Employment policy in Hungary with special regards to the problems of. unemployment

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1 Budapest, 28th of April, 1999 Dr János Hoós professor of economics Budapest University of Economic Sciences. Hungary Employment policy in Hungary with special regards to the problems of The main features of employment policy unemployment During the transformation of the Hungarian centrally planed economy into market economy the labor market has been freed. Freeing up labor markets means: reducing rigid central controls on wages and labor movement, while instituting active labor market policies, education, training, job information, consulting services, small business assistance, government provided unemployment benefits and new mechanism for collective bargaining : to promote efficient labor mobility and to avoid strikes using effective negotiation techniques. In Hungary after 1992 the wage regulation has been abolished and now the wages are determined mainly by the market forces. However there is a so called Council for Interest Reconciliation consisting of Government, representatives of employees and trade unions, what advises the entrepreneurs and the trade unions what wage policy is rational to follow in the given situations and it sets up some guidelines for wage and income policy too, for example, recommends the minimum wage. Open unemployment appeared in Hungary relatively late, basically in Its level increased steadily during the transformation and reached about 10-12% of active population at the end of and it has remained almost at the same level: 9,9-10,1%. The unemployment problems usually are handled by so called 1

2 passive and actives means. The passive means involve unemployment benefits financed by Labor Market Fund (LMF); the employee has to pay 1,5% of its wage bill into the Fund, as the employer has to pay 3,0% of this wage into this Fund; different social assistance, aids given mainly by local municipalities. The active means involve re-education programs, employment creation, creating new working places, jobs, public works, development of regional production-related infrastructures, road, telecommunication, for example. Active labor market policies That is, Hungary offers the usual package of active labor market policies (ALMPs) found in most OECD countries, from training to wage subsidies and public-sector job creation. Expenditure and participant numbers have remained roughly over the last few years at about 0,4 % of GDP and 2,5 % of labor force, respectively, and there have only a few changes to the type of program offered to the unemployed since mid Recent changes include the new vocational rehabilitation programs for disabled and government pilot program of teleworking primarily targeted on people with physical disabilities. Under this scheme individuals can work at home, with the government supporting the purchase of necessary equipment. Changes to the Employment Act now permit non-profit organizations to bid to run programs, allowing them to bring to bear extensive experience in helping disadvantaged groups. Additional financial support is being made available to enterprises that modernize their work places. To encourage 2

3 geographic mobility firms that recruit jobseekers who have been unemployed more than six months and who live in different localities are eligible for assistance to defray transportation costs. A recent evaluation of Hungarian ALMP programs found that: Training programs were the most effective in generating employment gains for participants while individuals training had slightly larger impacts than group training. Earning gains were also positive, but disappeared over longer term; Neither public-sector job creation nor wage subsidies led to employment increases. Moreover, participants generally fared worse than they would have had they not participated; Self-employment programs had no impact on employment and led to lower earning than would have been the case in the absence of participation; Results on the effectiveness of the Public Employment Service (PES) were mixed: some jobseekers experienced employment and earning gains, but others did not; There is some evidence that programs worked better for some population subgroups such women and middle-aged workers. The programs tend to be too rigid and that schemes such training and wage subsidies are rarely used in combination with one other. The government hopes to better integrate them in the future, but in may be constrained by the limited staff resources in PES, whose workload is high relative to other OECD countries. Low staff level detract from an individual approach to assistance, something that has been found to help increase jobfinding chances of the unemployed. This surfaces in the wage subsidies, which tend to be directed towards larger groups of jobseekers in distressed regions as opposed to being in individual need, resulting in high deadweight losses. Although training was found to improve job-finding chances, evidence from OECD countries suggests that expending it may be counter productive of decreasing results. Youth tend to be over-represented in training - partly due to a lack of spaces in tertiary education. They use the recently established modern Regional Training Centers to acquire skill in areas such as computing, but might be better served in the general education 3

4 system leaving relatively expensive places to more needy jobseekers, such as older workers. 4

5 Issues of unemployment policies Unemployment will be a major issue the years to come, but reduction of these labor market unbalance mainly depends on the resumption of dynamic economic growth and the accompanying increase in labor demand. According to the latest forecast the supply of the labor will increase by 40 thousands persons per years till The market forces can increase the demand of labor 4 thousands if the growth of the GDP increases by 1%. Hungary can expect about 5% annual economic growth till 2001, that is, the market forces can create 20 thousands new job per year; it means if the government want avoid the increase in the number of unemployed people it should create additional 20 thousand new job per year. However policies that make working more attractive and also less attractive being dependent on welfare can be considered as important. For example: rearrange unemployment benefits to encourage take-up of new jobs, including low pay jobs. In Hungary, as many countries, welfare systems discourage the unemployed from accepting new jobs which offer wages close, or even below the level of benefits paid to the unemployed. A number of labor market institutions tended to generate rigidities that have contributed to Hungary s high-nonemployment rate and tenacious long-term unemployment. It highlighted the interaction between relatively generous social programs, such as early retirement and disability benefits, and the payroll taxes that finance them and how they encourage tax evasion and avoidance, shift work to the underground economy, distort the size of labor force. Some developments relating to the labor marker reform can be experienced in these and other areas. They are the following: Government recently introduced occasional employment contracts. Previously, a worker needed an explicit written contract for job lasting more than five days. Under the new scheme causal workers maintain a booklet in which a history of their employment with various employers is tracked, noting their position, pay and hour of work. The booklet simplifies the payment of taxes and social contributions, which can be paid using special stamps purchasing at the post office. Labor center are responsible for issuing the booklets, 5

