Flexibility and investments – Analysis by Lucian-Liviu Albu
Workforce is the productive factor that should have undergone the deepest changes in the transition period. Analysts say that, despite mutations in the structure of workforce, marked by the appearance of new categories of specialists, results are far behind expectations. Reasons are numerous, beginning with the basic education system and ending in the slow implementation in the state enterprise and budget sector of a promotion and incentives system based on competence and performance.
Authorities’ inability to implement consistent sets of so-called active policies has led to a higher official number of unemployed and retired, with disastrous long-term implications on the budget. On the other hand, the black labour market extended (today, it measures 1.5-2 million people), in parallel with the semi-official market of collaboration conventions and contracts, with cumulated functions, and the attraction of categories which, traditionally, were excluded from the active workforce (pupils, students, housewives, retired people). All this indicates a lack of structural correlation between real supply and demand on the labour market.
A national economy is the more advanced as its labour resources are better utilised. Somehow paradoxically, in Romania, this very resource has been neglected. The immediate consequence has been the migration of a relatively major share of the competent workforce or young graduates with a remarkable potential, and a deepening gap, in terms of labour productivity, versus the average in West-European countries, as well as other countries in transition. For instance, in 1997, the average labour productivity in Romania was 68% of that in Poland, 63% versus Croatia, 54% vs. Hungary, 49% vs. Slovakia, 46% vs. the Czech Republic and only 39% vs. Slovenia.
To increase labour productivity, the first prerequisite is to stimulate the investment process. Investments are thus the main source of renewal for fixed capital, for introducing technical progress and attracting and training a performing workforce. In Romania, however, the investment crisis has been the most severe.
Whereas in the short and medium term, direct productive investments are the engine of economic recovery and increasing labour productivity, a long-term approach required other sectors to be taken into consideration.
According to international statistics, in the West, the so-called intangible investments (education, health, culture, research) have long ago exceeded, in terms of absolute volume, tangible investments (so-called productive sectors). In this context, the bankruptcy of former centralised-planning economies can be interpreted as a consequence of neglected intangible investments, which in most cases were below 25% of all investments. Relatively recent estimates show that in developed countries, a monetary unit invested today in education produces in the future a profit that is a multiple of the effect by investing the same monetary unit even in top industrial sectors.
In Romania, to resume economic growth and ensure its steadiness over the years, it is essential to break a vicious circle which, in a sketchy representation, could be made of one of the following phases: low labour productivity – low revenues in the productive sector (employees and capitalists) – low savings, accumulation and budget collections – low investments and insufficient spending on health, education and workforce training – shortage of funds needed to replace physically and morally obsolete fixed assets, to expand capacities and introduce technical progress, on one hand, and depreciation of health, education and professional competence indicators, on the other – permanently low levels for labour productivity, etc.
Fighting rigidity – Analysis by Lucian Croitoru
The functionality of the labour market affects the economy’s competitiveness. When it is flexible, it allows many adjustments in the economy to take place at adequate rates. We could say that, essentially, labour market rigidity explains a fair share of the performance differences between various economies. For the sake of example, I will mention a difference between the United States and Western Europe.
It could be said that structural rigidity sets the different pace for absorption of new technologies in the two economic areas. In the USA, return on investment is higher than in Western Europe. This is because the USA sports a labour market that is more functional than Western Europe’s. The increased mobility of labour in the USA encouraged greater absorption of new technologies, with lower costs.
In transition countries, including Romania, the same rule applies. Transition nations that will evolve toward more flexible labour markets, characterised by less rigidity stemming from frequent negotiations with the government or employers, by a lack of territorial and sector-wise mobility of the workforce, companies (comparable in terms of economic power) will absorb new technology much faster. However, in these countries in particular, rigidity on the labour market will have an impact on the restructuring of state enterprises in general, both in the pre-privatisation and post-privatisation stage.
Because they can lose their jobs without any immediate prospect of finding another, personnel in state companies will oppose restructuring and privatisation.
On the other hand, to avoid this rigidity, privatisation methods will be those of mass privatisation or those wherein company personnel can buy the enterprise for a preferential price, when resistance diminishes because the staff can still enjoy dividends if fired. Still, if profits are distributed as a raise to the co-owning employees, resistance to restructuring will be the same.
