Reform of Severance Pay Law Statements and Comments

Transcription

1 Reform of Severance Pay Law Statements and Comments Ágnes Hárs Kopint-Datorg Economic Research Institute The Hungarian severance pay system, according to the Hungarian Labour Code, is very similar to the previous Austrian regulation. The payment is based on the length of job tenure, job tenure categories are corresponding to the previous Austrian ones. Illegibility is based on the notice of the employer or firing due to company closing-down without legal successors. The relative amount of payment in Hungary, a share of the previous monthly, is modest and considerably below the share of the old Austrian regulation (see table 1). The amount is increasing linear in time, in contrast to some exponential trend of the previous Austrian regime. In addition, severance payment is also taxed at a regular tax rate. Table 1: Hungarian and previous Austrian severance pay regulations Employment duration Austrian Hungarian amount of severance payment as a share of monthly less than 3 years no no 3 5 years 2 times of the monthly gross 1 times of the monthly average 5 10 years 3 times of the monthly gross 2 times of the monthly average years 4 times of the monthly gross 3 times of the monthly average yeas 6 times of the monthly gross 4 times of the monthly average years 9 times of the monthly gross 5 times of the monthly average 25 years and over 12 times of the monthly gross 6 times of the monthly average Source: Hungarian Labour Code vs. Hofer (discussion paper) Severance pay for civil servants is regulated by different regime(s) under different Codes and with considerable different notice and severance pay regulations (due to the rigidity of civil servants employment and high cost of notice that is a hot issue in Hungary resulting in serious cut of the protection of civil servants). We will be restricted in the present paper to those cases of employment covered by Labour Code regulation; namely the competitive sector employees and non-civil servants of the non-competitive sector. (In the latter case there is some gap in the illegibility regulations in case of notice, however.) Illegibility for severance payment according to Labour Code is lacking in case of entitlement for old-age or early old age pension while extra premium of 3 month severance pay will be given (once only) to those entitled for old age or early old age pension in 5 years. Agreements with the company included into collective agreement may change (increase) the statutory payment or widen illegibility. 65

2 In the paper we discuss some important issues from the point of view of Hungary. first some peculiarities of the Hungarian labour market will be discussed; than some evidence on the relevance of the severance pay to the Hungarian labour market will be given; finally some exercise and estimation on the comparison and relevance of the new pay system will be shown. The paper concludes with some lessons on Hungarian labour market. 1. Relevance of severance payment Severance pay in Hungary is, on the one hand, an eminent labour protection issue; and, at a second rank, discussed as an instrument hindering job mobility and labour market flexibility. 1.1 Labour markets of Hungary and Austria a brief comparison The Hungarian labour market is different to the Austrian and unique in Europe with an extremely low level of participation that is resulting in low employment ratio as well as moderate unemployment rate. (cp. table 2). Table 2: Labour market indicators, 2005 (population aged 15-64, in percentages) Austria Hungary EU 15 OECD Europe Employment / population ratio Labour force participation rate Unemployment rate Source: OECD Employment Outlook, 2006 As for age groups, even labour force participation rate of prime age Hungarian population is considerable below the Austrian (and also the European) level: 78.8 percentages in contrast to the 86.4 percentage of the Austrian rate and the 84.3 percentage of EU15, in Participation rate for youth and older age population is low in both Austria and Hungary, compared to the EU15 level (in Hungary youth participation is extremely low, however cp. OECD Employment Outlook 2006). In Hungary those who are employed are mostly employed on a permanent basis with a work contract for indefinite period (93% of total employment). Those, however, who work under work contract for a definite period, are forced to work so, main reasons: no other job (39%), probation, as a common employment for young new entrants especially (17%), casual or seasonal work (9%). An additional 10 percentage works in various supported employment schemes under active labour market policy programs. (Hungarian LFS, 2005) Since participation rate is low and a considerable share of the corresponding age (15-64 years old) population is out of the labour force (and out of the visible labour market) Hungarian labour market is quite small, the share of those employed is modest. Labour market turnover is low, 94 percentage of those employed were employed a year ago and only 6 percentage of employment 66

