Serbia: Labor Market Assessment

Report No. 36576-YU Serbia: Labor Market Assessment September 2006 Human Development Sector Unit South East Europe Country Unit Europe and Central ...
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Report No. 36576-YU

Serbia: Labor Market Assessment

September 2006

Human Development Sector Unit South East Europe Country Unit Europe and Central Asia Region

Document of the World Bank

FISCAL YEAR

January 1 to December 31

CURRENCY EQUIVALENTS (Exchange Rate Effective as of June 28, 2006) Currency Unit Serbian dinar

Equivalent units US$1 = 65.8 dinar

WEIGHTS AND MEASURES Metric System

ABBREVIATIONS AND ACRONYMS ALMPs BEEPS CEE CEM DfID EBRD ECA EU FDI FYR GDP ILO IMF LFS LSMS MoLESP MOP NES OECD PICS PISA RSO SEE UI UN WDI

Active Labor Market Programs Business Environment and Performance Surveys Central and Eastern Europe Country Economic Memorandum (U.K.) Department for International Development European Bank for Reconstruction and Development Europe and Central Asia European Union Foreign Direct Investment Former Yugoslav Republic Gross Domestic Product International Labour Organisation International Monetary Fund Labor Force Survey Living Standards Measurement Survey Ministry of Labor, Employment, and Social Protection Materijalno Obezbeđenje Porodice National Employment Service Organisation for Economic Cooperation and Development Productivity and Investment Climate Survey Programme on International Student Assessment Republic Statistical Office South Eastern Europe Unemployment Insurance United Nations World Development Indicators Vice President: Country Director: Sector Director: Sector Manager: Task Team Leader:

Shigeo Katsu Orsalia Kalantzopoulos Charles Griffin Arup Banerji Gordon Betcherman

ACKNOWLEDGMENTS This report was prepared by a team consisting of Gordon Betcherman (task team leader), Arvo Kuddo, Maria Laura Sanchez Puerta, Shweta Jain, and Tanja Boskovic. A background paper on labor costs and wages by Mihail Arandarenko and Katarina Stanic was a substantial input to the study. A major part of the analysis was based on the 2004 and 2005 Labor Force Survey databases, which were made available by the Republic Statistical Office. In particular, the team acknowledges the collaboration of Dragana Dokovic Papic, Jelena Milakovic, and the entire RSO team responsible for the LFS. Radmila Katic, Assistant Minister of Labor, Employment and Social Protection and Svetlana Aksentijevic, Head of Department of Statistics of the National Employment Service provided very useful data and other materials. Carmen Laurente and Augustina Nikolova worked on document preparation as well as coordinating the administrative aspects of the project. The study greatly benefited from inputs, comments, and ideas from Toby Linden, Dena Ringold, Mathew Verghis, Ardo Hansson, Ruslan Yemtsov, and the peer reviewers, Wendy Cunningham, Willem van Eeghen, and Gary Fields. Comments were also provided by the Ministry of Labour, Employment and Social Policy. The project was carried out under the supervision of Carolyn Jungr and Arup Banerji.