In terms of economic policy, the above discussion is relevant because it suggests the directions and chances of improving the functionality of labour markets in a transition economy. On the other hand, it becomes obvious that an adequate regulation of the labour market should receive the appropriate attention. From this perspective, the government is interested in doing whatever necessary to maximise flexibility on the market.
Trade unions, in turn, would see how intense negotiations with employers can turn into rigidity factors on the labour market, with effects contrary to unions’ goals. In this area, there is room for development. Any improvement of institutions, functional structures and regulations will lead to rapid progress. The government, unions and employers can cooperate, and there is the theoretical chance of relatively fast progress.
But, beyond regulations, the labour market depends on cultural factors, on tradition, on the concept of freedom, and first of all, on the inheritance in infrastructures and the size of state enterprises. For instance, precarious infrastructure quality erodes the territorial mobility of the workforce. Also, radically different living standards in various parts of the country impede territorial mobility. All these weaknesses of the labour market are difficult or almost impossible to eliminate in the short term. Therefore, they will continue to have very severe repercussions on restructuring processes.
Prejudices – Analysis by Claudiu Doltu
There are many reasons why the labour market in Romania is rigid. The most important are the short-sightedness of political decision-makers and the economic confusion of a large portion of the civil society.
Union leaders have been permanently cultivated and used by political decision-makers in hopes that authorities would control the reactions of crowds of workers affected by the negative consequences of reform. The civil society is dominated by convictions such as “workforce is more than a commodity.” Therefore, the minimum salary or collective negotiations are only regarded as natural instruments that govern relations between workers and employers, ignoring their contribution to a rigidity of the labour market.
The opinion that workforce in Romania is paid below what’s due, is very dear to political decision-makers and to union leaders and regular people alike. Unfortunately, such a belief, which justifies many legislative steps and some popular outbursts, has nothing to do with an economic way of thinking. In fact, it is the same as saying that market prices are too low. For this latter statement to be true, we would have to accept that an individual or group of individuals can decide that prices on a market are high or low. But this is impossible, because the market is not limited to an individual or group of individuals.
Out of the previous confusion (about the market) emerges another misconception, that all workers have the same interests, and higher salaries to a category of workers help all others. This idea is entirely wrong, because when a trade union uses force to secure for its workers better pay than their market value, this negatively impacts not only the other workers, but society as a whole. Developments in the last ten years confirm this. Unions in various industries do not have the same influence. Railway unions are more “persuasive” than those in agriculture or education. Therefore, salary raises each trade union is able to secure differ, depending on the political force and strategic position of each. Therefore, salaries imposed by unions do not follow workers’ economic productivity, but entirely different criteria.
It is true that salary claims laid by unions lead to a higher average salary in the economy. But since every union has a different influence in negotiations, some categories of workers will have lower real salaries. Because of the growth in nominal salary, prices on goods made by various groups grow, too, prompting a growth in the cost of living. Since the growth is not the same across all workers’ groups, while the increase in the cost of living is general, many workers end up worse than before the raise. But this does not happen immediately – prices take time to adjust. The immediately visible effect is a salary growth (people leave home with more money on pay-day) and the public generally “buys” unions’ demands with ease and even joy.
This is a typical case of short-sightedness because people observe only some effects of their decisions and not all of them. This short-sightedness is understandable with regular people, but it is serious that political decision-makers, union leaders and other opinion leaders keep selling illusions to people, whose price only later shows up on the tab.
Salvation is in motion – Analysis by Valentin Lazea
In the communist system, a person was encouraged by all means to “tie up” to a single workplace, beginning with difficulties in relocating the domicile and ending in the bonus for continuous working experience in the same unit. This model – let’s call it “Japanese” – can no longer function at a time when our country is approaching a liberal Europe, which strongly stimulates mobility, both geographical and occupational.
Geographical mobility has two components: domestic (within the country) and foreign. Ten years after the revolution, domestic mobility remains inhibited by specific factors such as a high rate of housing ownership (more than 90% of the total); a high number of families living on a small patch of land, just sufficient to ensure survival in a subsistence agriculture; the lack of a nation-wide labour exchange.
This explains why counties with a very low unemployment rate (for instance, Vrancea) adjoin to counties where unemployment is a major problem (Vaslui, Braila, etc.)
