Bosnia and Herzegovina Labor Market Update

Europe and Central Asia Region

The World Bank

Bosnia and Herzegovina Labor Market Update

The Role of Industrial Relations

The World BankHuman Development Sector UnitEurope and Central Asia Region

December 2005

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The World Bank

Enhancing Job Opportunities 2

What is the aim of this report?

Update the analysis of the 2002 World Bank Labor Market Study based on 2003 and 2004 LSMS and compare with countries in the region Review in-depth the system of industrial relations and their impact on labor market outcomesPropose concrete labor market policy directions to make the labor market in BH more dynamic

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The World Bank


Employment and unemployment…

BH has strong economic growth but insufficient to make a dent into continued high unemploymentAlready very high youth unemployment has increased furtherBut gains in labor force participation and employmentIncrease in hours workedStill overstaffing in State-owned sector – unproductive and fictitious employment

0

10

20

30

40

50

60

70

2001 2002 2004

Source:Ow n calculations and World Bank (2005) based on LSMS

perc

ent

Unemployment

Employment

Labor ForceParticipation

Unemployment by age

0%

10%

20%

30%

40%

50%

60%

70%

15-18 19-24 25-34 35-44 54-54 55-64

Source: Ow n calculations, based on LSMS

Per

cen

t 2001

2002

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The World Bank


…the informal sector…Much of the employment creation happens in the fast growing informal sectorInformal sector dominated by employment in agriculture and self-employed and contributing family membersFalling share of small business in informal employment

Employment by sector, in percent of total employment

0%10%20%30%40%50%60%70%80%90%

100%

2001 2004

Ow n calculations and World Bank (2005), based on LSMS

Pe

rce

nt

Informal sector

Formal sector

Distribution of Informal Sector Employment 2004

Agriculture

Construction

Manufacturing

Other

Trade

Hotels andRestaurantUtility

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The World Bank


…wages and productivity…Formal sector wages are high relative to productivity in a regional comparisonAnd in RS they are growing fast relative to productivity

Net wage/GNI per capita, 2004

0.020.040.060.080.0

100.0120.0140.0160.0180.0200.0

Per

cent

Net wage/GNI per capita

Wage and Productivity Growth

0

50

100

150

200

250

1999 2000 2001 2002 2003 2004

FBH wage

FBH prod

RS prod

RS wage

Average Net Monthly Wages in EUR, 2000 and 2004

0100200300400500600

Source: World Bank staff calculations

EURO

2000

2004

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The World Bank


…and the payroll tax burden

The payroll contribution and wage tax burden as evident in the tax wedge is not excessive in a regional context, but there is room for improvementThe effective burden is equal between RS and FBHBut what differs is the taxable base: FBH excludes wage allowancesSystems remain non-harmonized

ECA tax wedge on labor, 2003

010203040506070

Source: World Bank (2005b) and ow n calculations

Shares of take-home pay and payroll deductions in total labor cost

0%

20%

40%

60%

80%

100%

FBH RS

Source: Ow n calculations

Wage Tax

Social InsurancecontributionsRS Take-home pay

FBH Allow ances non-taxableFBH Base Wage

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The World Bank


Industrial Relations are evolving

Historically, collective bargaining dominated by Government and public sector trade unions, with Government extending collective agreement coverage across the economyWhile FBH just adopted first new GCA since 2000, RS GCA has remained unchanged for yearsRecent strengthening of private sector employers’ associations in collective bargaining, but still limited representativenessTrade union density on the decline and little penetration of the new private sectorStrengthening of tripartism in Economic and Social Councils at Entity and possibly State level

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The World Bank


Impact of labor regulations on labor market outcomes: Main Findings

Mixed message: the labor market in BH is more dynamic than often assumed, but constraints remainAlthough substantial aspects of labor regulations are rigid on paper (particularly in the collective agreements) they do not appear to have the expected negative effect on the labor market at large in practiceEvidence of non-enforcement of collective agreement provisions across the economy as a whole, but application in some sectors Improving job opportunities requires continued strong growth, wage restraint, improvements in the business environment and a careful look at labor regulationsData are often inconsistent and of low quality

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The World Bank


The FBH minimum wage is not fully binding…

20 percent of formal sector employees in FBH report earnings less than the minimum wageShare of employees reporting less than 50 percent of the average wage are almost similar between SR and FBH, despite different MW levels

Share of formal sector employees reporting earnings below 50 percent of the average wage

0

5

10

15

20

2001 2002 2003

Source: Ow n calculations based on LSMS,Note: (a) Earnings are for w orkers aged 15 and older; (2) Averages are calculated from the

LSMS and are based on usual earnings.P

erce

nt FBH

RS

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The World Bank


FBH wage indexation mechanism has not led to higher wage growth…

FBH minimum wage remains high in a regional context, which may undermine complianceHowever, “minimum wage - average wage spiral” in FBH has not led to higher wage growthWages have been growing faster in RS, where there is no automatic indexation mechanism

