Labour market policies in the global environment: Case Study of Ukraine

1. 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

2. Structure of presentation • Brief information about Ukraine • Overview of labour market developments • Coping mechanisms and strategies for: • Households • Firms • National policies affecting work and well-being • Directions of further reforms

3. 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 2007 21% of total in 1991 Share of people older than 65: 16% of total in 2007 12% of total in 1991 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

4. Economic situation Major shock: transformation from centrally planned to market economy after the collapse of the USSR

5. Employment: general trends

6. Unemployment patterns

7. 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

8. 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.

9. 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.

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.

11. Institutional set up • 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.

12. Income taxes and social insurance contributions • 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 extensivebut poorly targeted system of social privileges and social assistance.

13. 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 marketpolicies. 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.

14. Directions for further reforms • 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.