6 but employers are expected to enforce their conditions, which include restrictions that users of booklets may nor work more than five days or fifteen days within a calendar month, and no more than 90 days in a year for a single employer or more than 120 days in any calendar year for any number of employers. This new system should be attractive to workers because it qualifies them for unemployment benefits and healthcare (although suck leave is not covered). For firms, the attraction lies in the simplicity of tax compliance. Following modest employer payroll tax reduction in 1988, the 1999 budget significantly lowered such taxes from 49 to 44 %, while increasing those paid by employees. There are two main changes: The employer s rate will go down by 6 % (from 39% to 33%), including a 2 %(from 24% to 22%) point decline in pension contribution, a 4 % (from 15% to 11%) point reduction in health contributions and a 1 % (from 4% to 3%) point fall in payment made to LMF. These cuts will be partly offset by 66 % increase in the minimum health contribution paid by employers to forint, which amount to about 2 % of payrolls; thus the net impact of all changes will be reduce employer contributions by 5 % point. Emoloyee`s social security contributions will rise one percentage point and new personal income tax bands will be introduced. All earned income will become taxable with first forint at rate 20 %, and next at a 30 % rate and earnings above forint at 40 %. While the overall fall in an emloyer`s tax burden may encourage additional hiring and improve tax compliance, the increased compulsory healthcare contribution will raise the rate paid on low-wage workers, perhaps reducing their employment prospects significantly. Moreover, the tax burden of this category of workers will rise appreciably, although families with children will receive significant tax relief. Early retirement in Hungary is widespread and increasingly disability benefits have been used as an additional path to early retirement. Government has tightened access to these benefits. While in 1997 the government made access to disability benefits temporarily and required more frequent medical supervision evaluations, re-certification remained relatively easy and to frequent. A further tightening was introduced in 1998, when the authorities introduced a series of measure that will move workers already 6

7 certified as permanently disabled to the temporary disability pension. Under the new rules, for example, firms employing people whose ability to work was diminished through workplace injury or other reasons are expected to make reasonable efforts to find suitable work for them and can receive state financial support to do so. In the event that this is not possible, these workers may then become eligible for a state benefit. Firms employing fewer than 20 people, who hire individuals with reduced abilities are eligible for tax credit (wage subsidy) of about forint. For unemployed persons with changed working ability, the Public Employment Service (PES) provides vocational rehabilitation and endeavors to find them suitable work, drawing on the advice and assistance of a new network of specialized occupational therapies. Beginning in January 1998, the pre-pension unemployment benefit was abolished and replaced with a less generous early-retirement benefit that is paid at rate of 80 % of minimum old age pension. Beneficiaries must now also report to the PES for any work that might be suitable. Workers are also eligible for a firm-funded retirement plan, under which firms placing workers into early retirement are now required to make semi-annual payments into the pension fund, which if not paid are covered by the central budget. Although many of these changes should contribute to reducing the large number of persons receiving some form of early retirement/disability benefit, their impact would be increased if relatively easy access to these benefits were further tightened. Disability pensions constitute the largest group of working-age transfer recipients in Hungary and their numbers continue to grow. About one-quarter of the working-age population is in receipt of some form of benefit. Although most recipients are no longer classified as being permanently disabled, those receiving the temporary benefit are too easily re-certified. Experience from other OECD countries suggests that coercive policies like the new quote systems are not effective tools for promoting employment among the disabled. Rather, systems that rely on positive incentives tend work better. Areas for further actions 7

8 Non-employment remains endemic in Hungary and many people in this situation receive some form of public benefit. Despite a number of recommendations and measures designed to improve employability only limited progress has been made. Two areas in particular stand out where further actions is warranted. First, although measures have been introduced, access to benefits remains relatively easy and recipient numbers continue to climb. While it appears that many beneficiaries are no longer assigned a permanent disability status, those judged as temporarily disable continue to draw benefits for an extended period of time and even though they are reassessed each year the total number of people on disability is substantially higher than even the poor health of the Hungarian population would lead one to expect. Second, to ensure a speeder return to work, reassessment should include referral to appropriate vocational rehabilitation programs and Public Employment Service for jobsearch assistance where applicable. Here, however, the low staff levels in the PES may hamper its effectiveness in providing individual assistance to its clients and in the running of ALMPs, leading to poorer outcomes for participants. The PES should, therefore, consider scaling back some of the large wage subsidy and job creation programs, thereby freeing up staff time and financial resources for programs better focused in the needs of individual jobseekers. Moreover, when used, subsidies and make-work programs should be better targeted to labor market needs. 8

9 References János Hoós: "Emergence of Social Insurance Funds in Central and East Europe: Fiscal, Political and Social Aspects" Country Report: Hungary. Journal of Transforming Economies and Societies. (EMERGO). Spring pp OECD Economic Survey - Hungary Paris. 9