smallest, employment rates for workers with postsecondary education are still 26 points higher than for workers with only basic schooling; in Albania, Macedonia, and Montenegro, this gap is over 50 points. Similarly, unemployment rates decline substantially with higher levels of educational attainment. The positive relationship between educational attainment and employment is found for all age groups (Table 2). Box 1: Household surveys used in the analysis The latest household survey databases for the Western Balkan countries available to Bank staff were used for the analysis. For Bosnia and Herzogovina, this was 2004; for the others, it was 2005. In Albania and Bosnia and Herzegovina, Living Standards Measurement Surveys (LSMS) with labor force modules were used. In Macedonia, Montenegro, and Serbia, Labor Force Surveys (LFS) were used. In some cases in the analysis, Montenegro is omitted because the sample size was not large enough to provide reliable disaggregations. Efforts were made to make the survey definitions of labor force outcome indicators comparable and consistent with international (ILO) standards. However, in some cases, certain differences remain. The educational categories do differ somewhat, especially between LFS and LSMS instruments (see below). Definitions of education categories in the household surveys

Albania 2004 LSMS

BiH 2004 LSMS

Macedonia 2005 LFS

Montenegro 2005 LFS

Serbia 2005 LFS

Basic None, primary 4yrs, primary 8/9yrs

No diploma, primary school certificate

Without school education, uncompleted primary school, primary school

No school, 1-4grade elementary, 5-7grade elementary school, elementary school finished

Secondary Vocational

Vocational 2-3yrs and vocation 4-5 yrs

Art school, normal school, religious school, teachers training programs and sredjna strucna

Secondary (3yrs) Secondary school lasting 1-3yrs

Secondary General

Secondary general

Secondary school certificate (includes secondary technical, gymnasium’s )

Secondary (4yrs) Secondary vocational school lasting 4-5yrs or high school

Post Secondary

University or post grad in Albania or abroad

Junior college, undergraduate diploma, master of science, doctor of science

Higher, university, master's, doctor's

Junior college, college or academy, postgraduate, master's degree, PhD

College, Faculty, academy or equivalent, M.A./M.Sc, PhD

the actual role of human capital in “modern” labor markets. As the region’s countries continue the transition to non-agricultural, urban economies, it is important to focus in a forward-looking note on the contribution of education in the emerging context.


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Figure 1: Employment and unemployment rates for the non-agricultural labor force by level of education, Western Balkans, latest year1

0

20

40

60

80

100

Alb

ania

Bos

nia

Mac

edon

ia

Mon

tene

gro

Ser

bia

Alb

ania

Bos

nia

Mac

edon

ia

Mon

tene

gro

Ser

bia

Employment Rate Unemployment Rate

Basic Secondary Post Secondary

1. 2005 except for Bosnia and Herzegovina which is 2004. For education definitions, see Box 1. Source: see Table 1. Table 2: Employment rates by age group and education level, Albania, Bosnia, Macedonia, and Serbia, latest year1

Country Education Attained 15-24 25-29 30-34 35-39 40-44

Basic 36.6 61.6 66.8 73.1 73.5 Secondary 26.6 56.5 62.7 75.4 75.3

Albania

Post Secondary 69.7 69.8 93.6 92.7 96.0 Basic 22.8 44.4 53.6 48.4 55.9 Secondary 27.8 54.8 55.8 60.2 57.9

Bosnia


Macedonia


Serbia

Post Secondary 34.1 57.3 78.8 82.0 86.2 1. 2005 except for Bosnia and Herzegovina which is 2004. For education definitions, see Box 1. Source: see Table 1. Restricting the analysis to young people provides a clearer picture of how education is now affecting labor market outcomes, especially in transition economies. Looking at the complete adult populations (as in Figure 1) mixes the labor market experiences of the recently educated with those of individuals who received their schooling a long time ago. The issues at the heart of this note are primarily informed by how current (or at least recent) education experiences pay off in the labor market. This is particularly true in countries, like those in the Western Balkans, where both the labor market and education systems have changed dramatically since the transition. Accordingly, a more precise picture of the current impact of education on employability is provided by focusing on younger workers who were largely educated after the transition. The


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challenge is to define a sub-sample of individuals who are young enough to have experienced post-transition schooling and old enough to have some labor market experience. After carrying out different sensitivity tests, we have used the 25-29 year age group for much of the empirical analysis. Individuals in this age group in 2005 would have had their post-basic education after 1990 and still would have had experience in the labor market by the time they were observed in the 2005 surveys –albeit, for the youngest, only their first years after labor force entry. As a result, in some situations, we have extended the sample to age 34. Employment and unemployment experiences of young people improve significantly with higher levels of educational attainment. When the analysis is restricted to 25-29 year olds, the patterns are similar to those observed for the complete adult population (Figure 2). The data show the serious problems poorly educated young people are experiencing in the labor markets of the Western Balkan countries. The employment rate for those with only basic education is extremely low, ranging from 13% in Macedonia to 36% in Bosnia and Herzegovina. Though rates are still fairly low for secondary graduates, they are much better, with all countries between 37% (Montenegro) and 53% (Bosnia and Herzegovina). Another large jump occurs for those with postsecondary education, with the range from 48% (Macedonia) to 75% (Bosnia and Herzegovina). Unemployment rates decline with education.8 However, the advantages of an additional level of schooling are, in some instances, less striking than was the case for employment rates. Figure 2: Employment and unemployment rates for the non-agricultural labor force, aged 25-29 years, by level of education, Western Balkans, latest year1

0

20

40

60

80

100

Alba

nia

Bosn

ia

Mac

edon

ia

Mon

tene

gro

Serb

ia

Alba

nia

Bosn

ia

Mac

edon

ia

Mon

tene

gro

Serb

ia

Employment Rate Unemployment Rate

Basic Secondary Post Secondary

2. 2005 except for Bosnia and Herzegovina which is 2004. For education definitions, see Box 1. Source: see Table 1. Education matters a great in determining whether young women choose to participate in the labor force. For young men, education’s major influence is in terms of how likely they are to find a job and what kind of a job. Participation rates are not significantly correlated with schooling level (Figure 3a). For young women, on the other hand, education is a major factor in determining their likelihood of participating in the labor force in the first place, in all countries but Bosnia and Herzegovina (Figure 3b). Young women with only primary schooling have extremely low 8 Better labor market outcomes may partly reflect the fact that more educated workers are more mobile and, accordingly, better exploit job opportunities. See Vodopivec (2002) for evidence of this in Bosnia.


