Labour market policies in the global environment:

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
  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
Commodity trade turnover with EU-25, of total 20.6 (1996) 26.0 31.9 30.9
Commodity trade turnover with Russia, of total 40.7 (1996) 31.4 27.0 26.8
Current account, GDP -3.1 2.9 -1.5 -4.2
FDI (net), USD bn 0.3 0.5 5.3 9.2
Consolidated fiscal balance, GDP -6.9 -2.1 -0.9 -1.1
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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 countrys
  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 extensive but 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 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.

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.