The Black Sea and Central Asian Economic Outlook 2008
“Promoting Work and Well Being: Policy Challenges in the Global Environment”
OFFICIAL LAUNCH OF THE REPORT
Labour market policies in
the global environment:
Case Study of Ukraine
Speaker:
Veronika Movchan
Academic Director
Institute for Economic Research
and Policy Consulting
23 June 2008, Bucharest
Institute for Economic Research and Policy Consulting
www.ier.kiev.ua
1
Structure of presentation
1. Brief information about Ukraine
2. Overview of labour market developments
3. Coping mechanisms and strategies for:
• Households
• Firms
4. National policies affecting work and wellbeing
5. Directions of further reforms
Institute for Economic Research and Policy Consulting
www.ier.kiev.ua
2
Demographic situation in Ukraine
Population: 46.4 millions as January 1, 2008
51.9 millions as January 1, 1991
Urban population: 68% of total
Share of children (0-14 years): 14% of total in
21% of total in
Share of people older than 65: 16% of total in
12% of total in
Life expectancy at birth: 68.1 years
including: females
74.4 years
males
62.4 years
Birth rate: 1.25 in 2007 vs. 1.77 in 1991
2007
1991
2007
1991
Institute for Economic Research and Policy Consulting
www.ier.kiev.ua
3
4
Economic situation
Major shock: transformation from centrally planned
to market economy after the collapse of the USSR
1995
1999
2006
2007
GDP growth (real), % yoy
-12.2
-0.2
7.1
7.3
CPI, % yoy aop
376.4
22.7
9.1
16.6
26.0
31.9
30.9
(1996)
31.4
27.0
26.8
-3.1
2.9
-1.5
-4.2
0.3
0.5
5.3
9.2
-6.9
-2.1
-0.9
-1.1
Commodity trade turnover with
EU-25, % of total
Commodity trade turnover with
Russia, % of total
Current account, % GDP
FDI (net), USD bn
Consolidated fiscal balance, %
GDP
20.6
(1996)
40.7
Institute for Economic Research and Policy Consulting
www.ier.kiev.ua
5
Employment: general trends
110
index, 1990 = 100
100
90
80
70
60
50
40
30
real GDP
employment
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
20
real wage
Institute for Economic Research and Policy Consulting
www.ier.kiev.ua
6
Unemployment patterns
3500
%
thous. persons
3000
14
12
2500
10
2000
8
1500
6
1000
4
Officially
registered
unemployment,
thous. persons
Unemployment
rate, % of
economically
active
population
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
0
1997
0
1996
2
1995
500
Unemployed
economically
active
population,
thous. persons
Institute for Economic Research and Policy Consulting
www.ier.kiev.ua
Coping mechanisms for households
• Engagement of informal activities
• Migration
• Risk aversion, including work after retirement, low
job mobility, readiness to work despite wage arrears
and forced part-time job, and high employment in
public sectors
• Downturn in consumption
• Family support and social safety nets
• Delayed payments for housing and utility services
• Households’ savings
• Development of small business
• Crime
Institute for Economic Research and Policy Consulting
www.ier.kiev.ua
7
Informal economy
• The informality became the key coping strategies for
households.
• Approximately 45% of population worked (full- or
part-time) in the informal sector in the late 90s.
• During the early years of transition the single most
important informal sector activity for coping with
economic adversity was the cultivation of a personal
plot of land. That was important particularly for
urban population.
• Besides agriculture, the informal activity is
widespread service sectors like trade, repair, hotels
and restaurants, as well as construction.
Institute for Economic Research and Policy Consulting
www.ier.kiev.ua
8
Migration
• Migration seems to be the second most important
coping mechanism of households after the informal
work.
• Internal migration, mostly employment-driven,
accounts for approximately 2% of population, with
Kyiv being the most attractive destination for
migrants.
• Net external migration is estimated at 1-1.5 million
persons at least. The largest stream of external
migration are to Russia and the EU.
• While in the beginning of 90s personal (including
ethnic) motives dominated the migration, later the
external migration became labour-driven. The most
of migrants work in agriculture, and construction.
Institute for Economic Research and Policy Consulting
www.ier.kiev.ua
9
10
Adjustment mechanisms for firms
• Job displacement and reallocations in Ukraine were
not as significant as could be expected, but still play
an important role in enterprises’ restructuring.
• Hidden unemployment was equally pervasive
instrument of adjustment to the demand contraction.
The practices of wage arrears, forced part-time job or
administrative vacations ceased frequently after the
economic recovery started.
• Being en exporter or attracting the FDI to the
enterprise means higher labour productivity. It
indicates the positive influence of country’s integration
into the global economy on the development of
domestic labour market.
Institute for Economic Research and Policy Consulting
www.ier.kiev.ua
Institutional set up
11
• Laws on Employment (1991) stipulates the major
regulation on the labour market issues, such as rights
of employees, guarantees in case of job loss, etc.
Key innovation: definition of unemployment
• Law on Labour Remuneration (1995) determines
economic, legal and organisational basics of
remuneration of labour, including minimum wages.
• Labour Code (1971) is a main legislative act on
labour market issue. It sets working hours, overtime,
the working condition, the firing rules.
• Though, weak law enforcement makes the market
more flexible than it is stipulated by the laws.
Institute for Economic Research and Policy Consulting
www.ier.kiev.ua
Income taxes and social
insurance contributions
12
• Before 2004, personal income tax was a progressive
tax with the rate of 0-40% paid on wages. The flat tax
rate was introduced in 2004 and is 15% since 2007.
• According to current legislation, the social insurance
contributions constitute 38-53% of wage bill, out of
which the employees pay only 1.5-3.5%.
• The most of social insurance payments accounts for
pension insurance that constitutes 34-35% of wage bill.
• The pension system reform launched in 2004 was
derailed several years later.
• Ukraine has an extensive but poorly targeted system of
social privileges and social assistance.
Institute for Economic Research and Policy Consulting
www.ier.kiev.ua
Unemployment insurance
• The State Employment Office (SEO), an executive
body of the Unemployment Insurance Fund, is
responsible for conduct of both passive and active
labour market policies. Though, its efficiency is
rather low.
• Less than half of actually unemployed persons
request the unemployment insurance.
• Still, almost a half of receipts was directed towards
unemployment benefits payment, while the
spending on active labour market policies was a bit
more than 10% in 2006.
• Only approximately 40% of individuals registered as
unemployed in 2006 were employed through the
SEO.
Institute for Economic Research and Policy Consulting
www.ier.kiev.ua
13
Directions for further reforms
14
• Liberalisation of employment protection
legislation. The new Labour Code should be adopted
creating more flexibility. At the same time, law
enforcement should be secured.
• Continuation of pension reform. The second pillar
of the reform (state accumulative pension insurance)
should be introduced.
• Reform of social welfare system. It should become
better targeted. Also, a larger part of social insurance
contributions burden should be placed on employees.
• Increased efficiency of active labour market
policies. The system of evaluating the ALMPs should
be introduced.
Institute for Economic Research and Policy Consulting
www.ier.kiev.ua