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participation rates, especially in Albania and Macedonia. For all countries but Bosnia and Herzegovina, these rates rise dramatically with secondary schooling and, for those with postsecondary education, participation levels are not that different between young women and young men. Figure 3: Labor force participation rates for the non-agricultural labor force, aged 25-29 years, by level of education, Albania, Bosnia, Macedonia, and Serbia, latest year1

(a) Men (b) Women

1. 2005 except for Bosnia and Herzegovina which is 2004. For education definitions, see Box 1. Source: see Table 1. Education also significantly affects earnings. In order to evaluate the returns to education, Mincerian-type regressions were estimated for Albania, Bosnia and Herzegovina, Macedonia, and Serbia for non-agricultural wage employees less than 35 years of age (Figure 4).9 In these models, education wage premiums are estimated as the additional earnings for post-secondary and secondary education over basic (or less) education, holding constant individual characteristics including gender, sector of employment, age, experience, and hours of work. The wage premiums for post secondary education are highest in Albania and Serbia, while secondary education alone has little incremental impact on wages in Bosnia and Herzegovina and Macedonia but still has a significant impact in Albania and Serbia. These differences presumably reflect differences in the relative scarcity of more educated workers in these countries. In all countries, young women face a significant wage disadvantage, compared with men with the same education and experience in the same sector. In Albania, for those under 35 the disadvantage is the largest, with women likely to earn more than 40% less than men, in Bosnia and Herzegovina 12%, in Macedonia 16%, and in Serbia 13% less.

9 Various other specifications were estimated with little effect on the results. According we present the OLS estimates. Other types of workers (e.g., self-employed) were not included because of reliability concerns about earnings data.

0.010.0

20.030.0

40.050.060.0

70.080.0

90.0100.0

Albania Bosnia Macedonia Serbia

Basic Vocational Secondary Post Secondary

0.010.0

20.030.0

40.050.060.0

70.080.0

90.0100.0


Basic Vocational Secondary Post Secondary


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Figure 4: Adjusted wage premium (%) for secondary and post-secondary education over basic (or less) education, non-agricultural wage employees aged less than 35, Albania, Bosnia, Macedonia, and Serbia, latest year1

23.6

4.2 4.0

26.1

71.9

38.143.1

68.3

0

10

20

30

40

50

60

70

80


wag

e pr

emiu

m

secondary post secondary

1. 2005 except for Bosnia and Herzegovina which is 2004. For education definitions, see Box 1. Wage premiums

adjusted for other determinants of earnings. Source: see Table 1.

A key issue in the region concerns the relative value of general vs. vocational secondary education. Historically, vocational education was very important in the Western Balkan countries, as it had been through the ECA region. Most secondary students were enrolled in these programs that were closely oriented to the skill requirements of local public enterprises. Since the transition, however, vocational programs have declined and general secondary education has assumed a much more important relative position. This has gone furthest in Albania where 60% of secondary graduates of all ages but only 20% of those in the 25-29 age group took vocational programs. Clearly, an important question is how well general secondary programs are able to prepare young people for the labor market relative to vocational programs. Comparisons can be made in those countries with LSMS data (Albania and Bosnia and Herzegovina). In the LFS countries, however, comparisons are more difficult because of definitional factors.10 Even though vocational education is much more expensive, employment and unemployment rates are no better for vocational graduates than they are for completing general secondary programs. With secondary school enrollment shifting from vocational to general programs, it might be expected that the relative scarcity of vocationally-schooled labor would result in more favorable labor force outcomes. However, this is not the case. In Bosnia and Herzegovina, there is little difference in the employment rate of young graduates of the different types of school (56% for vocational, 53% for general), but general graduates have a somewhat lower unemployment rate (27%) than their vocational-school counterparts (33%). In Albania, vocational schools, with unit cost three times as high as general schools, do not provide better employment outcomes (Figure 5). A recent study of the financing of vocational education in the EU-8 countries also found that the unit costs of vocational education were much higher than general education at the upper secondary level – though the difference was not as great as was found for Albania (World Bank 2006d). That report identified a number of factors explaining the higher unit costs of vocational education – lower teacher/student rations, more non-teaching staff, larger premises, 10 The LFS questionnaires more typically distinguish between years of secondary schooling, rather than general vs. vocational secondary. See Box 1.


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higher heating costs, and more student stipends. As we have concluded in Albania and Bosnia and Herzegovina, the EU-8 study did not find that vocational school leavers did better in the labor market than their counterparts in general education. Figure 5: Employment and unemployment rates and cost per pupil, general and vocational secondary education, Albania, 2005

0

10

20

30

40

50

60

General Secondary Education Vocational Secondary Education

%

0

10

20

30

40

50

60

70

Cos

t per

pup

il (L

ek '0

00)

Employment Rate Unemployment Rate Cost per pupil

Source: 2005 LSMS, Albania. Source for expenditures Moreover, the returns to vocational education are lower than to general secondary education in Albania and Bosnia and Herzegovina. Using the same wage regression methodology described above for wage earners under 35, estimates for Albania indicate that, controlling for other factors, general secondary graduates earn 22% more than those with basic education, while vocational graduates earn just 15% more. In Bosnia and Herzegovina, the regressions show that vocational graduates’ earnings are not statistically different from those of basic education graduates, while general secondary graduates earn about 10% more. These results are consistent with those found by Yemtsov et al. (2006: 17) for Belarus, Bulgaria, Georgia, Hungary, Moldova, Poland, Romania, and Russia who concluded that “vocational graduates have seen their wage levels crumble”, particularly in the private sector. Longer secondary school programs (4-5 years) have significantly higher returns than shorter secondary programs (2-3 years). In Serbia and Macedonia, a comparison between the longer and shorter secondary programs is possible. In Macedonia, graduates of the longer programs do slightly better while in Serbia they do slightly worse, in terms of employment and unemployment rates, than the graduates of the shorter programs (Figure 6 below). Wage regressions, however, give a clearer advantage to the longer programs. In Macedonia, while there is no statistically significant difference between the wages of basic education graduates and those of 2-3 year secondary graduates, the longer programs delivery an 8% wage premium over basic education. In Serbia, the differences are much bigger – a 28% wage premium over basic education for 4-5 year graduates over compared to 12% for 2-3 year graduates.