Average net wage growth, 1997=100

0

50

100

150

200

250

300

1997 1998 1999 2000 2001 2002 2003 2004

Source: FBH and RS Statistical Institutes

FBH

RS

Minimum/average wage ratio, 2002 (%)

0 10 20 30 40 50 60 70

AzerBelar

RussiaMoldArmRSEst

BulgRom

PolLat

CzechSlovak

HungSloven

UkrMacFBHLith

Source: World Bank (2005) and ow n calculations

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The World Bank


Many collective agreement provisions have no significant impact on wages…

Length of employment (“seniority”) has no significant impact on earningsThis is opposed to what the Branch Collective Agreements’ wage coefficient systems would predictReturns to education weaker than in many other countries, despite rigid education coefficients in the collective agreementsWhile in theory covering the entire economy, de facto coverage is limited, especially in the de novo private sector

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The World Bank


But….

Flexibility through non-enforcement of labor regulations is undesirable, as it leads to informality, creates uncertainty and undermines worker protectionCollective agreements remain broad in scope and rigid and, while being partly evaded, can still have negative effect in some sectorsThere are obstacles to labor adjustment due to gaps in legislation and regulations

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The World Bank


Collective agreement rigidities

Automatic extension of collective agreement coverage to companies not represented in bargainingCollective agreement duration open-ended – while FBH has just adopted a new GCA (the first since 2000), the RS GCA remains unchanged since 2000Transferable seniority premium in wage determination in RS Education coefficients in wage determinationCaps on temporary and part-time employmentLong maternity leave provisions

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The World Bank


Obstacles to temporary and part-time employment

The work book system is not geared towards temporary and part-time employment Doing Business: BH scores worse than regional comparators on an index of hiring difficulty – due to caps on temporary employment

Employment Rigidity in 2005

0

10

20

30

40

50

60

Diff iculty ofHiring Index

Rigidity ofHours Index

Diff iculty ofFiring Index

Rigidity ofEmployment

Index

Hiring cost(% of salary)

Firing costs(w eeks ofw ages)

Ind

ex

Bosnia andHerzegovina

Region

OECD

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The World Bank


Long maternity leaveBH’s maternity leave extends to 1 year – substantially longer than in many European and OECD countriesContinued low female employment and labor force participation rates

Maternity Leave - Duration in Weeks

0 10 20 30 40 50 60

Portugal

Turkey

US

Germany

Belgium

Austria

Luxembourg

Netherlands

Poland

Spain

Sw itzerland

Romania

Canada

Greece

Denmark

Finland

Ireland

UK

Estonia

Italy

Hungary

Bulgaria

Czech Republic

Croatia

Macedonia

Albania

Norw ay

Bosnia and Herzegovina

Weeks

BH Labor Market Outcomes and Gender, 2004

0

10

20

30

40

50

60

70

80

unemployment employment labor forceparticipation

Pe

rce

nt

Men

Women

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The World Bank


Regulatory Gaps

Representativeness criteria for social partners in collective bargainingLegal framework for firm-level bargainingAlternative to employee work book system to keep records for social insurance contributionInsurance of employers for wage payment obligations in cases of natural disaster and disabilityNo system to deal with temporary lay-offs – to prevent re-emergence of “fictitious” worker problem

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The World Bank


Policy directions for a more dynamic labor marketCreate a leaner but more enforceable set of labor regulations– Allow for a gradual reduction of the minimum

wage as a share of the average wage in the FBH

– Introduce a youth minimum wage– Rationalize and simplify the system of

“coefficients” and other aspects of wages, employment and benefit determination

– Allow for wage restraint– Reduce the duration of maternity leave and

pay maternity benefits through the social insurance system

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The World Bank


Policy directions for a more dynamic labor market

Review the system of payroll contributions– Integrate non-wage benefits into the taxable

base in the FBH– Harmonize systems of payroll social insurance

contributions and rates between the Entities– Allow for reductions in payroll contribution

burden by identifying savings in the health, pension and unemployment insurance system and by introducing limited general revenue financing

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The World Bank



Review systems of collective bargaining and wage determination– Separate public sector wage determination

from that in other sectors– Limit collective agreement coverage to those

enterprises that are represented in bargaining

– Define criteria for representation of social partners involved in tripartite bargaining

– Create a State-level Economic and Social Council as a forum to discuss medium-term labor market and collective bargaining reforms

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The World Bank



Facilitate labor adjustment and stop the flow of new “fictitious” workers– Promote enterprise restructuring and free

up labor currently held up in fictitious and unproductive employment

– Develop an alternative to employee workbooks to promote labor mobility

– Introduce legislation to address temporary layoffs

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The World Bank



Improve the statistical basis for labor market analysis– Introduce an annual Labor Force Survey,

complemented by enterprise surveys– Increase capacity of the statistical offices to

collect more accurate data from enterprises


The World Bank

Thank You

World BankBosnia and Herzegovina Country Office

Fra Anđela Zvizdovića 171000 Sarajevo

www.worldbank.ba

Bosnia and Herzegovina Labor Market Update

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