CONTENTS OVERVIEW ..................................................................................................................................................i A. Labor Market Trends ...........................................................................................................................ii B. Constraints to Job Creation .................................................................................................................iv C. The Safety Net for Workers ................................................................................................................vi D. A Reform Agenda for the Labor Market ..........................................................................................viii CHAPTER 1: INTRODUCTION ................................................................................................................. 1 A. Background.......................................................................................................................................... 1 B. Framework and Structure of the Report............................................................................................... 5 CHAPTER 2: LABOR MARKET TRENDS ............................................................................................... 7 A. Recent Labor Market Developments ................................................................................................... 7 B. Long-term Trends .............................................................................................................................. 16 C. Looking Forward – Demographic Trends.......................................................................................... 20 CHAPTER 3: SPECIFIC ISSUES IN THE LABOR MARKET................................................................ 25 A. Long-term Unemployment ................................................................................................................ 25 B. Wage Determination .......................................................................................................................... 29 C. Informal Employment ........................................................................................................................ 33 D. Youth in the Labor Market ................................................................................................................ 37 CHAPTER 4: THE CONTEXT FOR JOB CREATION............................................................................ 45 A. Macroeconomic Environment............................................................................................................ 45 B. Investment Climate ............................................................................................................................ 50 C. Education and Skills of the Workforce .............................................................................................. 54 CHAPTER 5: LABOR MARKET POLICIES: LABOR COSTS AND REGULATIONS........................ 59 A. Labor Costs........................................................................................................................................ 59 B. Labor Market Regulation ................................................................................................................... 66 CHAPTER 6: SAFETY NET FOR WORKERS ........................................................................................ 73 A. Supporting Enterprise Restructuring ................................................................................................. 73 B. Unemployment Benefits .................................................................................................................... 78 C. Active Labor Market Programs.......................................................................................................... 82 References .............................................................................................................................................. 89

List of Boxes, Figures, and Tables Box 1.1: The Unique Employment System in the Former Yugoslavia......................................................... 1 Box 2.1: Labor Force Survey 2004-2005...................................................................................................... 8 Box 2.2: Labor Market Status and Subjective Perception of Household Financial Situation..................... 10 Box 2.3: Employment in the Roma Communities ...................................................................................... 12 Box 2.4: Issues in Measuring Unemployment (and LM Activity) with Registration Data ........................ 17 Box 2.5: Methodology: LFS 1995-2003 vs. LFS 2004-2005 ..................................................................... 19 Box 3.1: Tracking Workers with the Longitudinal Panel ........................................................................... 28 Box 3.2: Data and Methodology for Wage Analysis .................................................................................. 30 Box 4.1: How Private Sector Development has been a Key to Job Creation in Transition Countries ....... 50 Box 4.2: Principal Data Sources for Analyzing Serbia’s Investment Climate............................................ 51 Box 5.1: The 1996 Serbian Law on Labor Relations.................................................................................. 67 Box 6.1: Redundant Worker Transition Centers......................................................................................... 75 Box 6.2: World Bank-DfID Tracer Surveys of Redundant Workers.......................................................... 76 Figure 2.1: Distribution of Employment by Status, Total Economy, 2005 .............................................13 Figure 2.2: Distribution of Wage-earners by Ownership According to Demographic Characteristics, 2005 .................................................................................................................................................................... 15 Figure 2.3: Labor Market Indicators for Ages 15 and Over (thousands), based on LFS and Registered Data, 2000-2005.......................................................................................................................................... 18 Figure 3.1: Transitions Out of Unemployment ........................................................................................... 28 Figure 3.2: Adjusted Monthly Wage Premiums by Educational Level, 20051 ........................................... 31 Figure 3.3: Minimum Wage as Percent of Average Wage, Latest Year Available .................................... 32 Figure 3.4: Monthly Log Wage Distributions, Informal and Formal Wage Sectors, 2005......................... 33 Figure 3.5: Employment Status of Youth, 2005 ......................................................................................... 39 Figure 4.1: Recent and Projected Trends in GDP, Serbia and Montenegro................................................ 46 Figure 4.2: Changes in Employment and in GDP, Serbia and Montenegro and Selected Countries in Eastern Europe ............................................................................................................................................ 47 Figure 4.3: Share of GDP in Services, Serbia and Montenegro and Selected Transition Countries, 1996 and 2004...................................................................................................................................................... 49 Figure 4.4: Problems Faced by Enterprises in Serbia and Montenegro, BEEPS, 2002 and 2005 .............. 53 Figure 4.5: FDI as a Percent of GDP, Serbia and Montenegro and Selected Countries in ECA, 2004 ...... 53 Figure 4.6: Proportion of Firms Indicating that Skills and Education of Workers is a Business Constraint, Serbia and Selected SEE Countries, 2005 .................................................................................................. 54 Figure 4.7: PISA Performance Indicators, Serbia and Comparator Countries in ECA............................... 56 Figure 4.8: Incidence of training in Serbia and Montenegro and selected countries in ECA ..................... 57 Figure 5.1: Real Gross Wage Trends, RAD-1 and Tax Administration Data Estimates, 2002-2005......... 61 Figure 5.2: Multiples of Monthly Wages Paid in Severance at Selected Lengths of Service, Serbia Compared to ECA and OECD Regions ...................................................................................................... 69 Figure 5.3: Labor Regulations as a Problem in Doing Business in Serbia, SEE, EU8, and ECA Countries, BEEPS, 2002 and 2005............................................................................................................................... 71 Figure 6.1: Distribution of UI Beneficiaries, According to Benefit Duration, December 2005 ................. 80 Figure 6.2: UI Contributions Collected as a Percent of Net and Gross UI Liabilities, 2003-2005............. 82 Figure 6.3: Public Employment Service Staff, Selected Countries, Latest Year ........................................ 84 Table 1.1: Summary of Main Findings and Policy Reform Options ............................................................ 3 Table 1.2: The MILES Jobs Framework....................................................................................................... 5 Table 2.1: Labor Market Indicators, Adult Population 15-64 years, 2004-20051 ......................................... 9 Table 2.2: Key Labor Market Indicators, Western Balkans, 20041 .............................................................. 9

