OECD Reviews of Labour Market and Social Policies LATVIA

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1 OECD Reviews of Labour Market and Social Policies LATVIA Ministry of Welfare, Riga, 31 March 2015 Monika Queisser and Paolo Falco Directorate for Employment, Labour and Social Affairs

2 Context for employment & social policies in Latvia Large but uneven income gains 5 Growth rates , annual averages, % Latvia Estonia Slovak Republic Czech Republic Slovenia OECD Source: OECD National Accounts.

3 Gini coefficient Context for employment & social policies in Latvia Steep increase in income inequality OECD average LATVIA Estonia Slovak Republic Slovenia Sources: OECD Income Distribution Database and SWIID.

4 1. Demographics and migration Latvia s population dropped by 25% in 25 years Both natural decline and emigration; 10% of Latvians have left in the past decade Decline of working-age population and younger adults has accelerated Contraction of children cohorts is particularly fast: Only half as many 0-4 year-olds in 2010 as in New entries into labour force to decline for foreseeable future Old-age dependency ratio is climbing, by some 20% in next decade % (1990=100) Population size 100 Total Population 95 Working age population 90 Cohort born Source: Central Statistical Bureau

5 1. Demographics and migration Most emigrants will not come back Only 16% say they plan to return within 5 years 31% indicate they could be convinced, but factors preventing return are not easily resolved Latvia s diaspora policy is still adapting to this challenging reality, but initiatives are not fully developed, funded, or closely tailored to different diaspora groups A more favourable climate for inward labour migration is needed, even if this cannot undo population decline Emigrants rate (% born in country living abroad), 2010/11 total tertiary educated Source: OECD DIOC.

6 2. Labour market: productivity & inclusiveness The government has increased its focus on active labour market policies e.g., new profiling system, training vouchers, excellent administrative data But participation and spending remain too low, also because of low benefit coverage Resources are not sufficiently linked to labour-market conditions and programme success Need to invest in VET and work-based learning Current skills mismatch and projected future labour shortages Recent VET reforms are welcome: better infrastructure, links between curricula and employer needs But apprenticeships suffer from poor reputation, often limited educational value, and significant costs for employers Participation in life-long learning is among lowest in Europe (5%) USD PPP Output per hour worked Latvia Estonia Czech Republic Slovenia Slovak Republic OECD

7 2. Labour market: productivity & inclusiveness High labour-force participation but very large wage disparities Low-wage employment more common than in any OECD country. Large earnings gaps between groups Weak bargaining power of low-skilled workers due to poor representation, informality, envelope wages The uniform minimum wage and a high tax wedge at low wage levels create employment barriers for disadvantaged groups Efforts to reduce informality and strengthen enforcement of labour and tax law are welcome and need to be maintained But some initiatives to limit opportunities for under-reporting (e.g., raising minimum wages) have unintended consequences and can weaken employment among disadvantaged groups 0% Earnings gaps, selected groups of workers, % Note: Secretariat calculations using EU-SILC. Results show earnings gaps relative to reference group for otherwise similar workers (i.e., controlling for a broad set of personal and job characteristics). -10% -15% -20% -25% no tertiary education no uppersecond. education no work experience national minority (citizen) national minority ('non-citizen') female worker

8 3. Social protection: adequacy & accessibility Inequality and income volatility indicate significant demand for social protection. But spending levels are low and pro-cyclical, and transfers are weakly targeted Coverage is limited for some key benefit programmes In the context of informality and long-term unemployment, the strong link between earnings histories and support entitlements limit the extents of redistribution and income smoothing Coverage of unemployment benefits should be broadened and ongoing efforts to strengthen social assistance benefits, notably GMI, stepped up Systematic inequality impact assessments should accompany major reforms on both the spending and revenue sides, to better reflect and support the government s key objective of tackling inequality % of GDP Source: OECD SOCX Public social spending, 2012 services, other cash, working-age services, health cash, old age FRA ITA SWE GRC DEU PRT SVN IRL OECD CZE POL USA SVK EST LVA TUR CHI MEX

9 3. Social protection: adequacy & accessibility In 1996, Latvia was one of the first countries in Europe to introduce a multi-pillar pension system built on defined contributions principles. Reforms were successful at maintaining financial sustainability in the context of low fertility, ageing and emigration. But benefit levels are already low in international comparison. Replacement rates in the 1 st pillar public scheme are projected to halve from 38% to 19% by 2060 Filling the resulting pensions gap with payouts from 2 nd and 3 rd pillar pensions will be difficult judging from recent contribution patterns into these schemes The government is considering measures to provide additional support for the lowest-income pensioners. But broader policy adjustments are needed to ensure both fiscal and social sustainability of the pension system As a basis for assessing different policy options, a comprehensive review should analyse the consequences of expected pension gaps for poverty and income adequacy during old age