Measures and Policies to Enhance Labor Market Flexibility in Romania

Dr. Jungyoll Yun (Professor, Ewha Womans University)

Overview of Romanian Economy

▶ Maintaining relatively high growth before financial crisis (esp. after 2002) : domestic demand and foreign K. inflows ▶ Sluggish Growth after Crisis => Need momentum for sustainable growth

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GDP Growth 3

KSP with Romania

▶ Policy Suggestions focusing on Human Resource Development our experiences of crisis management our efforts for structural reforms (since early 90’s) ▶ Policy Objectives of KSP Reducing youth and long-term U.

Inducing emigrants to return ▶ Policy Tools of KSP LM flexibility ALMP Government Incentives

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KSP with Romania 5

Labor Market in Romania (I)

▶ Relatively lower employment rate Relatively lower unemployment rate => Relatively lower Participation Rate ▶ Relatively High Youth Unemployment Rate Long-Term Unemployment Rate

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Employment Rate

72 70 68 66 64 62 60 58 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 EU ROM

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Unemployment Rate

12 10 8 6 4 2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 EU ROM

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Labor Force Participation Rate

80,0 77,0 74,0 71,0 68,0 65,0 62,0 59,0 56,0 53,0 50,0 2005 2006 2007 2008 2009 2010 2011 EU ROM

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Long-term Unemployment Rate (Relative: u-long/u)

0,7 0,6 0,5 0,4 0,3 0,2 0,1 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 EU ROM

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Youth Unemployment (Relative: u-youth/u)

3,5 3 2,5 2 1,5 1 0,5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 EU ROM

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Causes for Low Rate of Employment & High Rate of youth and Long-term Unemployment

▶ Large Size of Outflows of High-Ed. Young Workers ▶ LM Rigidity for Temporary and Part-time Employment

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Effects of LM Flexibility

▶ No clear relationship between flexibility and (un)employment * open LM ▶ LM rigidity => higher long-term unemployment and lower turnover rate (OECD 2004) higher youth unemployment (Nickell 1997) lower FDI

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LM Rigidity (EPL Index) of Romania 14

EPL in Romania

▶ EPL index has been reduced over years 3.2 (2003) => 2.8 (2005) 3.0 for non-regular 4.8 for collective redundancies ▶ 2011 Reduced further * Changes in EPL for Temporary Emp.

and for Collective Redundancies Not accompanied by changes in LM structure (turnover rate, portion of temporary employment)

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Vacancy Rate

1,8 1 0,8 0,6 0,4 1,6 1,4 1,2 0,2 0 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 EU ROM

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Temporary Employment (Relative)

6,0 4,0 2,0 0,0 16,0 14,0 12,0 10,0 8,0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 EU ROM

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LM Flexibility in Romania and Korea

Regular Temporary Collective 2003 2005 2001 1) Korea(2003) 2.2

(1.8) 2.4

2.9

(2.0) 1.2(2.4) 2) 4.4

(3.4) 1.9

Source: OECD(2004) 1) EPL index values for 2011 are the ones estimated by consultants 2) EPL index for temporary employment prior to crisis Total 3.2

2.8

(2.2) 2.0

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LM Flexibility in Korea

▶ More flexible After Crisis Especially for Temporary Employment Introducing Collective Redundancies Little Changes for Regular Employment ▶ Substantial Increase in Non-regular Employment Peaked at 50% during early 2000’s before it has recently been lowered Too flexible for temporary employment

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LM Flexibility and FDI

▶ Non-linear relationship (Parcon (2008)) FDI is increasing in EPL when EPL is low <= Productivity Effect FDI is decreasing in EPL when EPL is high <= Cost Effect ▶ High Level of EPL and Low Level of FDI in Rom.

=> Need to enhance flexibility to induce FDI inflow into Romania

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LM Flexibility and FDI

FDI 0 Romania at High EPL and Low FDI EPL

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FDI (% of GDP)

5 2 1 4 3 0 2004 -1 2005 2006 2007 2008 2009 2010 EU ROM

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LM Flexibility and Employment

▶ Increasing LM flexibility for Temporary Employment and Collective Redundancies =>Increase domestic youth employment Facilitate returning of emigrants (Directly and through its effect upon FDI)

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How to Enhance LM Flexibility

▶ Social Protection Flexicurity ▶ Social Dialogue (Labor-Management-Gov’t) : Economic and Social Development C.

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EPL VS. Social Protection

▶ Lower social protection for the unemployed => stronger employment protection ▶ Expanding social protection => Reduced burden of LM Reform for Labor

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A trade-off between EPL and Unemployment 26

Social Protection Expenditure (% of GDP)

SP 35 30 25 20 15 10 5 0 2005 Source: Eurostat 2006 2007 2008 2009 year EU ROM

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People at Risk of Poverty (%) Total population EU Unemployed persons EU

2005 2006 2007 44,8 23.9

71,6 63.8

2008 42,4 22.8

71,8 64.3

2009 40,9 22.4

72,2 63.5

2010 39,7 22.5

73,3 63.8

2011 38,4 23.4

73,0 65.2

Source: Eurostat

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Expansion of SP Against Unemployment in Korea

(Million US$) 160 140 120 100 80 60 40 20 Jab Stabilization Program Jab Training Program Unemployment Insurance Benefit Source: Korea Labor Institute (2005)

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(year)

Social Dialogue (Romania)

▶ The Economic and Social Council (ESC) Social Consultation for Fair Allocation of Burdens Inducing Parties to Actively Participate in Gov’t Policies (Enhancing Enforceability) ▶ Development of ESC (3 Stages) 1 st Stage : 1990-6 Strong Union and No Employers’ Org.

2 nd Stage : - 2008 Economic Growth and Strong Union 3 rd Stage : 2008 – Economic Crisis and Weakened Union

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Social Dialogue in Korea

▶ Economic and Social Development Commission (ESDC) Founded during the crisis Effective by the crisis ▶ ‘Social Pact’ Reduction in EPL Expansion of SP against Unemployment Others: Work-hours Reduction Strengthening Trade Unionism

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ESC for LM Reform

▶ Economic Crisis and Establishment of Employers’ Org.

=> favorable environment for LM Reform : Changes in Labor Code in 2011 ▶ Fair Allocation of Burden bet. U and E => Larger Contribution of E to Social Protection Expansion in return for More LM flexibility ▶ Enhance Enforceability

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Conclusion (Policy Suggestions) I

▶ Increasing LM flexibility (esp. for Tem. and Part-T. employment): Reduce long-term & youth unemployment (and possibly total unemployment) (directly or through the increase of FDI inflow)

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Conclusion (Policy Suggestions) II

▶ To effectively reduce employment protection, Increase SP expenditure for Unemployed Social Dialogue (ESC) for LM Reform (changes in labor laws for LM flexibility) through ‘Social Pact’

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Discussion

▶ Limitations Relatively large portion of agricultural sector => Need for Industrial Policy as well as LM policy

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