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Figure 6: Employment, unemployment, and labor force participation rates, graduates of 2-3 vs. 4-5 year secondary programs, Macedonia and Serbia, 2005

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EmploymentRate

UnemploymentRate

LFPR UnemploymentRate

EmploymentRate

LFPR

Macedonia Serbia

2/3yr vocational programs 4/5yr vocational (incl. general secondary)

1. 2005 except for Bosnia and Herzegovina which is 2004. For education definitions, see Box 1. Wage premiums

adjusted for other determinants of earnings. Source: see Table 1. The employment advantages of longer and general secondary programs are likely understated in this analysis. Many graduates of 4-5 year general secondary programs go on to post-secondary education and, accordingly, the survey data for the general secondary category does not capture many of the most capable people who went through these schools. Thus their impact may be understated by employment and unemployment rate and wage comparisons, since those who enter the labor market directly from these programs tend to be those who have been less successful academically.11 More post-secondary graduates of all ages work in the public sector than in other sectors. As Figure 7 shows, post-secondary graduates are significantly more likely to be employed in the public sector than elsewhere. This is so, even though the public sector is not always the highest paid. In both Bosnia and Herzegovina and Albania, LSMS data indicate that wages are higher in the private sector (World Bank 2005b, 2006b). The greater risk and uncertainty, the social stigma associated with manual work, and the fewer opportunities for supplementary earnings in the private sector probably explain this preference. However, it does mean that the source of future economic growth – i.e., the private sector – is currently not employing large shares of the most educated young people in the Western Balkan countries.

11 However, it is also true that those who enter vocational rather than general schools tend to be those who have been less successful in basic education. As a result, vocational students can be presumed to have had poorer educational preparation. They also may have weaker abilities, on average. It has not been possible with the data available to analyze this “selection bias” – i.e., isolating the effect of vocational schooling itself, without these additional factors, on labor market outcomes.


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Figure 7: Post-secondary graduates by sector of employment, Serbia, Macedonia, Bosnia, and Albania, 20051

0 10 20 30 40 50 60

Agriculture

Industry

Construction

Services

Public

% of Post Secondary graduates employed

SerbiaMacedoniaBosniaAlbania

1. 2005 except for Bosnia and Herzegovina which is 2004. For education definitions, see Box 1. Source: see Table 1.

Educational attainment is negatively correlated with employment in the informal sector. In all the Western Balkan states, the incidence of informality declines with educational attainment (Figure 8). In Albania, Serbia, and Macedonia, the vast majority of workers with basic education only are in the informal sector. In these countries, informality rates drop substantially with secondary and particularly post-secondary completion, although this is less true in Serbia than in the other three countries included in Figure 8.12 Moreover, better educated workers are more likely to stay in the formal sector once there and to use informal employment as a pathway to the formal sector. Analysis of longitudinal data in Albania and Serbia indicates that well-educated people are able to retain jobs in the formal sector at a higher rate than their less-educated counterparts. In Albania, 83% of post-secondary graduates with formal employment in 2002 were still employed in a formal job in 2004, compared to 53% of secondary graduates and 28% of basic graduates. Serbian data shows the relationship between educational attainment and mobility out of the informal sector. Less than 5% of workers with only primary education who were employed in the informal sector in 2004 had found formal employment in 2005, compared to 39% with post-secondary education.

12 In Serbia, Kristić (2004: Figure 4), using LSMS data, found that hourly wages in Serbia’s informal sector in 2002 were 28% higher than in the formal sector, but that for university graduates the differential was more than 100%. On the other hand, the World Bank (2006b) analysis based on LFS data found that wage sin the informal sector were about 20% lower than in the formal sector, even after other factors were controlled for.


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Figure 8: Percentage of employment in the informal sector, 25-29 year olds, by level of education, Albania, Bosnia, Macedonia, and Serbia, latest year1

0

20

40

60

80

100

Basic Vocational 4/5yr vocational orgeneral Secondary

Post Secondary

Rat

e of

info

rmal

ity (%

)Albania Bosnia Macedonia Serbia

1. 2005 except for Bosnia and Herzegovina which is 2004. For education definitions, see Box 1.

Source: see Table 1. 3. Evidence from business environment and enterprise performance surveys Enterprise data can also provide useful insights by providing evidence on the skill structure of labor demand, on the extent to which a lack of skills is a business constraint, and on the investments firms are making in developing human resources. This section is based on analysis of enterprise data collected in Business Environment and Enterprise Performance Surveys (BEEPS) conducted by EBRD and the World Bank in 26 transition countries plus Turkey.13 The advantage of BEEPS is that it provides employer assessments of many aspects of the business environment, including human resources. Moreover, because standardized methodologies are used, individual countries can be benchmarked against others as well as sub-regional and regional averages. The limitations of BEEPS should also be noted. First, sample sizes are fairly limited – about 200 firms in Albania, Bosnia and Herzegovina, and Macedonia, and 300 in Serbia and Montenegro (combined in the BEEPS). Second, the sample is somewhat biased towards larger firms (about 10% over 250 employees) and towards industry (35-50%). Virtually by definition, firms operated in the informal sector are excluded. Finally, much of the BEEPS data is qualitative. Workforces in the Western Balkan enterprises are surprisingly oriented to skilled, managerial, and professional occupations. Table 3 shows the average distribution of employment by broad occupational category for the Western Balkan and EU-8 countries. Although EU-8 economies may be more skills-intensive, this is not really apparent from the structure of the workforces, with the exception of Albania where unskilled labor has a relatively high share. Overall, in the 36 months preceding the 2005 survey, the structure of employment had changed slightly in the

13 This survey was carried out in 1999, 2002, and 2005. More details and country and sub-region summaries are available at http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/EXTECAREGTOPANTCOR/0,,contentMDK:20720934~pagePK:34004173~piPK:34003707~theSitePK:704666,00.html.