3 spell lasted shorter than a year. Turnover for those experiencing short employment spells is high, on the other hand. There is a mobility from outside of the labour force into unemployment while unemployment is stable, nearly every second unemployed was unemployed a year before while one third of unemployed were employed a year before (cp. charts 1). Chart 1: Labour market mobility activity a year ago 0,3% 0,3% 1,5% 3,4% 1,1% 0,4% 0,2% 0,1% 92,8% employed, age employed unemployed study pension disabled maternity leave inactive (family duty) other inactive 4,6% 1,4% 1,1% 7,8% 2,1% unemployed, age ,7% 0,3% employed unemployed 32,4% study pension disabled maternity leave inactive (family duty) other inactive 46,7% armee 1.2 Severance pay illegibility criteria in Hungary The Hungarian severance pay system is similar to the previous Austrian one; the illegibility is confined to the former employment duration with the same employer. Some estimation will be given below on the structure of labour market in connection to the employment duration as a requirement of the illegibility Employment spell and severance pay illegibility Due to the entitlement categories we checked the employment duration of present employed population in Hungary. Using a cross-section data we found that a quarter of the employment was of short duration (although we do not know how long they will last) and a fifth of the employment lasts for over 15 years (cp. table 3). Table 3: Employment duration of the employed population, 2005 Employment duration Share of employees (percentage) Average employment duration (year) less than 3 years 25,4 1,1 3 5 years 14,4 3, years 24,6 6, years 14,8 11, yeas 8,5 16, years 4,7 21,6 25 years and over 7,6 30,7 Total 100,0 8,9 67

4 As one can suppose, there are considerable differences by occupations; duration of employment is mostly short in elementary occupations (40 percentage last less than 3 years) and also among service and plant and machine operators (30 percentage). Once someone worked for 3 years, it is likely they work over 5 years with the same employer (cp table 4). Table 4: Employment duration by major employment groups (ISCO-88), 2005 Breakdown of employment duration period, in percentage ISCO-88 major groups < < Total 1 Legislators, managers 14,1 12,6 27,7 20,2 10,1 5,8 9,6 100,0 2 Professionals 18,8 12,1 23,9 14,6 11,0 7,0 12,7 100,0 3 Technicians 21,3 15,3 24,3 15,3 9,2 5,6 9,0 100,0 4 Clerks 25,1 16,3 24,2 15,2 7,6 3,9 7,7 100,0 5 Service, shop workers 31,4 16,0 25,0 13,5 6,7 3,4 4,0 100,0 6 Skilled agricultural employee. 19,1 12,3 28,1 19,7 10,2 4,1 6,5 100,0 7 Craft and related workers 26,3 14,8 24,1 14,9 8,7 3,8 7,5 100,0 8 Plant and machine operators 30,2 14,6 24,1 11,9 7,5 5,1 6,5 100,0 9 Elementary occupations 39,3 14,0 22,6 11,5 6,3 3,0 3,4 100,0 Total 25,5 14,5 24,6 14,7 8,5 4,7 7,6 100,0 According to the above data, 3 out of 4 employees would be illegible for some amount of severance pay in case of notice (supposing suitable employment duration). Some groups of employees are more vulnerable however and more likely to be fired without any difficulty and any pay. In addition, since level of severance pay (measured as a share of average monthly ) is quite low; shorter employment duration periods have no considerable effect on labour turnover even if 1-2 monthly has to be paid, especially for low employees. Checking the share of employment by years of employment duration, is gives clear evidence, however, that severance pay has some effect against mobility for those employed for at least 5 years or more (see chart 2). There is a hump on the graph each time a new illegibility period begins. Once people worked e.g. for 14 years, a higher share of employees work already for 15. The same evidence is clear in various occupations but agriculture and legislators (ISCO No 1), the latter group includes civil servants who are not covered by the present severance pay system. Chart 2: Share of employment by years, share of employment, percentage employment duration, years Separation by reasons 68

5 The reasons of separation and leaving employment are broad, only limited share of separation is subject of severance pay. LFS gives data on reasons of separation of those who left employment and are not employed again. We do not know their previous employment spell with the last employer; consequently we do not know their illegibility for severance pay. We know, however, that all cases included into investigation were separations that were not followed by a new spell of employment (shown by chart 3). Cases of separation followed by short (or no) non-employment duration and concluded in employment is not included; these persons are less vulnerable even if not covered by severance pay, persons who were subject of separation on the reason of notice (and possible severance pay in case of illegibility) followed by a new employment soon have a similar or even more advantageous position. Chart 3 summarizes the various reasons of leaving employment and evidences are somewhat shocking. Only limited share of separation is due to reasons of notice or company closing down. Quitting of the employee is marginal among reasons of separation; that refers to the lack of labour market flexibility. The most striking, however, the extreme share of old age pension at a rather young age and even more so the huge share of disability pension. Reform of illegibility of both pension schemes is an up-to-date problem (on both labour market and financing. reasons). Chart 3: Reasons of leaving employment, without new employment, age 15-64, 2005 persons other labour market termination maternity leave, family reason, disability pension old age, early old age pension quit of th eemployee notice, company close down age (year) 69

