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Republic of Poland: Selected Issuse

Author(s):
International Monetary Fund
Published Date:
May 2000
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V. Labor Market Issues in Poland1

A. Introduction

1. Slow employment growth in recent years and the prospect of rapid labor force growth and continued restructuring in the economy have made job creation a top priority for the government, as outlined in its “Strategy of Public Finance and Economic Development, Poland 2000-10”. This chapter discusses what has happened to employment and the labor force in recent years, and the role of reforms of labor market institutions in reducing the unemployment rate.

B. Background

2. Poland has experienced rapid economic growth in the past five years, but employment has not risen in tandem with that growth (Figure 1). The labor force activity rate has been declining, partially reflecting policies designed to ease the transition through generous pension benefits and widespread early retirement (Table 1 and 2). Unemployment, after an initial jump at the beginning of the transition process, declined gradually to around 10 percent in 1998 (Table 3). A recent rebound in the unemployment rate, to 13 percent in December 1999, reflected not only the slowdown in economic activity, but also structural factors that are likely to persist.

Figure 1.Poland: Employment, Wage, Productivity and Growth, 1993-98

(1993=100)

Citation: 2000, 60; 10.5089/9781451831887.002.A005

Sources: OECD Analytical Database, Eurostat, Central Statistical Office and staff projections.

Table 1.Poland: Labor Force and Employment, 1993-98
199319941995199619971998
Labor force (in millions)17.317.117.117.117.117.2
Total employment (LFS, in millions)14.914.714.815.015.215.4
Q114.814.414.514.814.915.2
Q214.814.614.915.315.115.4
Q313.114.815.015.115.415.6
Q414.814.714,815.015.315.4
Labor force participation rate68.467.466.966.466.1
15-2439.739.038.337.3
25-5484.083.682.982.9
55-6435.935.035.534.3
Men75.073.973.573.272.8
15-2443.943.442.341.0
25-5490.169.789.489.3
55-6445.544.545.344.5
Women62.161.060.559.959.7
15-2435.634.634.333.7
25-5478.077.576.576.5
55-6427.626.927.125.7
Employment rate58.358.158.458.858.9
15-2427.327.928.828.6
25-5474.274.674.775.0
55-6433.833.033.632.3
Men64.964.765.266.165.8
15-2431.132.033.032.2
25-5480.881.482.162.2
55-6442.541.742.741.7
Women51.951.851.851.852.2
15-2423.523.824.725.2
25-5467.767.867.367.9
55-6426.325.525.724.3
Memorandum items
(in percent of total)
Based on registration data
Agriculture26.727.227.828.227.527.4
Industry24.724.924.624.323.622.9
Services42.742.242.141.943.043.8
of which:
Public administration and defense l/2.32.52.52.62.72.7
Based on LFS data
Agriculture22.622.120.519.1
Industry3231.731.932.1
Services45.446.247.648.8
Sources: Eurostat and OECD.1/ Excluding armed forces.
Sources: Eurostat and OECD.1/ Excluding armed forces.
Table 2.Poland Number of Pensioners, 1990, 1995–98
19901995199619971998
(In thousands)
Non-agricultural pensioners55557009717273137466
Old age pensioners23533230331333943497
Disability21872629267227082735
Family pensions10151150118712111234
Agricultural pensioners15062049202820011969
Old age pensioners10511258121211761139
Disability441762785793796
Family pensions1429313234
Total70619058920093149435
of which: disability (in percent of total)37.237.437.637.637.4
Persons insured with Social Insurance Fund1412412935131771309212705
Persons insured with Agricultural Insurance Fund1452139814191419
Pensioners to contributors ratio (in percent)43.063.063.164.266.8
Source: Central Statistical Office.
Source: Central Statistical Office.
Table 3.Poland: Unemployment Rate in Selected Central European Countries, 1993-98 1/
199319941995199619971998
(In percent)
Poland14.014.413312.311.210.6
Bulgaria21.420.514.713.715.016.0
Czech Republic4.34.34.03.94.86.5
Estonia6.57.69.710.09.7
Hungary11.910.710.29.98.77.8
Latvia18.918.314.413.8
Lithuania17.417.116.414.113.5
Romania8.28.06.76.06.3
Slovenia7.47.9
Slovakia12.213.713.111.111.611.9
Source: Eurostat.

Based on labor force survey data, annual average.

Source: Eurostat.

Based on labor force survey data, annual average.

3. Looking ahead, the large inflow of the working age population into the labor force, high hidden unemployment in the agricultural sector, and the sizable labor shedding expected during the agricultural and industrial restructuring will put further pressure on the labor market. If the current trend of employment growth—about 1 percent a year—continues and the labor force grows at about¾ percent a year, the unemployment rate is expected to exceed 10 percent even in 2005 (Figure 2). Accordingly, job creation will be essential to ameliorate the social costs of the restructuring and to absorb the large inflow of new entrants to the labor force. The following sections describe key recent trends in the labor market and the challenges posed by prospective industrial and agricultural restructuring. This forms the foundation for the discussion of policy issues which follows.