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Western Balkan countries, with an increase in the relative importance of professionals and a reduction in that of managers. Companies with growth in sales tended to have a higher share of professionals. Table 3: Occupational structure (% distribution) of the workforce in surveyed firms, Western Balkan and E-8 countries, 20051

Albania Bosnia and

Herzegovina Macedonia Serbia and

Montenegro EU-8

Managers 11.4 12.7 17.2 12.0 13.9Professionals 13.0 13.3 17.3 16.2 14.9Skilled workers 42.5 54.4 44.3 50.6 54.4Unskilled workers 25.4 8.2 10.8 7.5 9.8Non-production workers 7.7 11.4 10.4 13.7 6.9Total 100.0 100.0 100.0 100.0 100.01. EU-8 – Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia. Source: BEEPS 2005 The skills and education of workers is not the major operational concern in the Western Balkans but it is raised as a problem by about one-quarter of firms. In the Western Balkans, the major concerns raised by enterprises are uncertainty about regulatory policies (on average, 60% of businesses reported this as a binding constraint); following by tax rates and macroeconomic instability (both 57%), and cost of financing (56%). About one-quarter identify skills and education of workers as a problem for their operation and growth (Figure 9). Firms in Albania (about one-third) were slightly most likely to emphasize this constraint than the other countries. Note that the EU-8 enterprises see skills as a problem more frequently than firms in the Western Balkans. Consistent with this observation is the fact that firms in the EU-8 take longer to fill vacancies that firms in the Western Balkans.14 However, there are reasons to believe that skills-related concerns will increase in this sub-region as companies continue to innovate and operate in more competitive environments. Skills–related constraints are more frequently reported by firms in the “emerging” sectors of the Western Balkan economies. Although only a minority of firms overall cited skills as a problem, the BEEPS data suggest that it is a more common issue in the “emerging” segments of Western Balkan economies. Medium-size companies (50-249 employees), those in more dynamic sectors, those experiencing growth in sales and exports, young firms (less than 10 years old), and those that have invested in research and development emphasize this constraint more than other firms.

14 For example, the average time needed to fill a professional vacancy in the EU-8 was 5.1 weeks. In the Western Balkans, the equivalent range was 2.6-4.9 weeks. For skilled workers, EU-8 employers reported needing on average 3.8 weeks, compared to 1.9-2.6 weeks in the Western Balkan countries (BEEPS 2005).


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Figure 9: Percentage of firms that consider skills and education of workers to be a problem for the operation and growth of their businesses, BEEPS, Western Balkan countries, and SEE and EU-8 averages, 2002 and 20051

0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0

EU8

SEE

Albania

BiH

Macedonia

SAM

20052002

1. SAM – Serbia and Montenegro; BiH – Bosnia and Herzegovina; SEE – South Eastern Europe, including the Western Balkans; EU-8 – Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia. Source: BEEPS 2002 and 2005 Firms across the Western Balkans are increasingly involved in innovation and in the development of new product lines and services that require skilled labor. In 2005, around 40% of enterprises reported that they had developed new products or services in the previous 36 months - a higher ratio than among EU-8 countries (Table 4). The percentage of firms that had upgraded their products was even higher, especially in Bosnia and Herzegovina and Serbia and Montenegro. The incidence of other aspects of innovation that would lead to changed and often higher skill needs are reported in Table 4. Table 4: Percentage of companies that had introduced various innovations over the previous 36 months, Western Balkans and EU-8 countries, BEEPS, 2005 Albania Bosnia and


Montenegro EU-8

Developed new product line/service

40.1 42.5 37.0 38.0 30.9

Upgraded at least one product line/service

45.2 62.0 46.0 67.7 47.0

Discontinued at least one product line/service

11.5 6.5 9.5 14.3 17.1

Agreed to a new joint venture with foreign partner

3.5 7.5 17.0 7.3 7.3

Obtained new product license 9.1 11.5 7.5 9.0 9.9 Outsourced major production activity/service

3.5 6.5 9.0 7.7 6.2

Brought in-house of a major production activity/service that was previously outsourced

8.6 10.5 26.0 10.7 5.4

Obtained a new quality accreditation

14.9 14.5 11.0 11.7 15.5

Source: BEEPS 2005


15

Currently, firms in the Western Balkans train less than firms in the EU-8 countries. Training is an important activity for developing a productive and competitive workforce. However, the BEEPS data suggest that Western Balkan firms are less likely to invest in their employees than their counterparts in the EU-8. On average, about 40-45% of firms in the Western Balkan countries offer formal training to skilled workers, compared to over 50% in the EU-8 (Table 5). The differences are much larger in the case of training professionals, especially in Albania and Macedonia. The table shows that enterprises with sales growth, export growth, and new technology are relatively likely to train although rates in the EU-8 are still generally higher. Table 5: Percentage of firms providing formal training, overall and by selected performance characteristics over the preceding 36 months, Western Balkans and EU-8 countries, BEEPS, 2005 Albania Bosnia and


Montenegro EU-8

Skilled workers 41.8 45.1 39.9 44.3 52.7 Unskilled workers 35.7 35.9 23.0 31.8 38.6 Non-production workers 13.1 42.1 15.2 37.9 43.4 Among firms with sales growth Skilled workers 47.3 51.4 52.5 50.9 62.5 Unskilled workers 40.2 40.0 43.8 34.7 46.6 Non-production workers 12.5 47.8 12.0 42.7 50.0 Among firms with exports growth

Skilled workers 56.4 63.0 66.7 70.6 69.9 Unskilled workers 51.4 58.3 55.6 37.9 50.8 Non-production workers 22.2 37.5 41.7 45.2 57.6 Among firms with new technology