Table 2.3: Distribution of Working Age Population, Employed, and Unemployed by Demographic Characteristics, 2005................................................................................................................................... 11 Table 2.4: Labor Market Indicators by Age Groups, 2005 ......................................................................... 11 Table 2.5: Labor Market Indicators by Level of Education Completed, 2005 ........................................... 12 Table 2.6: Labor Market Indicators by Geographical Groupings, 2005 ..................................................... 13 Table 2.7: Employment by Ownership and Industry, 2004-2005 ............................................................... 14 Table 2.8: Incidence and Composition of Part-time Employment, 20041 .................................................. 15 Table 2.9: Weekly Hours Worked, All Employees and Wage-earners, 2005............................................. 16 Table 2.10: ILO (LFS) and Registered Unemployment, 2005.................................................................... 20 Table 2.11: Demographic Trends for Serbia and Montenegro, 1985-2050 ................................................ 21 Table 3.1: Long-term Unemployment: Rates and Incidence, 2005 ............................................................ 25 Table 3.2: Long-term Unemployment Rates and Duration in Serbia, 2005 ............................................... 26 Table 3.3: Subjective Perception of Household Financial Situation........................................................... 27 Table 3.4: Transition Probabilities from Unemployment ........................................................................... 29 Table 3.5: Nominal Monthly and Hourly Wages by Type of Firm, 2005................................................... 30 Table 3.6: Subjective Perception of Household Financial Situation, 2005................................................. 34 Table 3.7: Characteristics and Rates of Informality Among Wage Employees, 2005................................ 34 Table 3.8: Work Experience in the Formal and Informal Sectors .............................................................. 35 Table 3.9: Wages in the formal and informal sectors, 2005 ....................................................................... 35 Table 3.10: Transition Probabilities Out of Informality/Formality ............................................................ 36 Table 3.11: Transition Paths Into Employment, LFS 2004-2005 ............................................................... 37 Table 3.12: Main Labor Market Indicators for Youth, 2005 ...................................................................... 38 Table 3.13: Main Labor Market Indicators: Serbia and Selected Countries............................................... 38 Table 3.14: Wages and Hours of Work, Youth in Wage Employment, 2005............................................. 39 Table 3.15: Informality Rates by Education, Young Wage Earners, 2005................................................. 40 Table 3.16: Monthly and Hourly Wages by Age Groups, 2005 ................................................................. 40 Table 4.1: Employment Structure in CEE Countries and in Serbia, Compared to International Benchmarks .................................................................................................................................................................... 50 Table 4.2: Time Needed to Fill Vacancies, by Occupation and Type of Firm ........................................... 55 Table 5.1: Average Monthly Wages, Published and Paid-out, 2001-2005, RAD-1 Survey ....................... 60 Table 5.2: Average Net Wages by District and as a Percentage of National Average, 2001 and 2005, RAD-1 Survey ............................................................................................................................................ 62 Table 5.3: Serbia’s Net Wages (Euros) Compared to Other South Eastern European Countries, 200120041 ........................................................................................................................................................... 63 Table 5.4: Labor Tax Wedge at Various Wage Levels, 2005 ..................................................................... 64 Table 5.5: Impacts of Employment Protection Regulations Based on International Literature.................. 66 Table 5.6: OECD-Method Indicators for EPL Strictness, Serbia and OECD Countries (descending order) .................................................................................................................................................................... 70 Table 6.1: Privatization of SOEs, 2002-2006 ............................................................................................. 73 Table 6.2: Job Search Activity Among Redundant Workers (% distribution) by Age, Tracer Survey Results......................................................................................................................................................... 77 Table 6.3: Employment Status in April-May 2005 of Workers Displaced in 2002-2003, According to Socio-demographic Characteristics (% distribution), Tracer Survey Results............................................. 78 Table 6.4: Age Distribution of UI Beneficiaries and Unemployed Workers, 2004.................................... 80 Table 6.5: NES Expenditures (CSD millions), 2003-2005 ......................................................................... 81 Table 6.6: NES Registered Job Seekers, 2000-2005 (average per month) ................................................. 84 Table 6.7: Types of Active Labor Market Programs Provided by NES, 2005 ........................................... 85 Table 6.8: Impacts of ALMPs, Based on International Experience............................................................ 86

