IGOR GUARDIANCICH

26th Annual Meeting of the Society for the Advancement of Socio-Economics

Northwestern University and University of ChicagoJuly 10-12, 2014

Welfare States in Post-Socialist Europe

A Not-So-Long Goodbye to Bismarck1

Churchillian wisdom…2

Now this is not a paper. It is not even the beginning of a paper. But it is, perhaps, a paper on the beginning.

The 3 dimensions of Western dualization

3

Policy (institutional) dimension core employees in Standard Employment Relationships (SERs)

enjoy contributory benefits and occupational insurance marginal workers employed through atypical contracts are covered

only by social assistance and in-work/non-contributory benefitsPolitical dimension

reformers pass the costs of reforms on outsiders and future generations, instead of modernizing the welfare state and protect the most vulnerable (women, low-skilled, young, immigrants)

Outcome dimension individuation of outsiders in different countries and whether a

segmentation in the labour market directly translates into differential treatment via welfare state institutions

What about post-socialist Europe?

Labour markets from guaranteed employment to jobless growth and increased

flexibilityPensions

from guaranteed subsistence to individualizationIndustrial relations

from neocorporatist aspirations to the Americanization of social partnership

Leading to… liberalization tout court? dualization within CEE? transnational dualization?

4

Labour Markets5

Labour market characteristics wages were low and not highly differentiated supplemented by subsidized basic goods and benefits provided by SOEs work was guaranteed

Implications no unemployment, hence rudimentary system of unemployment benefits no poverty (officially), hence little poverty relief no sophisticated targeting of benefits

little selectivity by income level low state capacity – supplanted by SOEs

Tranformational recessions output collapse severe skills mismatches

rule of thumb: 10% unemployed, 10% informal, 10% retired

Cumulative GDP growth (1990=100)6

Unemployment rates7

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000CZ 0,7 4,1 2,6 4,3 4,3 4,0 3,9 4,8 6,5 8,7 8,8HU 1,4 8,2 9,3 11,9 10,7 10,2 9,9 8,7 7,8 7,0 6,4PL 6,5 12,2 14,3 16,4 16,0 14,9 13,2 10,9 10,2 13,4 16,1SK 1,2 9,5 10,4 14,4 13,6 13,1 11,3 11,8 12,5 16,2 18,6SI na 7,3 8,3 9,1 9,1 7,2 6,9 7,1 7,4 7,4 6,4BG 1,6 10,5 15,0 16,3 18,6 13,7 13,0 14,5 16,0 17,0 16,4RO na na na na na na na na na 7,1 7,3EE 0,6 1,5 3,7 6,6 7,6 9,7 10,0 9,6 9,8 12,2 13,6LV 0,5 0,6 3,9 8,7 16,7 18,1 20,5 15,4 14,3 14,5 14,6LT na 0,3 1,3 4,4 3,8 17,5 16,4 14,1 13,2 14,6 16,4RU na na 5,3 6,0 7,7 9,2 9,3 10,8 11,9 12,9 10,7UKR 0,0 0,0 0,2 0,3 0,3 0,3 1,3 2,3 3,7 4,3 11,6

Informal economy: Household electricity approach

8

1989 1990 1991 1992 1993 1994 1995CZ 21.7 24.3 31.7 31.8 27.1 24.5 21.8HU 24.6 25.6 31.1 33.2 33.6 31.4 29.6PL 22.9 31.6 32.5 31.7 31.1 27.9 23.9SK 21.7 24.3 32.0 32.0 34.1 32.0 28.4SI 26.7 26.8 27.4 31.2 28.4 25.0 22.7BG 23.3 28.9 33.7 34.1 34.0 35.9 34.0RO 17.3 24.4 36.9 39.0 37.5 34.2 28.3EE 16.9 22.0 32.0 37.4 38.4 38.1 35.8LV 17.3 19.4 22.6 41.7 45.5 43.1 43.7LT 17.0 21.0 31.7 47.4 52.2 47.6 46.0RU na na na 37.8 36.0 39.1 39.2UKR na na 28.1 37.4 47.0 54.6 52.8

Great abnormal pensioner booms9

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 % CZ na na na 2,521 2,519 2,523 2,498 2,507 2,545 2,537 0.6