Skilled workers 52.5 51.3 61.5 60.0 63.2 Unskilled workers 38.2 48.3 45.5 34.6 48.9 Non-production workers 14.0 42.2 25.0 46.4 52.7 Source: BEEPS 2005 Training investments are very uneven, both in terms of firms sponsoring training and employees receiving it. Medium-sized and large companies and firms in the service sector tend to offer training programs more frequently; the proportion of workers in state owned companies who are trained is very low. Employers are less likely to select women, young employees, involuntary part-time and temporary workers, workers in low-skilled occupations, and workers with low literacy for training. 4. Implications for education policy Even in the high-unemployment labor markets of the Western Balkans, human capital is a key factor. The household data show that employment prospects increase with educational attainment. In this region, as elsewhere, the type and amount of education has an impact on the ability of young people to succeed in the labor market after they leave school. In addition, access to further education and training opportunities – which leads to still better employment prospects -- is


16

strongly correlated with schooling because those with higher educational attainment are more likely to find employment in the formal sector where training is more common and because, when a company does provide training, it provides more of it to those employees with more education. These messages apply to industrialized countries (OECD 2004) as well as the Western Balkans (recall Table 5).

Moreover, evidence from enterprise surveys suggests that the demand for skilled labor is increasing as these economies continue to modernize and integrate with Europe and the world. Although skills are not one of the most important business constraints currently, there are signs that this is changing. Firms in emerging sectors are more likely to experience difficulties meeting skill requirements and, with more enterprises innovating and responding to competitive pressures, the demand for highly-skilled workers will increase. In short, as the Western Balkan countries pursue a development path low value-added, resource- or heavy industry-based economies to higher value-added, knowledge-based economies, education must play a key, and changing, role. This is summarized in Table 6, which has been adapted by the World Bank (2007), from Schwab, Porter, and Sachs (2001). Table 6: The role of education in the stages of economic development Development stage

Key economic challenges Focus of economic production

Education and labor-market requirements

Factor-driven growth

Get factor markets working properly to mobilize land, labor, and capital.

Natural resource extraction, assembly, labor-intensive manufacturing. Primary sector is dominant.

Basic education, low-level skills, disciplined work habits.

Investment- driven growth

Attract foreign direct investment and imported technology to exploit land, labor, and capital and begin to link the national economy with the global economy.

Manufacturing and outsourced service exports. Secondary sector is dominant.

Universal secondary education, improved secondary vocational and technical education, life-long learning to retool and update skills, flexible labor markets (easy entry, easy exit).

Innovation- driven growth

Generate high rate of innovation, and adaptation and commercialization of new technologies.

Innovative products and services at the global technology frontier. Tertiary sector is dominant.

Highly developed higher education, especially in science and engineering specializations; high rates of social learning, especially science-based learning; dynamic R&D sector linking higher education programs and innovating firms.

Source: World Bank (2007), adapted from Schwab, Porter, and Sachs (2001) For countries in the Western Balkans, substantial improvements in education and training system will be needed to progress through the stages described in the table. Without reforms, these countries will not be able to supply the human capital needed for investment- and then innovation-led growth. Educational attainment is not universally high enough to meet the expected future skill demands in a quantitative sense. This raises a host of issues including financing, access, and overall system management. Quality is also a serious concern. The limited evidence available indicates that students in the region lag behind their counterparts elsewhere in Europe and in the industrialized world in terms of actual learning outcomes. These systems are


17

not producing enough students with the skills needed in modern economies. As secondary education undergoes needed reform, postsecondary education needs to develop as well. Graduates are still scarce and labor market premiums attached to postsecondary education suggest that these systems need to expand. Finally, job training is underdeveloped with relatively few firms providing training and many workers having little access to opportunities to upgrade. Western Balkan countries are well behind their competitors in the enrollment rates in upper secondary education. Secondary school completion has become the minimum entry ticket for succeeding in modern, urban labor markets. However, as Figure 10 shows, enrollment at the upper secondary level is lower in the Western Balkan than in new EU member countries in Central and Eastern Europe or in Western Europe and North America.15 Achieving universal secondary school completion rates should be a fundamental goal of education systems. In Macedonia, the government has recently moved to make secondary education compulsory (starting in September 2008)16 and to introduce penalties on parents who fail to enroll their students. Figure 10: Gross enrollment rates, Western Balkans, CEE EU member countries, and North America and Western Europe, 2004

0

20

40

60

80

100

120

Albania Bosnia &Herzegovina

FYRMacedonia

Serbia &Montenegro

EU CEE N.America &W. Europe

% o

f 15-

18 a

ge g

roup

Sources: Albania, Bosnia, Macedonia, EU CEE, TransMonee database; Serbia and Montenegro, estimated; North America and Western Europe, UNESCO, EFA Global Monitoring Report 2007. The causes of non-enrollment are complex and involve both supply-side and demand-side factors. A starting point is for policy makers to understand the reasons why students drop out of school, especially at the transition from lower secondary to upper secondary and during upper secondary. The data shows the expected patterns: these students tend to be in rural areas, from poorer backgrounds, and belong to certain ethnic minorities. Female students from certain ethnic minorities are further disadvantaged. This means that the burden of expanding secondary education will not fall evenly on all parts of the country, but is likely to fall disproportionately on those municipalities with the least capacity (in both financial and human resources terms). This

15 Upper secondary education is what comes after basic (which is usually compulsory) and before higher education. 16 Though the announced policy is unclear as to the length of secondary education that is to become compulsory.