Figure 2.Poland: Employment, Labour Force and Unemployment Rate, 1993-05

(Based on Labour Force Survey data)

Citation: 2000, 60; 10.5089/9781451831887.002.A005

Developments in employment and wages

4. During the early stage of the transition period, job losses—mainly from the restructuring and closing of state enterprises—reached more than 2 million during 1989-92. Employment started to recover in 1994, but only modestly. While real GDP increased by 33½ percent during 1993-98 cumulatively, employment was up by only 3 percent measured by the labor force survey (LFS), or by 8 percent based on registration data2. Accordingly, the gross value of fixed assets per worker (a measure of the capital-labor ratio) rose by about 15 percent during the same period (Figure 1).

5. The pattern of sectoral employment growth during 1993–98 reflected the substantial restructuring in the economy during this period (Figure 3 and Table 4). Job losses were concentrated in the mining and public utilities sectors, which are still predominantly state owned. New jobs were mainly created in privately owned businesses, notably in small and medium-sized enterprises in the service sector, particularly in hotels and restaurants, financial intermediation, real estate, and business activities. Employment in the public administration also experienced a large expansion. Agricultural employment grew over this period, which may partly reflect the higher hidden unemployment on farms and the fact that registered agricultural employment data are based on the population census, which is imprecise. Employment in the public sector in general is declining, while the private sector is creating new jobs (although these data are distorted, as firms are reclassified into the private sector following their privatization).

Figure 3.Poland: Changes in Sectoral Employment between 1993–98

(in percent)

Citation: 2000, 60; 10.5089/9781451831887.002.A005

Table 4.Poland: Employment Structure by Sectors, 1993—98 1/
19931994199519961997 2/1998 2/
(In thousands, end of the year)
Total14761.214924.015129.115487.415940.815921.1
Agriculture3938.34054.44207.14371.54377.94356.1
Agriculture, hunting and forestry3922.84039.54193.54358.74365.24343.7
Fishing15.514.913.612.812.712.4
Industry3641.43717.03728.83757.33761.33650.0
Miring and quarry398.8376.8357.1339.1325.9297.0
Manufacturing2985.53071.43102.53158.83177.03100.0
Electricity, an and water supply257.1268.8269.2259.4258.4253.0
Construction880.7853.0827.4868.7947.5939.0
Services6300.66299.66365.86489.96854.16976.0
Trade and repair1982.21892,21903.11900.32060.62106,0
Hotels and restaurants170.1175.8185.9188.0201.8222.0
Transport, storage and communication823.3844.2838.1832.3864.7859.D
Financial intermediation221.6252.1268,2285.8305.2327.0
Real estate and business activities570.6529.6554.3594.4688.1752.0
Public administration and defense 3/336.6375.7381.3402.5431.8431.0
Education871.3893.6896.4911.8902.1908.0
Health and social work989.2995.71003.41009,61029.21021.0
Other services335.9340.7335.1365.2370.6350.0
Share of private employment in the total (in percent)
Total58.960.662.465.168.270.7
Agriculture94.696197.897.898.0
Industry40.750.555.263.770.1
Mining and quarry1.93,13.34.56.9
Manufacturing49.260.064.974.581.5
Electricity, gas and water supply2.53.74.55.45.7
Construction69.668.784.587.891.3
Trade and repair92.794.194.996.197.3
Hotels and restaurants83.184.48484.586.7
Transport, storage and communication27.626.728.832.934.9
Financial intermediation33.936.438.64249.9
Real estate and business activities57.963.365.469.873.3
Public administration and defense 3/0.10.10.20.30.2
Education2.52.83.43.54.2
Health and social work5.54.14.56.26.4
Other services56.658.160.760.358.2
Sources: OECD and Central Statistical Office.

Based on registration data.

As of end-September.

Excluding armed forces.

Sources: OECD and Central Statistical Office.

Based on registration data.

As of end-September.

Excluding armed forces.

6. Overall real wage growth has been moderate, averaging about 4 percent per annum economy-wide from 1993 to 1998, lower than productivity growth (Figures 1 and 4, Table 5). A striking fact is that despite large labor shedding in mining and quarrying, annual real wage growth in that sector (of 4.9 percent) has been higher than the national average. Sectors experiencing rapid employment growth also tend to have more real wage growth, despite the high level of unemployment. Wage growth moderated further in 1999; during the period January-October 1999, gross wages in the enterprise sector grew by 3.3 percent in real terms, compared with 3.6 percent in the same period of 1998.

Figure 4.Poland: Changes in Sectoral Employment and Wages between 1993–98

(in percent)

Citation: 2000, 60; 10.5089/9781451831887.002.A005

Source: Central Statistics Office, OECD and staff estimates.