HU 2,587

2,668

2,795

2,868

2,948

3,010

3,059

3,104

3,139

3,184 23.1

PL 5,598

6,154

6,505

6,703

6,873

7,036

7,172

7,313

7,466

7,524 34.4

SK na na na na 1,386

1,387

1,393

1,402

1,415

1,435 3.5

SI na 419 449 458 458 460 463 468 472 476 13.6

BG 2,273 2,347

2,443

2,440

2,424

2,409

2,381

2,392

2,387

2,381 4.8

RO 2,570 3,018 3,201 3,253 3,439 3,600 3,740 3,875 4,020 4,181 62.7EE 361 374 383 387 376 375 375 374 375 378 4.7LV 610 648 661 665 663 666 662 664 660 653 7.0LT 879 909 891 897 907 898 930 990 1,076 na 22.4

RU 32,848

34,044

35,273

36,100

36,623

37,083

37,827

38,184

38,410

38,381 16.8

UKR na 13,100

13,600

14,200

14,500

14,500

14,488

14,487

14,535

14,520 10.8

Main labour market trends10

Jobless growth despite swift recovery, employment did not rebound productivity catch-up with minimal increases in the labour input

Non-participation especially due to lay-offs of workers near retirement the skills mismatches generated scores of discouraged workers

High and persistent unemployment low-skilled workers, young individuals, depressed regions

Changes in the composition of employment industry and agriculture to services public to private sector permanent to more flexible contracts dependent employment to self-employment formal to informal sector

Growing wage inequality

Atypical contracts and self-employment11

Part-time Fixed-term Own-account

94-8 99-03 04-8 09-

13 94-8 99-03 04-8 09-

1399-03 04-8 09-

13EU-15 31.6 33.4 36.2 37.8 13.1 14.4 15.3 14.7 8.3 9.3 9.5

BG - 3.1 2.5 2.8 - 5.5 5.8 4.2 - 7.8 7.4CZ 9.9 8.9 8.5 9.8 7.7 9.5 10.1 10.6 10.7 11.6 13.3EE 11.4 11.0 11.0 14.6 1.3 1.7 1.8 2.8 4.8 5.2 4.6HR - 10.9 11.8 11.2 - 10.6 12.6 12.7 - 13.1 12.3LV 13.1 12.5 9.6 10.8 5.7 6.9 4.8 4.1 6.1 5.8 6.2LT - 11.7 10.2 10.3 - 4.3 2.9 1.8 14.1 11.0 7.4HU 5.6 5.4 5.9 8.7 6.0 6.5 6.5 8.9 9.0 7.0 6.1PL 13.4 13.3 13.1 11.4 4.0 10.4 25.6 26.5 17.9 15.4 14.3RO 17.9 16.1 10.5 11.1 3.0 2.2 1.6 1.1 18.6 16.7 17.1SI - 7.5 11.3 13.6 - 14.2 19.6 18.6 7.1 6.4 7.9SK 3.8 3.3 4.3 5.6 4.4 4.4 5.1 6.3 5.7 9.5 12.3

Employment Protection Legislation12

Permanent Fixed-term 2013 ±

from2008

± from2003

± from1998

2013 ± from2008

± from2003

± from1998

CZ 2.93 -0.13 -0.38 -0.38 1.44 +0.31 +0.94 +0.94EE 1.81 -0.93 - - 3.00 +1.13 - -LV 2.69 - - - 0.88 - - -HU 1.59 -0.42 -0.42 -0.42 1.25 +0.13 +0.63 +0.63PL 2.23 +0.00 +0.00 +0.00 1.75 +0.00 +1.50 +1.00SI 2.16 -0.49 - - 1.50 -0.31 - -SK 1.84 -0.38 -0.46 -0.63 1.75 +0.13 +0.38 +0.38Some of the countries, where fixed-term employment is not common (Estonia, Hungary, Slovakia) have very low and falling protection for permanent contracts as well.

Summary13

Labour markets in Central and Eastern Europe are not univocally dualized.