18

reinforces the need for collaboration across municipalities, including for school network optimization and consolidation. Private costs are also a factor in explaining low enrollment rates. In Bosnia, where there is evidence of the reasons for lack of attendance (in all types of education), the PEIR (World Bank 2006c) identified the cost of education as a major reason for non-continuation of schooling beyond the compulsory level. The Bank’s review noted that the private costs of school increase sharply after primary level especially for poor households that are more likely to be rural, and to face larger costs than urban families for school-related transportation and lodging. The opportunity costs of sending children to school are also higher for those families, mainly in rural areas, which rely on their labor for income generation. In other words, enrollment patterns suggest that populations where there is low participation in upper secondary education do not currently find it sufficiently attractive to overcome the barriers they face. This implies some demand-side measures to reduce the cost of attendance (such as vouchers and conditional cash transfer programs) as well as tackling supply side issues such as improving the quality and relevance of education.. The quality and relevance of education in the Western Balkan countries is a concern. Performance has not been good which does not augur well for future labor productivity. International tests of learning outcomes including PISA and TIMSS can benchmark countries against others. The Western Balkan countries have participated on a limited basis only in these tests but when they have, their performance has been poor, ranking below that of EU countries. Moreover, their performance is often somewhat below what would be expected when controlling for GDP per head, especially on the PISA assessment which measures the ability of students to apply and use knowledge that they have learned in new situations. In the case of Macedonia, the only Western Balkan country that has participated in two rounds of the TIMSS, performance deteriorated between 1999 and 2003. It is important that region’s countries participate in these tests to monitor their performance and progress.17 Evidence is accumulating that, not surprisingly, the quality of education matters for labor market outcomes.18 More spending might well lead to higher quality but the priority should be to increase the efficiency of current spending. Do spending levels improve performance? The evidence is not definitive although a new UNICEF (forthcoming) report suggests that, up to a certain threshold of spending per pupil, higher public expenditures per head yield better outcomes. Most Western Balkan countries fall below this threshold. However, caution is needed in terms of interpreting this finding and, more fundamentally, in concluding that the Western Balkan countries need to spend more on education. Countries tend to spend more on education as a proportion of their GDP as they grow richer and the countries in this sub-region already can be considered to be spending towards the high end of countries of comparable GDP per capita. Increasing the efficiency of current spending should be the first priority. More flexible financing arrangements along with management reforms can lead to gains in spending efficiency. Reforms in education finance and the management of education systems will be needed in order to achieve efficiency gains in spending. To realize these gains, financing formulas need to shift from an input basis -- e.g., number of teachers, schools, etc. -- to an output

17 As of now, there is no consistent measure in any of the Western Balkan countries of student performance at the end of secondary education. Each country has started work on introducing a Matura examination and so this situation should change significantly over the next few years. . 18 See, for example, Hanushek and Wőßmann (2007)


19

one -- e.g., number of students.19 Another, and related, reform involves decentralization, a process which has already started in the countries in the region. In addition to supporting efficiency objectives, these financial and management reforms will also be needed to reorient the systems to delivering higher-quality and more relevant education. While important, decentralization of more education responsibilities to lower levels of government does raise certain challenges both for increasing secondary enrollment and for spending efficiency. In Serbia, municipalities are relatively large, so almost all have one or more secondary school. This is not the case in Macedonia where the municipalities are quite small and many have only a handful of primary schools. The role of municipalities in expanding access is therefore critical, both from a financing perspective (will they be able to afford the increased costs?) and from an education perspective (since secondary schools have different profiles it does not make sense for all municipalities to have all types of secondary schools). So, some collaboration across municipalities is important in both aspects (e.g., will funds follow the pupil across school boundaries and if so how?); but as yet in most countries there are no formalized mechanisms or incentives for municipal collaboration (and the representative associations would need strengthening in this respect). Finally, as enrollments expand this will lead to increases in funding for some municipalities where enrollments are currently low, but these municipalities will tend to have the least human resource capacity to manage these increases well to improve both access and quality in secondary education. Currently, funding sources and management arrangements vary, complicating the way that a reform program might be implemented and paid for. In each country, different parts of the education budget are funded in different ways. For example, in Macedonia, Montenegro, and Serbia, the central government pays the cost of teachers and other staff salaries and capital expenditure but the municipalities (or some lower tier of government) are responsible for non-salary recurrent costs. These non-salary costs are largely met by transfers from the central government; but local governments do contribute their own resources (for example, in Serbia, 11% local government spending on secondary education is spent on wages, costs which in theory are meant to be met by the central government). In Albania, the allocation of funding is even more complex, as it is divided between three levels of government. Responsibility for the establishment and maintenance of the school network, i.e., responsibility for the determining the number, location and curricula offerings of schools, is also split. In Serbia, municipalities are formally responsible for proposing changes to the secondary school network (including the curriculum/profiles of schools), but these have to be approved by the central ministry. Demographic trends will lead to significant declines in the school-age population which could have some implications for fiscal savings, although there will be other pressures to maintain spending. Table 6 presents data on projected changes in the school age population (0-17 years of age) between 2005 and 2025, based on United Nations population projections (2004 revisions, medium variant). In all countries in the Western Balkans, substantial declines are projected, ranging from -9.6% in Macedonia to -26.6% in Bosnia and Herzegovina. In all countries, declines will be greater at the secondary and post-secondary age levels than at the primary level. On the one hand, the fall in school age populations would allow enrollment rates to be increased without raising expenditures. However, given the unsatisfactory coverage especially at the secondary and postsecondary levels, efforts – including financial allocations -- will be needed to raise enrollment

19 These capitation type formulas tie funds to the real objectives of education more than input-based formulas as well as providing incentives to be financially efficient in delivering education services. The formulas are not perfect, since they cannot guarantee quality, for example. For more discussion, see World Bank (2007).


20

rates and not just maintain them. Moreover, if greater resources turn out to be necessary to assure high quality and relevance of schooling (see below) even after efficiency improvements are made, then the demography-driven fiscal savings will be minimized further. Table 6: Projected change in school age population (0-17 years) by level of education, Western Balkan countries, 2005-25

Percentage change in projected school-age population Percentage change in population 0-17 years

Primary secondary higher

Albania -13.3 -12.4 -20.8 -15.1 Bosnia and Herzegovina -26.6 -24.5 -34.7 -32.6

Macedonia -9.6 -21.4 -31.5 -31.5 Serbia and Montengero -12.8 -15.0 -24.9 -25.7

Source: World Bank (2007), based on United Nations Population Prospects, 2004 Revisions (medium variant)