Table 5.Poland: Wages and Salaries, 1993-98
199319941995199619971998
(Average monthly wage, in zlotys)
Nominal gross wage3905256918741,0661,233
Of which:
Enterprise sector4105717549391,1621,349
Budgetary sector3574736398171,0061,176
Of which:
Public sector75496111771360
Private sector5997599561,120
Industry4175837599551,1451,307
Mining and quarrying6831,0451,3371,6771,9582,253
Manufacturing3624956578331,0151,164
Electricity, gas and water supply5547881,0101,2571,4811,695
Construction3684646017639601,133
Wholesale and retail trade; goods repair3234385777208921,041
Hotels and restaurants261366492607763895
Transport, storage and communication4135587279171,1351,346
Financial intermediation5847671,0011,3091,6411,966
Real estate and business activities4275667369521,1701,343
Public administration and defense4926388591,1311,3631,603
Education3504586187919771,119
Health and social work3334305737168731,003
Nominal net wage3204255617108771,027
(Percent change from year earlier)
Nominal gross wage34.834.531.626.522.015.7
Of which:
Enterprise sector37.139.332.124.523.716.1
Budgetary sector31.831435.127.923.116.9
Industry37.839.830.125.919.914.1
Mining and quarrying43.553.028.025.416.815.1
Manufacturing35.436.732726921.814.7
Electricity, gas and water supply46.842.328.224.517.814.4
Construction23.926.329.427.025.818.0
Wholesale and retail trade; goods repair25.435.431.824.823.916.7
Hotel and restaurants23.739.934.523.525.717.3
Transport, storage and communication36.235.030.226.221818.6
Financial intermediation34.731.230.530.825.419.8
Real estate and business activities31.332.730.029.422.914.8
Public administration and defense33.329.634.631.720.517.6
Education35.530.735.028.023.514.5
Health and social work30.629.233,324.921.914.9
Nominal net wage31.332.931.826.723.517.1
Consumer price index35.332.227.919.914.911.8
Sources: Central Statistical Office and staff estimates.
Sources: Central Statistical Office and staff estimates.

Demographics

7. The Polish population has stabilized at around 38.7 million in recent years, as the natural population growth rate declined steadily from the early 1980s. The population is relatively young—only 12 percent of the population is aged 65 or above, with the shares of the old age pensioners and of the working age group both increasing in the total population, and the number of children and youth (aged 0–14) is decreasing (Table 6). The working age population is growing rapidly, by 0.9 percent a year, or more than 200,000 a year in 1998. This growth is expected to continue during the next five years as the baby-boomers enter the labor market. Emigration is low. Internal migration is also low and declining, owing largely to the housing shortages and the resulting high rents in fast-growing urban areas.

Table 6.Poland: Demography, 1993-98
199319941995199619971998
Population, cop (in millions)38.538.638.638.638.738.7
of which: working age population 1/22.322.522.622.823.023.2
Net increase (in thousand)152.0168.4146.0172.6194.0212.3
Growth rate (in percent)0.70.80.60.80.90.9
Age structure(in percent of total)
Poland
0-14 years23.122.521.921.120.3
15-64 years65.966.366.767.267.8
65 years and older10.911,211.511.711.9
Czech Republic
0-14 years19.419.118.618.117.417.1
15-64 years67.667.868.268.56969.2
65 years and older1313.113.213.413.613.7
Hungary
0-14 years18.618.31817.717.5
15-64 years67.567.767.86868.1
65 years and older13.91414.214.314.4
Slovakla
0-14 years23.522.922.321.721.1
15-64 years65.866.366.867.367.7
65 years and older10.710.810.91111.2
(per thousand)
Natural growth rate2.72.51.21.10.80.5
Net migration-0.4-0.5-0.5-0.3-0.3-0.3
Internal migration in urban areas1.11.00.7
Sources: Eurostat and Central Statistical Office.

Working age population refers to males aged 18—64, and females aged 18–59.

Sources: Eurostat and Central Statistical Office.

Working age population refers to males aged 18—64, and females aged 18–59.

Participation rates

8. As employment growth has been sluggish, the decline in the unemployment rate over the past four years was largely due to the lower participation rates (Table 1). Overall labor force participation rates declined by more than 2 percentage points between 1994 and 1998, with similar trends in the participation rates for men and women. Across the age groups, there were early signs of stabilizing participation rates for the 25-54-year cohort, with continued declines in participation rates for youth (15-24) and the elderly (55-64).

9. During 1994-98, about one-fourth of the reduction in the unemployment rate was a result of employment creation, while three-fourths was attributable to the decline in the labor force participation rate. This is partly due to the labor market policies that encourage early retirement to contain the surge in open unemployment at the beginning of the transition during the early 1990s and generous provisions for the disability pensions. As a result, Poland has a high ratio of pension beneficiaries to the working population, with the old age dependency ratio (pensioners to contributors) increasing from 43 percent in 1990 to 67 percent in 1998 (Table 2). The average retirement age in 1997 was 59 for men and 55 for women3, compared with the OECD averages of 62 for men and 61 for women. The share of those officially classified as disabled among the pensioners is high, at over 37 percent of total pensioners.

10. These policies led to an increase of the combined pension expenditures from 7 percent of GDP in 1988 to more than 14 percent of GDP in 1999, and high payroll taxes. The tapering off of the effect of the earlier policies that encouraged early retirement, and recent pension reforms, which encouraged people to work longer and tightened eligibility requirements for disability benefits, will put upward pressure on the participation rates.

Unemployment

11. The current unemployment rate in Poland is high among the transition economies in Central and Eastern Europe, notably in comparison with the Czech Republic, Hungary, and Slovenia (Table 3 and Figure 5). Data on registered unemployment show that it has declined substantially, from 16½ percent in 1993 to about 10 percent in 1998. The decline is less dramatic using the Labor Force Survey (LFS) data, although the unemployment rate measured by these two sources-namely, LFS and the registration data-has converged since 1997 (Table 7).