6 2. Estimations on the amount of severance pay Finally, some estimation has been done on the amount of payment of the possible schemes using Hungarian survey data. The survey covers a huge sample of employees s and connected indicators, data are given on the compulsory basis by companies (bias for small enterprises). Let s suppose a random decision of notice, the average of the total sample offers basis for calculation of the severance pay of the present regime. We made a calculation for both the Hungarian and also the previous Austrian severance pay using the same employment duration and different share of monthly s as a basis for payment. The more generous Austrian system would be evidently a larger impediment for labour market flexibility, especially in case of long employment spells (cp chart 4). The steps of the illegibility categories are manifest using 2005 average income data of the survey. The estimated new scheme payment based on a lower interest rate and same contribution is also indicated. The evidence is somewhat surprising: the present possible value of severance pay corresponds with the modest contribution and asset interest rate suggested by the Austrian reform. In addition, there is an increase following the top category of the possible severance pay. The higher share for Austria gives a somewhat different picture since the new system would offer the same amount as the old one only in considerable longer time. Chart 4: Estimating old Austrian severance pay scheme and the new scheme for Hungary estimated severance payment in HUF Total (competitive sector) new 2% return severpay_h severpay_a employment duration Source: Own calculation based on Hungarian -survey data, 2005 Differences for the illegibility based on employment duration with the company are considerably by branches or occupations, as well as by various other indicators. Table 6 gives a brief view into the differences. While the average duration of employment with the company is around 7 years, in some branches it is much less, e.g. in construction, trade and various business services less than 5 years. Average duration of employment is very different by occupations across branches as well. The uneven distribution of illegibility based on previous employment duration is obvious. There are branches where severance pay is not any issue since most of the people are not subject of the pay at all. 70

7 Table 5: Average duration of employment with the company by occupations and branches Total (busines ssector) Of which seleceted brances Real estate, business service Manufacturintion Construc- Trade and Transport. Occupation groups repairing storage 1 Legislators, managers 10,1 10,8 7,6 7,7 15,2 7,2 2 Professionals 6,4 6,8 4,3 4,4 9,5 5,6 3 Technicians 7,8 8,2 6,4 4,9 12,2 5,4 4 Clerks 7,3 8,6 6,3 4,8 11,8 4,7 5 Service, shop workers 5,2 5,3 3,9 3,9 11,3 3,2 6. Skilled agricultural employee. 7,3 4,4 3,0 3,0 2,7 10,4 7 Craft and related workers 7,5 7,6 4,5 4,4 13,6 5,0 8 Plant and machine operators 6,9 6,4 5,5 4,1 8,2 2,5 9 Elementary occupations 4,4 5,0 2,8 3,4 6,2 4,0 Total 7,0 7,2 4,8 4,6 11,1 4,7 cases Source: calculation from the Hungarian survey 3. Some conclusion Some brief conclusions can be drawn from the comparison of the Hungarian and the Austrian regulation and the peculiarities of the Hungarian labour market. Although the amount of severance pay is low in Hungary and only in case of mass lay-offs or notice of highly qualified and/or for a long time employed employees can reach a considerable amount, the labour market flexibility is still limited while severance pay offers a premium for those who stay. In addition, the system is unequal and unfair. There is a reform process corresponding with the regulations of the Austrian reform, namely the pension reform. The high share of old-age (and early old age) pension as well as the extreme share of disabled pension at early age has been shown before. The high share of outflow from the labour market into various pension schemes is partly (considerably) due to labour market deficiency. The reform is aiming at the financing burden and the labour market associations of the present circumstances. In addition, the more fair character of the new Austrian regulations and the effect onto the flexibility of the labour market without cutting the security of the employee considerably, the advantage of the new Austrian example is a possible new element to develop the present process of the pension reform. 71

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