Policy-makers will also face potential increases in costs in order to address both supply and demand side constraints on secondary enrollment. On the demand side, reducing private costs of attendance could be achieved through provision of free textbooks and/or transportation, or though direct payments to families to compensate for lost earnings. However, the deadweight costs of these programs could be very large (since currently the families of children who attend school pay for these items), and so any program needs to be carefully targeted through linkages to social assistance or welfare programs. The costs on the supply side are probably even larger -- development and provision of new curriculum materials and the desperately needed teacher training would require significant new resources.20 In each country, there is a significant backlog of needed maintenance repairs, even focusing on the most essential health and safety issues. Finally, improving access for rural populations – a necessity to attack enrollment shortfalls – will require significant spending, either through the construction of new schools or by providing reasonable transport arrangements for students to attend existing schools.21 Each country will need, therefore, to investigate how these costs and savings might compare under different reform scenarios. This underlines the importance of moving to more effective, lower-cost courses with stronger general education content. The analysis of the household data showed that vocational education graduates do not have an advantage in the labor market compared to general secondary graduates – despite the significantly higher costs. Indeed, these findings echo the results of a recent study of vocational education in the EU-8 countries (World Bank 2006d). Moreover, while vocational education programs may have been appropriate for the hiring and employment practices of the

20 In Bosnia and Macedonia, teacher salaries relative to prevailing wage rates are reasonable and imply that no increases in salaries are needed – indeed, in both countries there appears to be scope for keeping salaries increases below the rise in GDP and in overall spending. In Serbia, however, this is not the case. In each country, pupil-teacher ratios are generally in line with international averages and could probably rise without any decrease in quality and any savings on salaries could be used directly on quality-enhancing non-salary inputs. 21 The World Bank (2004) did some preliminary calculations for Serbia to see how these costs might compare with the potential savings. In this case, there would need to be no increases in spending, on reasonable assumptions and holding most other things such as pupil-teacher ratios constant. However, these calculations did not include significant expenditures for equipment or capital.


21

planned economies, they are less well suited to meeting the labor demands of a market economy (World Bank 2007). Indeed, students and parents have been voicing their preferences by increasingly choosing general secondary education over vocational programs. Vocational schooling at the secondary level must provide stronger more generic skills and place less emphasis on narrow job-specific skills. Because of the economic changes, vocational secondary education must teach more generic skills (literacy, numeracy, communication, problem-solving) and skills for broader families of occupations than the specific skills for narrow occupations which it was traditionally occupied with. This applies to both 2-3 year and 4-5 year programs. In other words, vocational and general secondary education need to converge. More specialized vocational and technical training should take place after high-quality secondary education – either at the post-secondary level or in the workplace. The economic transformation is placing a premium on postsecondary education. The evidence from the household surveys is clear in showing that postsecondary education has substantial returns in the labor market. Compared to less educated young people, employment rates for graduates are much higher, the quality of jobs is better (including far less informal employment), and earnings are significantly higher.22 For young women, post-secondary education is highly correlated with labor force participation. The relationship between higher education and success in the labor market is consistent with all international trends and, based on the experience of more developed countries, policy-makers in the Western Balkans can expect it to continue and accelerate. It is not clear whether, at some point, rising levels of post-secondary education would reduce returns, but certainly, the evidence from OECD countries is that returns continue to increase even as the numbers with these levels of education continue to rise.23 With current post-secondary attainment levels in the Western Balkans well below other European countries, preparations need to be made to expand the systems while increasing their efficiency, relevance, and quality.24 Given the high private returns, this argues for greater cost recovery within higher education which would call for the development of loan and credit instruments to promote access.

As education focuses increasingly on generic skills, the training effort must be strengthened as the source of specific skills formation. To be relevant, training systems need to be closely tied to the needs of the labor market Job-specific training can occur either in workplaces or in training institutions, including private-sector deliverers. International experience has provided strong evidence that, to be successful, training needs to closely linked to the needs of the labor market. It is possible for institutional systems to be responsive to these needs through strong industry involvement (e.g., private-public partnerships, dual systems). However, encouraging workplace-based training and commercial training providers is a more straightforward strategy for achieving the goal of generating responsive and relevant training.

22 Isolating the real impact is actually a complicated matter. There is the question of “selection bias” – i.e., at least some of the employment and earnings premiums may reflect the fact that the most capable are most likely to go on to higher education. Also, in a context of constrained labor demand, employers may be able to select higher education graduates for jobs that actually require secondary education. This will widen observed differences in employment rates between the two levels of schooling. On the other hand, the large wage differentials between secondary and tertiary education suggest that employers are prepared to pay for the additional years of schooling which suggests increased productivity. 23 This is also true in the Latin America and Caribbean region; see de Ferranti et al. (2003). 24 Graduation rates are very low in much of the region; the average length of studies is long; and curricula and teaching methods are often unrelated to the needs of the economy. For a discussion of these issues in the context of Serbia, see World Bank (2004b).


22

Currently, employers in the Western Balkans provide less training than their competitors in the new EU members from Central and Eastern Europe. The BEEPS data analyzed for this report indicate that only a minority of employers in the Western Balkan countries provide training for their employees. Comparable numbers for employers in the EU-8 indicate that that enterprises in these countries are more active trainers. Increasing the training effort in industry will be critical if enterprises are going to manage the challenges of innovation and intensified competition successfully. The enterprise data show that the demands for skilled labor increases as enterprises adopt new technology, introduce various forms of innovation, and face heightened competitive pressures. Amid the generally slack labor markets of the Western Balkans, there already appear to be pockets of skill shortages where employers in emerging sectors are experiencing difficulties filling certain types of vacancies. As we have stressed in this note, the primary goal of the education system should be to establish a foundation for workers that will enable them to successfully add on specific vocational and technical skills. Training is always more effective when it builds on a strong educational base. But it is employers who will have to become more active in terms of ensuring opportunities for the formation of the specific skills. This will require reforms to strengthen the “training market” and provide incentives for employers and workers to invest in training. Strengthening the training market involves various reforms to ensure competition, quality, and efficiency. Licensing and accreditation of providers, labor market and training information, and occupational and training standards are all key elements in the framework to regulate training markets. Bulgaria, for example, has established the National Agency for Vocational Education and Training to license vocational education and adult training activities and coordinate the institutions involved in vocational guidance, training, and education. In the Czech Republic, a complex and formalized system for recognition of the outcomes of non-formal education and informal learning has been created. Several OECD countries have introduced standardized competence-based qualification systems, in which workers are allowed to take individual skill tests independently of the way skills are acquired. In the Western Balkans, initial steps are being taken to establish an institutional framework to promote training and assure quality. In Albania, for example, the National Agency for Vocational Education and Training has been recently established for quality assurance as well as to coordinate and prepare training activities. Financing is a major concern, both for firms and for workers. For well-known reasons, employers and workers risk “underinvesting” in training. Firms are often concerned about losing training investments if workers leave after receiving training – an event that can become more likely because of the training. Employees often do not have access to training unless they pay for it. This is particularly true for less educated and skilled workers who tend not to receive employer-financed training. Given the direct costs and the indirect costs (through foregone earnings), this can be a serious obstacle. Since there are credit constraints, it is essentially impossible for individuals to borrow to finance their own training. Finally, both employers and workers may underestimate the actual benefits that would flow from training. This last obstacle can be addressed through better information. The others raise the issue of whether and how governments can improve incentives for investing in training. Policy-makers may want to consider incentives for firms to invest in training. Many countries have established tax incentives for firms to encourage training. The most “activist” of these are “train or pay” schemes which tax employers unless they provide training or credit them after the training has been provided. These have different designs. For example, in Hungary, employers pay a vocational training contribution equivalent to 1.5% of the wage-bill. If they spend that amount on apprenticeships, the training of their own employees, or on the development of a