Figure 5.Poland: Unemployment Rates in Selected East European Countries, 1993–98

(Based on Labor Force Survey Data, in percent)

Citation: 2000, 60; 10.5089/9781451831887.002.A005

Source: Eurostat.

Table 7.Poland: Unemployment lndicators, 1993–98
199319941995199619971998
Unemployment (LFS, in millions)2.42.52.32.11.91.8
Q12.52.72.52.32.21.9
Q22.42.42.22.11.91.8
Q32.32.42.22.01.91.8
Q42.62.42.22.01.71.8
Unemployment rate (LFS, in percent)14.014.413.312.311.210.6
Q114.315.914.613.712.811.1
Q213.814.012.712.111.310.2
Q313.114.012.911.810.710.3
Q414.913.913.111.610.210.6
Age Structure of unemployment (in percent of total)
Aged 15-2426.827.628.728.427.526.7
Aged 25-5468.968.067.567.768.768.7
Aged 55 and above4.44.43.83.93.84.6
Female (in percent of total)51.351.250.951.854.053.5
Unemployment rate by age group
leas than 25 years old30.032.531.228.524.823.3
25 or above years old11.711.910.910.19.38.8
Share of long term unemployed in total33.539.640.540.039.137.9
Registered unemployment (in millions, cop)2.92.82.62.41.81.8
March2.63.02.82.72.21.8
June2.72.92.72.52.01.7
Sept282.92.72.31.91.7
Dec2.92.82.62.41.81.8
Registered Unemployment Rate
end of period16.416.014.913.210.310.4
Unemployment by educational attainment, 1995, end of period, LFS
Educational attainmentUnemployment rateIncidence of long term unemployment
199519981995
all levels13.110.639.9
University3.03.030.2
Tertiary, non-University9.333.3
Secondary vocational11.68.637.7
Secondary general15.313.532.7
Basic vocational training16.412.538.9
Primary or less14.414.447.8
Sources: Eurostat, the World Bank, and Central Statistical Office.
Sources: Eurostat, the World Bank, and Central Statistical Office.

12. Poland’s unemployment structure has the following characteristics: large and persistent regional disparities; high concentrations among the youth and the unskilled; a hardcore group of the long-term unemployed; and a higher share among women.

13. Regional unemployment rates at end–1998 ranged from 2.6 percent to 20.5 percent (Table 8). Such a wide regional disparity in the unemployment rate reflects unbalanced regional economic development and an uneven pace of structural transformation. The unemployment rate is high in regions dominated by agriculture, or declining industries, and localities that depend on one large industrial employer. In many rural areas, there are little employment and income opportunities outside the agricultural sector, which leads to a high rate of open unemployment and hidden unemployment.

Table 8.Poland: Regional Unemployment Rates, 1991–98 1/
1991199219931994199519971998
(In percent, and of period)
By voivodship
Maximum18.626.630.329.828.421.220.5
Minimum4.26.47.66.55.42.72.6
Max/Ma4.44.24.04.65.37.97.9
By locality
Maximum34.244.341.842.4
Minimum4.34.64.63.3
Max/Min8.09.69.112.8
Sources: OECD and Central Statistical Office.

Based on registered unemployment.

Sources: OECD and Central Statistical Office.

Based on registered unemployment.

14. The regional disparities in unemployment rates are also remarkably stable, consistent with the low internal migration rate. This has been attributed to the housing constraint in the country. Dwellings completed in recent years have been about half of the 1990 figure. Difficulties in acquiring land for construction, and the high cost of credit, have contributed to the high rental rate for housing in urban areas. Heavy subsidization of communal rents was a strong incentive for the tenants to stay with their housing.

15. The rate of youth unemployment (15–24 years old) is twice as high as the total unemployment rate. This could reflect the relatively high level of the minimum wage (see below) and the weakness in vocational education. Both the unemployment rate and its duration are negatively correlated with the educational level. The long-term unemployed (with a duration of unemployment exceeding one year) accounted for about 40 percent of the total unemployed, although the rate has declined in recent years.

C. Agricultural Reform and Industrial Restructuring

Agricultural reform

16. In the past, agricultural employment has served as a buffer when unemployment rose, as many people hold two jobs (in the agricultural and non-agricultural sectors simultaneously). The restructuring in agriculture will reduce this traditional buffer role and convert the hidden unemployment in agriculture into open unemployment.

17. The data on agricultural employment and hidden unemployment are subject to much uncertainty, as there are large variations among different data sources. Data based on the labor force survey show the share of agricultural employment at 19 percent in 1998, whereas the registration data indicate that share is above 27 percent of the total employment (Table 1). This is mainly due to the poor quality of the registration data and the difficulties in measuring agricultural employment, as there are large number of part time farmers who also hold non-agricultural jobs. There is widespread hidden unemployment in agriculture, which is estimated at about 4-5 percent of the total labor force. A 1996 Agricultural Census estimated that the redundant workforce on private farms is between 0.66 million to 0.95 million. If the redundant workforce is estimated instead as the differences between the total agricultural workforce and those registered with the Agricultural Social Insurance Fund (KRUS) (currently at 1.42 million),4 the redundant workforce is even larger than suggested by the 1996 Census estimates.

