Bosnia and Herzegovina Labor Market Update

Bosnia and Herzegovina Labor Market Update The Role of Industrial Relations December 2005 The World Bank Human Development Sector Unit Europe and Central Asia Region

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 outcomes • Propose concrete labor market policy directions to make the labor market in BH more dynamic

Employment and unemployment… • BH has strong economic growth but insufficient to make a dent into continued high unemployment • Already very high youth unemployment has increased further • But gains in labor force participation and employment • Increase in hours worked • Still overstaffing in State-owned sector – unproductive and fictitious employment

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

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

…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 improvement • The effective burden is equal between RS and FBH • But what differs is the taxable base: FBH excludes wage allowances • Systems remain non-harmonized

Industrial Relations are evolving • Historically, collective bargaining dominated by Government and public sector trade unions, with Government extending collective agreement coverage across the economy • While FBH just adopted first new GCA since 2000, RS GCA has remained unchanged for years • Recent strengthening of private sector employers’ associations in collective bargaining, but still limited representativeness • Trade union density on the decline and little penetration of the new private sector • Strengthening of tripartism in Economic and Social Councils at Entity and possibly State level

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 remain • Although 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 practice • Evidence 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 regulations • Data are often inconsistent and of low quality

The FBH minimum wage is not fully binding… • 20 percent of formal sector employees in FBH report earnings less than the minimum wage • Share of employees reporting less than 50 percent of the average wage are almost similar between SR and FBH, despite different MW levels

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

Many collective agreement provisions have no significant impact on wages… • Length of employment (“seniority”) has no significant impact on earnings • This is opposed to what the Branch Collective Agreements’ wage coefficient systems would predict • Returns to education weaker than in many other countries, despite rigid education coefficients in the collective agreements • While in theory covering the entire economy, de facto coverage is limited, especially in the de novo private sector

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

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

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

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

Regulatory Gaps • Representativeness criteria for social partners in collective bargaining • Legal framework for firm-level bargaining • Alternative to employee work book system to keep records for social insurance contribution • Insurance of employers for wage payment obligations in cases of natural disaster and disability • No system to deal with temporary lay-offs – to prevent re-emergence of “fictitious” worker problem

Policy directions for a more dynamic labor market • Create 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

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

Policy directions for a more dynamic labor market • 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

Policy directions for a more dynamic labor market • 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

Policy directions for a more dynamic labor market • 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

Thank You World Bank Bosnia and Herzegovina Country Office Fra Anđela Zvizdovića 1 71000 Sarajevo www.worldbank.ba

Bosnia and Herzegovina Labor Market Update