Some countries show the presence of institutional dualism prominent in Poland as well as Slovenia emerging in Croatia and the Czech Republic

Liberalization across the board plagues many others especially the Baltics, Bulgaria, Romania increasingly so, Hungary and Slovakia

Pensions14

Three layers of a socialist pension system Bismarckian core

(constitutionally guaranteed right to) work as legal basis of retirement post-war socialist social solidarity

PAYG system; increased coverage (small entrepreneurs and farmers) imported Stalinist centralization

monolithic public administration

Crisis under socialism financial strains

low retirement age and long assimilated periods (e.g. maternity leave); best- or last-years calculation formulae

cross-subsidization of other budget expenditures (e.g. social assistance) poverty in old age

the ‘old portfolio’ problem, due to insufficient indexation

Labour shedding and consequences15

(In)voluntary labour shedding steep rise in unemployment and informal employment

lower overall contributions great abnormal pensioner booms

higher overall expenditures

Vicious circle revenues not matching expenditures led to deficits

1990-2000 Croatia Hungary Poland SloveniaInsured -30% -25% -15% -10%Pensioners +55% +21% +38% +26%

% of GDP Croatia Hungary Poland SloveniaDeficit/year 6% 2001 0.5% 1990s 6% 1992-4 4% 1999

Retrenchment and refinancing16

Refinancing rapid increase in social security contributions

discontinued due to declining international competitivenessRetrenchment

arbitrary freezing of indexation of all but minimum benefits struck down by Constitutional Courts (no exceptional

circumstances) scaling down of public pillars

NDC in LV, PL point systems or DB life in BG, HR, HU, LT, RO, SK

Croatia 18.5% 1991 22% 1992-3 27% 1994Poland 25% 1981 38% 1987-9 45% 1990Slovenia 22.7% 1990 28.8% 1991-2 31% 1993-5

Restructuring via privatization17

Restructuring via privatization politically superior, allows for quid-pro-quos resonates with the public (equity as individualization) obfuscates cuts in public pillar

Size of mandatory funded pillar Substantial HU 68/33.5 LV 210/20 PL 7.3/19.52 SK 9/18 Medium BG 25/23 CZ 3+2/28 HR 5/20 EE 4+2/20 LT 2.55.5/18.5 RO 2.56/28

Substitutive Parallel Mixed90s Kazakhstan (1998) Hungary (1998)

Poland (1999)

2000s

Kosovo (2002) Lithuania (2004)

Bulgaria (2000)Latvia (2001)Croatia (2002)Estonia (2002)Russia (2003)

Slovakia (2005)Uzbekistan (2005)Macedonia (2006)Romania (2008)

10s Czech Republic (2013)

Summary18

Despite recent setbacks most post-socialist countries have firmly embraced a multi-pillar DC design for their pensions.

This breeds dualisims as it requires long contribution periods to guarantee benefit adequacy compatible with uninterrupted SERs incompatible with

atypical contracts unemployment spells insufficient coverage of assimilated periods (maternity,

childcare, military, education).

Unemployment insurance19

Max duration (months)

Net replacement rate in 2009 (% of APW)

± difference from 1991 (or earliest year)

BG 12 60 -7CZ 5 49 -6EE 12 45 +22HU 9 34 -29LV 9 51 +19LT 9 51 -28PL 12 24 -18RO 12 65 -4SK 6 63 -8SI 9 65 ±0

Characteristics20

CEE countries initially introduced fairly generous benefits in terms of duration, levels and eligibility. In response to the rise in claimants retrenchment tout court followed.

Duration of benefits always inferior to one year, against two or longer in Belgium, Denmark, Finland, France, the Netherlands, Portugal, Spain and Sweden.

Benefitsroughly in line with the Old Member States swiftly declines in time already during the first 12 months

Eligibility fairly generous, initially access was far less problematic

Harmonized net replacement rates have fallen in 7 out of 10 countries, stayed the same in Slovenia, and increased only in Estonia and Latvia from very low initial levels

Summary21

Being unemployed in CEE is a prelude to social assistance.

Active Labour Market Policies in post-socialist countries are notoriously underfunded and ineffective.

Atypical contracts, if covered at all, carry an inherently higher risk of involuntary unemployment spells than SERs, hence dualization in the labour market is considerably reflected in

unemployment insurance.

Lessons learned or more questions?22

Dualization is emerging in countries such as Poland and Slovenia dualisms in the labour market coupled with weakening

workers’ representation may translate into segmentation in welfare.

Liberalization tout court was embraced in many more labour markets are increasingly atomized industrial relations are ‘Americanized’ in all but the most

sheltered sectors social policies have been

individualized and privatized, e.g. through pension multi-pillarization

stripped to the bone, so that unemployment is a stepping stone towards social assistance