18. Despite data uncertainties, a large share of the labor force works in the agricultural sector in Poland, compared with about 8 percent in Hungary, 7 percent in the Czech Republic, and an OECD average of 8 percent (Figure 6). The agricultural sector is currently characterized by fragmented farms, a feature that has hindered the achievement of economies of scale and the application of new technology. According to the World Bank (1997) and the Joint Assessment by EU and the Polish authorities (1999), restructuring aimed at improving productivity and competitiveness will likely entail labor shedding and the transformation of the hidden unemployment into open unemployment. The likely increase in farm size during the agricultural restructuring will further reduce employment. A forthcoming study by the World Bank on the rural development strategy for Poland could shed further light on the nature and the extent of the agricultural reform on employment.

Figure 6.Poland: Employment by Sectors in 1998

(Based on Labor Force Survey data, in percent)

Citation: 2000, 60; 10.5089/9781451831887.002.A005

Source: Eurostat.

Restructuring in coal mining and other heavy industry sectors

19. Despite rapid growth in private sector employment in recent years, reflecting privatization and the rapid growth of privately owned new small and medium-sized enterprises, especially in the service sector, the state is still dominant in mining, utilities, transport, and communication. These sectors employ around 8 percent of the labor force (Table 4). As privatization and restructuring in these sectors gain momentum, substantial employment loss is inevitable.5 According to EU and the authorities’ estimates (Joint assessment, 1999), the restructuring of the coal mining sector will reduce employment in that sector by about 45 percent (105,000 people, or 0.6 percent of the labor force) over the next two to three years. About half of the 90,000 steel workers at end--1997 (0.3 percent of the labor force) could be redundant after the restructuring of the steel sector. In addition, the transformation of the defense industry will likely reduce employment in the sector.

20. In the 18 months through end–1999, 60,000 miners had already left the coal mining sector. Restructuring is planned to be completed in 2002. Under the coal sector restructuring program, miners leaving the sector are being offered generous severance packages, including the miners’ leave and social programs.6 In 1998, of the 25,000 miners who left the sector, 15,000 took miners’ leave, 10,140 took the lump sum cash option, and 160 took the social allowance. While many of the participants in these programs will exit from the labor force, and therefore will not add to the unemployment rate, a high cost will be borne by the budget and the pension system.

D. Labor Market Policies

21. In the context of the expected large inflow of entrants into the labor market, prospective reforms in the agricultural sector and ongoing industrial restructuring, sustained rapid growth will be a prerequisite for creating employment opportunities. The authorities have developed a job strategy to meet this challenge.7 Their strategy emphasizes the lowering of labor costs through reducing the social security costs, decentralizing wage setting, and reforming the minimum wages. It aims to revamp the benefits system through tightening the eligibility requirements for the early retirement, the disability and the sickness benefits; to provide better training opportunities and schooling for the young people; and to strengthen the active labor market policies. Given the weak employment growth experienced in the past few years and continued structural changes expected in the labor market, this strategy seems appropriate. The following section provides a qualitative assessment of the tasks facing policymakers, and assesses the contribution of policy in various areas to meeting the challenges of job creation.

Minimum wage

22. The government, the employers’ association, and the trade unions negotiate and set the minimum wage semi-annually, taking into account inflation and expenditure of low income households. Poland currently has one national minimum wage, which applies to all sectors, with no regional differentiation. In highly concentrated industries, informal industry-specific minimum wages (which are higher than the national minimum wage) exist as a result of trade union agreements. In 1998, the minimum wage was about 40 percent of the average wage, which was higher than those in Hungary and the Czech Republic (Figure 7). In addition, the increase in the minimum wage has been in line with average wage growth, higher than the inflation rate. The current minimum wage level is binding, evinced by the spike around the minimum wage in the pay distribution (OECD Annual Review of Poland 1999/2000).

Figure 7.Poland: Ratio of Minimum Wages to Average Wages, 1990–98

Source: OECD and Central Statistics Office.

23. Given Poland’s high incidence of unemployed young and unskilled people, and the expected large inflow of first-time job seekers, it is desirable to have some downward flexibility in the real minimum wage, or in its relative level to the average wages, so that it will not impede the entry of the low skilled and the young into the labor force. In this regard, the authorities are considering, proposals to index the minimum wage to inflation rather than average wages, and to introduce a separate, lower minimum wage (below the current uniform minimum wage) for the new labor market entrants. These initiatives are appropriate. Regional differentiation of the minimum wages would also be desirable in the context of wide regional disparities in unemployment rates, but is prevented by the Constitution. One solution to this problem could be to define minimum wage by sector.

Tax on labor

24. The tax burden on labor is high, as the tax wedge between labor costs and take-home pay in 1999 for the lowest tax bracket taxpayers is about 45 percent. Average and marginal tax wedges in Poland are at the high end in the OECD countries (Figures 8 and 9). This tends to reduce the incentive for employers to hire additional labor, and raises the incentive to push economic activities underground.

Figure 8.Poland: Tax Wedge between the Cost of Labor and the Take-Home Pay, 1999

(Lowest tax bracket taxpayers)

Citation: 2000, 60; 10.5089/9781451831887.002.A005

Figure 9.Poland: Labor Tax Wedge in Selected Countries, 1997

(In percent)

Citation: 2000, 60; 10.5089/9781451831887.002.A005

Source: OECD.