23

vocational training school, they are exempted from this contribution. The best known plan of this type is France’s training levy adopted 35 years ago. A minimum training expenditure was defined (now 1.5% of the wage-bill) and each firm must pay as a levy an amount equal to the difference between this legal minimum and its actual training expenditure. In addition to systems established by national legislation, a number of countries have sectoral training levies established through branch-level collective agreements. Typically, there is a bipartite or tripartite joint governance of the training funds financed through the levy. Another type of incentive is to provide tax deductions to firms based on their training expenses. To encourage training, Austria, Italy, Luxembourg, and the Netherlands allow employers to deduct more than 100% of the costs from their taxable income. Tax subsidies or grant schemes for firms do have the potential to raise employers’ investments in training, but such schemes should be carefully designed in order to avoid waste of public resources and to ensure that they reach their targets. Unfortunately, there has been little rigorous analysis of the effects of the various incentives on employer-sponsored training. Financial incentives for individuals are particularly important to broaden access to training. When the policy goal is to increase access for groups currently receiving little continuing vocational training, direct support through measures like individual training subsidies may be the most appropriate instrument. As the coverage of the personal income tax system broadens, other incentives may be considered. Indeed, there are various measures that have been introduced in EU member countries.25 Finally, while surveys of workers confirm the importance of financial barriers to training, they also emphasize the importance of time constraints, either because of family or work responsibilities. For this reason, many OECD countries have introduced various types of statutory or contractual training leave schemes that guarantee employees the right to return to their jobs after completing the training course, as well as institutional arrangements facilitating access to training and education on a part-time basis (OECD 2003). Reinstatement rights help to reduce the risk element of human capital investment borne by the worker and imply some cost-sharing with employers, (who need either to replace the worker or to make do without him or her on a temporary basis). The take-up of training leave often needs to be linked to financial support because of the income loss due to foregone earnings. In OECD countries, paid leave and learning accounts are examples of instruments to address this problem. In sum, the Western Balkan countries need start developing coherent and affordable lifelong learning strategies. These strategies should include the validation of prior learning, and the creation of learning environments that are open, attractive and accessible to everyone, especially to disadvantaged groups. A mixed, demand-driven training strategy appears to be the best approach: mixed, in the sense that measures to improve the functioning of the training and capital markets should be combined with government co-financing to increase firms’ and workers’ financial incentives to invest in training. In this context, it is necessary to promote more effective partnerships between key actors including business, the social partners and education institutions at all levels.

25 For instance, in Austria, legislation now allows individuals to deduct costs related not only to training required for their current job, but also to training that equips them to change jobs or enter a new profession. In Estonia, a person under the age of 26 has the right to deduct training expenses from taxable income: training expenses are defined as certified expenses incurred for studying at a state or local government educational establishment, university in public law, private school which holds a training licence or relevant accreditation, or foreign educational establishment of equal status, or for studying on fee-charging courses organised by such educational establishments. Also in Lithuania, the Law on Income Tax of Individuals envisages the possibility of receiving partial compensation for the cost of studies. For the Western Balkan countries, where PIT coverage is small, these are less promising options, at least for now.


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REFERENCES (incomplete) EC: Council Decision of 12 July 2005 on Guidelines for the employment policies of the Member States (2005/600/EC). EC (European Commission 2005). Employment in Europe 2005. Brussels. EC (European Commission 2006). Employment in Europe 2006. Brussels. EU Member States' autumn 2006 reports on the implementation of their National Reform Programmes to implement the Lisbon Strategy. Eurostat (2005), Statistics in Focus, Population and Social Conditions, 9/2005, Labor Market, Luxembourg, Eurostat. Fretwell, D., Lewis, M. and A. Deij. (2001). A Framework for Defining and Assessing Occupational and Training Standards in Developing Countries. Information Series No. 386. World Bank. Washington DC; Ohio State University, Columbus, Ohio; European Training Foundation, Turin. Krstić, Gorana, 2004, Labor Markets in Serbia and Montenegro, Background Paper for World Bank Country Economic Memorandum: Serbia and Montenegro, Belgrade, World Bank. OECD (2003). Employment Outlook 2003. Paris. OECD (2004). Employment Outlook 2004. Paris. OECD (2005). Employment Outlook 2005. Paris. OECD (2006). Employment Outlook 2006. Paris. Schneider, Friedrich, 2005, Shadow Economies of 145 Countries All Over the World: What Do We Really Know?, Centre for Research in Economics, Management and the Arts, Working Paper No. 2005 -13, Basel, CREMA. UNICEF, forthcoming, Education for Some More than Others?, CEE and CIS Regional Study on Education, Geneva, UNICEF. Yemtsov, Ruslan G., Stefania R. Cnobloch, and Cem Mete, 2006, Evolution of the Predictors of Earnings during Transition, Washington D.C., World Bank.

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