Foreign mobility has been, so far, encouraged only for highly qualified (computer scientists) or narrowly specialised segments (construction workers, welders). If Romanians were offered, they would gladly accept jobs which the West-Europeans themselves are unwilling to perform: road pavement, harvesting, and other labour-intensive jobs.
This arrangement, which successively involved the Portuguese, the Yugoslavian, and, earlier, the Italian and Turks, would have multiple advantages: it would provide work to many people at a time when the national economy is restructuring; it would relieve the country’s foreign payments balance; it would contribute to a general increase in the degree of civilisation. But, above all, it would lay the grounds for a new kind of “Romanian dream” – that of building your own house and buying a car with money earned for honest work abroad. Sociologists know how important this belief is for people and how its absence in the last ten years has sent the society adrift.
As to occupational mobility, here the problem is a little more complicated. As a rule, people with medium or higher education can make the jump without major difficulty. On the other hand, people with precarious education are caught in “poverty bags,” which can only be escaped by black labour or crime. The worst problem is that their children most often have the same expectations and repeat the parents’ education and behavioural model, although it obviously leads to nowhere. Therefore, the educational system is called to develop special programmes to attract and stimulate children in impoverished families, and give them a chance in life.
The final consideration refers to a flexible hiring and firing of workforce, for determined periods of time or part-time employment. Sweden, a long-time bastion of intransigent trade unionism, has relaxed in the last decade, producing “the new Swedish economic miracle.” The faster our unions realise that members’ well-being lies in a clear work schedule and flexible commitments, the better off everyone will be.
Better is the enemy of good – Analysis by Dragos Negrescu
The phrase “Western prices and African salaries” does not become true by mere repetition, as semantic artifices cannot veil the fact that salary is the price of work, even when made official (the term “retribution” was inaugurated in the last 2 decades of the communist regime). As any production factor, labour has a market of its own, which has many characteristics, the most obvious one being that concerted practices inadmissible on any other markets are explicitly accepted: as is the case of unions. When to this distortion adds one stemming from authorities’ intervention, the labour market no longer works correctly.
At its origins, intervention was designed to protect employees against abuse, but in time it turned into a source of damaging rigidity that affects economic performance and handicaps important groups in the society. Intrusion on the labour market is clearly higher in Continental Europe than in the Anglo-Saxon world, and its negative consequences in terms of unemployment and job creation are increasingly pronounced. In the Romanian tradition of form without function, many of these rigidities have been introduced on the labour market.
And the West-European system, although excessively expensive, can (with increasing difficulty) receive financial support from countries with GDP/capita that is several times higher. But the “target” is in motion, and ever more EU countries have engaged on reforms designed to make the labour market flexible.
Romanian-style imitation is, at best, useless. The minimum salary allowed by law – which compromises chances of hiring less productive workers if too high – is relatively low, but this contradicts the reason for its existence: fighting poverty.
Another instrument that badly affects the labour market is that of severance pay, which raises the cost of firing to the employer and increases reticence to hiring for undetermined periods. In Romania, this effect has been avoided because the payment obligation was levied from the unemployment fund, but the budget cost generated in the process was prohibitive, and led decision-makers to abort the scheme. But there are major distortions on the labour market, induced by measures theoretically designed to fight unemployment by limiting the supply of labour: shorter working week, early retirement.
Besides the unsustainable pressure on already debilitated public finances, such measures give active employees more lever in negotiating, thus encouraging salary raises not mirrored in productivity and keeping out of the labour market the very people for whom these measures exist. Romania’s counter-performance in this chapter is at the superior limit throughout Western Europe, where all countries have higher retirement ages, and many of them even have longer working weeks.
Because someone has to pay, this mimicking leads to a vicious circle. The costs per employee under the form of collections paid to the salary fund (CAS, unemployment, health) are excessive. In 1999, after CAS contributions were raised and contributions to solidarity and public education funds were established, tax levels grew to 50%, comparable with the highest levels achieved in the EU. Still, these measures are criticised here not for their size, but for… greediness. Pressure to maintain them cannot be contested in a democratic society. Provided that society’s option is not flawed by demagogic talk, a strong point among certain union leaders.