25. High payroll taxes are the result of labor market policies that encouraged early retirement and generous provisions for the disability benefits. Individuals who retired earlier than the statutory age requirement could combine pension and work income, which reduced the incentive to work longer.

26. The government is aware of these problems and tightened the eligibility requirements for disability benefits in 1997, and for early retirement in 1999. Under the new pension system, there are no provisions for early retirement benefits. As a result, workers will have to retire at age 65 for men or 60 for women. The old system still applies to people who are more than 50 years old in 1999 and is optional for people between 30 and 50 years old. A special system for a bridge pension to cover early retirement stemming from health reasons, financed by the employers in particular sectors (mainly for coal mining), is under negotiation with the trade unions. It is expected that this bridge pension will be enacted in January 2001.

27. A proposal dealing with the old pension system’s working early retirement beneficiaries is in Parliament. It gives the early retirement pensioners the option to continue to receive benefits by resigning from work, or continue to work but stop receiving pensions.

28. Disability benefits are widely claimed, as currently over 37 percent of pensioners are officially classified as disabled. The reforms introduced in 1997 have been effective in reducing the disability benefit claims, and the abuses of the system have been curtailed. Reform measures included the tightening of eligibility requirements, with a Social Insurance Institution (ZUS)-appointed medical board to determine the eligibility criteria, more frequent reviews of the individual disability certificate issued by the medical board, active use of preventive measures to reduce accidents in the workplaces, and additional resources allocated to rehabilitation to restore the ability to work (40 percent of people treated under the rehabilitation program become eligible for work).

Wage formation process

29. Wage setting in the private sector is decentralized. From 1991 to 1998, nominal wages increased faster in the public sector than those in the private sector (623 percent versus 584 percent), partly reflecting the pressure on private sector wage growth from the high unemployment level 8.

30. Wage setting for the budgetary sector and the medium-sized and large public enterprises (defined as employing at least 50 persons) is determined by the Tripartite Commission (TC), formed by representatives from the government, the employers’ association, and the trade unions. If no consensus is reached within the commission, the government decides the size of the wage increase. During the period 1995–2000, agreement was reached only in 1995 and 1996; the government determined wage growth in 1997–2000.

31. In the public sector, line ministries are responsible for monitoring wage developments in their respective sectors. Should the Board of Directors or management set wage growth above the norm in the tripartite wage agreement, and the state-owned enterprise concerned is experiencing financial losses, the Board of Directors and management could be fired or refused their profit shares or other bonuses. Sectors under restructuring (such as the coal and defense sectors) are exempt from the tripartite wage agreement. The maximum wage growth in these sectors is usually set at the inflation rate.

32. In practice, the wage norm has not been effective in constraining wage growth—actual average wage growth systematically exceeds the Tripartite Commission’s norm. In fact, it seems to serve as a floor rather than a ceiling for wage growth. It is also centralized, as one norm applies to public enterprises in different sectors. Excessive wage growth puts upward pressure on the private sector employers to match the wage increases.

33. Privatization or imposing a credible hard budget constraint could be more effective at controlling wage growth in public enterprises than the wage norm. In this context, accelerated privatization would help, especially in mining and public utilities companies. Wage norms aimed at controlling wage growth in enterprises lacking hard budget constraints are therefore a second best solution. But such norms should be made more effective by tightening the enforcement of disciplinary actions against managers who award excess wage increases. Steps in this direction have already been taken. The moderate wage growth in 1999 is attributed to the declining share of the public sector owing to privatization, the deterioration of the financial conditions in some of the public enterprises, and the liquidity constraint imposed by the refusal of banks to lend to these enterprises, especially in the mining sectors. In addition, the Ministry of Treasury has strengthened the enforcement of existing rules as three mining companies’ management boards were fired for excess wage increases in 1999.

34. There are ongoing efforts by the authorities to reform the tripartite agreement: proposals have been made so that loss-making enterprises cannot award wage increases above the inflation rate, and profitable enterprises cannot award wage increases that lower their profitability or operating surplus ratio. These proposals, if approved, could come into force from 2001; their overall effectiveness would then be monitored to determine whether or not they succeed in imposing hard budget constraints and preventing unwarranted wage increases.

Working time flexibility and employment protection legislation

35. For full-time employees, the labor code stipulates that the maximum hours of work are 8 per day and 42 per week on average over a period of three months. This is more strict than the EU directive, which set the upper limit at 48 hours per week with many exemptions. The actual number of hours worked in Poland is similar to other OECD countries, but much lower than what was observed when those countries were at a similar level of per capita income. In addition, the annual leave provision is at 18 days after one year of employment, 20 days after 6 years and 26 after 10 years (OECD, Annual Review of Poland, 1997/98).

36. Recent proposals to shorten the working week from 42 to 40 hours are controversial. The government estimated that it would affect 70 percent of all employees. The government also estimated that for those paid on a salary basis (about half of the affected workers), unit labor costs would rise by 7½ percent, resulting initially in a drop in profits of about 20 percent and subsequently in a reduction in employment of up to 30 percent in the affected areas. Unemployment was estimated to rise by ½ million people, assuming the reform was introduced immediately. In light of these estimates, the government proposed to stretch the implementation period over four years, and to combine the shortening of the working time with other measures to enhance the flexibility of the labor market. An alternative proposal foresees a reduction in working days from 6 to 5 (eliminating work on Saturdays), without a reduction in working hours. In considering these proposals, the objective should be to align the working time regulations toward the EU directive, without unduly increasing the labor costs.

37. Employment protection is moderate in Poland compared with other OECD countries (Table 9). However, de facto protection is higher in some of the depressed sectors with strong unions, which could slow down the restructuring process. A recent government proposal to lengthen the cumulative duration of successive fixed-term contracts,9 in line with the OECD recommendations, is welcome as more flexible fixed-term contracts would be conducive to job creation, especially by the small and medium-sized enterprises.

Table 9.Poland: Summary indicators of the Strictneas of Employment Protection
OECD
PolandHungaryCzech RepublicAverage
Regular employment
Overall strictness of protection against dismissals2.22.12.82.2
Temporary employment
Overall strictness of regulation1.00.60.51.9
Regulation of collective dismissal
Overall strictness relative to individual dismissal3.93.44.33.0
Overall2.01.72.12.4
Source: OECD.1/ The scores can range from 0 to 6, with higher values representing stricter regulation.
Source: OECD.1/ The scores can range from 0 to 6, with higher values representing stricter regulation.

Unemployment and social assistance benefits

38. Eligibility for unemployment benefits—at a flat rate of about 30 percent of average wages and indexed quarterly to CPI—has been tightened, as indicated by the decline in the coverage of the beneficiaries as a share of the registered unemployed from 60 percent in 1995 to less than 30 percent in 1998. The benefits replacement ratio is not high, with a duration of 6–18 months, depending on the local unemployment rate. The recent rise in the registered unemployment rate reflects in part the change in the eligibility requirements for healthcare benefits for the unemployed.

39. An unusual feature of the unemployment benefits structure is that the duration of the benefits lengthens as the regional unemployment rate rises. As the large regional disparities in unemployment are mainly due to structural reasons, social considerations could support such a system. However, this feature could reduce the job search incentive and reinforce the regional pattern of unemployment.

40. The amount of social assistance is quite small, and is determined by the resources available and the number of applicants. Other forms of means-tested transfers include family allowances, housing allowances, and childcare allowances. Overall social assistance replacement rates were estimated by OECD at around 30–36 percent, depending on family circumstances.

41. Despite the moderate level of unemployment and social benefits, generous early retirement schemes and disability pensions (see previous discussions on labor participation rates and the labor tax) and the abuse of the sickness benefits have served as substitutes for unemployment and social benefits.

Sickness benefits are widely claimed, with an average of 18 days per person in 1998. Major changes in the eligibility requirements for sickness benefits were enacted in June 1999 and became effective from September, which are designed to reduce the abuses. The law now stipulates that sickness benefits can be awarded only by doctors with licenses from ZUS, who have to agree to comply with the rules and regulations set by the ZUS. ZUS will conduct regular spot checks on the sick leave reported by the employers and doctors found to be in violation of the ZUS rules and regulations will lose their ZUS licenses. Doctors are also required to submit sick leave information to ZUS to improve information sharing and control. A six-month waiting period for the newly established self–employed to receive sick benefits was introduced, together with an upper limit on the amount of benefits (at 250 percent of the average wages, compared with 100 percent of actual wages before 1995, and 80 percent of actual wages from 1995). A 14–day period between employment will be covered by the sickness benefits, with benefits capped at not more than 200 percent of average wages. These measures are expected to reduce the sickness claims substantially—for self-employed, sickness leave claims dropped by 40 percent in one month after its implementation.

Active labor market policies

42. Spending on active labor market programs increased from about 11 percent of the total labor market program in 1996 to about 20 percent in 1999, partly reflecting the tightening of the unemployment benefits (Table 10). The OECD reported that the number of participants in these programs at end–1997 amounted to about 8 percent of the registered unemployed.

Table 10.Poland. Expenditures on Active Labor Market Programs, 1996-99
Est.
1995199619971998Ext. 1999
(in millions of zloty)
Active labor market Programs806.11168.41241.81160.5
of which:
Training and retraining86.1108.9115.1122.5
Intervention works277.2319355.6340
Public works238.2414.6334.7200
Loans78.3153.1177.1110
Graduates program126.3160.2229.4367.7
Total spending of Labor Fund7418658548165839
(in percent of total)
Active labor market programs10.917.725.819.9
of which:
Training and retraining1.21.72.42.1
Intervention works3.74.87,45.8
Public works3.26,36.93.4
Loans1.12.33.71.9
Graduates program1.72.44.86,3
Total spending of Labor Fund100.0100.0100,0100.0
Participants in:(in thousand)
Training81.8143.5139.0
Intervention works184139.0166.2142.9
Public works113.199.8149.8104.1
Sources: OECD, and Central Statistical Office.
Sources: OECD, and Central Statistical Office.

43. The largest active labor market program is subsidized employment (also called “intervention works”), which covered more than 140,000 participants in 1998. Public works programs have about 100,000 participants each year. The participants in training programs rose sharply from about 80,000 in 1995 to almost 140,000 person in 1998 (Table 10).

44. International experience suggests that the effects of the most active labor market programs on employment are quite small (O’Leary and others, 1998; and OECD 1999). Employment subsidies have large substitution effects as only a very small number of participants are retained by the employer after the program. Public works programs are generally located in municipalities and dynamic industrial centers, involving construction or cleaning. Such programs are expensive and have little effect on participants’ human capital. High wages offered for the public works program (at 70 percent of average wages) could reduce the job search incentive and serve as a floor for wages. The government is aware of this and has started to switch resources away from such programs.

45. Improving the adaptability of the labor force should be the priority of the labor market policy, given the substantial restructuring ahead. This could be achieved through skill development, training, and retraining. The targeting of retraining programs might be improved if participants were required to reimburse the cost of program after rejoining the workforce. The retraining program content could be improved by involving the employers in design and funding. In addition, the functions of the public employment service could be strengthened. More resources should be directed toward job-search counseling and job brokerage functions.

Regional labor mobility

46. Regional unemployment rates vary significantly, and this dispersion will likely be increased by prospective agricultural reform and industrial restructuring.

47. However, the regional labor mobility is low. The high cost of migration to the city, such as high food and property prices, and transport costs, together with complicated administrative laws, reduces the incentive for rural-urban migration. This is compounded by a skill mismatch between the excess labor in rural areas and the job opportunities elsewhere, and by the current high level of the minimum wage and social and unemployment benefits.

48. The shortage of housing, together with high rental prices in urban areas, has been identified as a major hurdle for the movement of labor from rural to urban areas. These problems are mainly due to the institutional weaknesses in the housing market, such as the lack of mortgage banking in the past, laws that overly protect the rights of the tenants, rent controls, and co-operative housing with weak legal arrangements. According to a recently announced Constitutional Tribunal decision, some rent control measures will be lifted in 2001, as the regulation from 1994 stating that rent is fixed by municipal boards will expire in 2001.

49. Moving business to rural areas also faces many impediments, such as the lack of infrastructure and an appropriately qualified labor force. There are encouraging signs of improvements lately as the government is investing in rural development programs that aim to create non-farm job opportunities in rural areas.

Possible effects of the adoption of the EU social chapter on the Polish labor market

50. According to the World Bank (1997), the gaps between Polish regulations and EU requirements in the social area were mainly in the compliance and enforcement of the existing legislation and regulations. Compliance with the “acquis communautaire” will involve legal harmonization and its implementation in the following four areas: equal opportunity for men and women; health and safety at work; labor law and working conditions with respect to firing costs; and coordination of social security schemes.

51. For Poland, compliance with such regulations will increase the employers’ labor costs, reducing labor demand and impairing the flexibility of the labor market in general. However, in certain areas early compliance will actually generate benefits. For example, the implementation of stricter health and safety regulations at work will reduce accidents and illnesses, which carry a high cost in disability pensions and sick leave benefits.

E. Conclusions

52. Job creation is crucial in Poland to ameliorate the social cost of structural transformation and the large inflow of youth into the labor force. Policies that helped to reduce unemployment through early retirement and generous severance packages for redundant workers in certain industries resulted in an unsustainable burden on the pension system and the budget. With the recent pension reforms and the tightening of eligibility requirements for disability and sickness benefits, future efforts to contain unemployment will have to aim at employment creation, which will come only from sustained high rate of growth, with flexible labor market institutions. In the latter regard, attention will need to be paid to the reform of the minimum wages, efforts to reduce the labor costs, and measures to ease the regional movement of labor.

References

Prepared by Guorong Jiang.

The difference arises from the increase in agricultural employment shown in the registration data, which are estimated from the population census and lack accuracy.

In Poland, the standard age for retirement eligibility is 65 for men and 60 for women.

The current eligibility requirement for registering with KRUS is to have 2 hectares of farm land or more, and to have owned it for five years or more. The previous eligibility requirement covered only the size of the land, which prompted many individuals such as taxi drivers to buy 2 hectares of land and to register for KRUS because of the low contribution rates.

See Chapter 4 for discussions on the recent developments in privatization and real sector restructuring.

Miners who have five 5 years or less until they reach the normal retirement age could choose to take miners’ leave, which offers 75 percent of salary, plus a coal allowance (13”month salary payment, and 14th month payment from profit if any) each year before they are eligible for pension benefits. The normal retirement age for underground miners could be as low as 45 years old (depending on the years of underground service) compared with the normal retirement age at 65 for men and 60 for women. Other miners leaving the sector are eligible for social programs, which include a lump sum cash payment option (ZI. 49,500 in 1999 and the same amount planned for 2000), or a social allowance option with two years of training (65 percent of wages are paid during the two-year training period, with a job offer guaranteed at the end of training, and a lump sum payment of Zl. 23,000 if the job offer is accepted). These packages are supported by employment programs and subsidized loans for starting new businesses. A special agency (GAP) has been created to serve as the miners’ labor office.

The job strategy was outlined in the government’s document “The Strategy of Public Finance and Economic Development, Poland 2000-10”, approved by the Council of Ministers on June 22, 1999. It was supplemented by “The National Strategy for Increase in Employment and Development of Human Resources over the Years 2000-06”, adopted by the Council of Ministers on January 4, 2000.

Wages in the private sector, especially in small enterprises, could be underreported to avoid taxes. In 1998 and 1999, there was some catching up of private sector wages with those of the public sector, although private sector wages are still about 20 percent lower (Table 5).

Currently the fixed-term contracts can be renewed up to two times.

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