List of Annex Tables Annex Table 2.1: LFS Main Labor Market Variables and Definitions ...................................................... 22 Annex Table 2.2: FSO/RSO Labor Market Indicators (000s) .................................................................... 22 for Working Age Population 15+ ............................................................................................................... 22 Annex Table 2.3: LFS Employment Categories According to Two Different Methodologies .................. 23 Annex Table 3.1: Conditional Regressions of Log Earnings, 2005............................................................ 41 Annex Table 5.1: Key Benchmarks on Labor Regulations (for regular employees) from National Labor Laws, Serbia and Comparator Countries in ECA ....................................................................................... 72

Republic of Serbia MINISTRY OF LABOR, EMPLOYMENT AND SOCIAL POLICY

Foreword The first Serbia National Employment Strategy (NES) has been adopted for the period 2005–2010. It defines the direction and scope of the activities to be carried out in order to address employment issues effectively and to develop an efficient labour market in line with the other development goals of Serbia. The NES defines specific directions in which problems of unemployment are to be addressed in the ongoing transition phase in Serbia and offers solutions adjusted to the developmental needs and available human and financial resources. The National Employment Strategy strongly emphasizes the need for the labor market in Serbia to be considered from a regional aspect, and consequently, the goals to be defined and measures recommended for fostering employment not only at national but regional levels as well. The Strategy insists upon the necessity of increasing FDI and significant activation of domestic savings into investment as key preconditions for economic growth and higher employment. Also, it has served as a framework for the adoption of the 2006-2008 National Employment Action Plan (NEAP) which defines the measures and actions for implementation of the National Employment Strategy with a view to achieving higher levels of employability, supporting employment, reducing unemployment, and overcoming the labour market challenges facing Serbia in its transition to a market-based economy. Performance indicators have been defined in compliance with the EU guidelines in the National Employment Strategy, which have been translated into the NEAP and adjusted to the current situation of the Serbia labour market. The NEAP is a document in which the National Employment Strategy as well as other development strategic documents and action programmes are translated into concrete measures and activities, in which the area of employment is taken into account from the perspective of sustainable economic growth and development and enhancement of employability. Only with major new investments will it be possible to achieve the goals of competitive production and sustainable economic growth based upon job creation and large-scale utilization of national resources. That is why the strategy for employment generation must be part of the overall development strategy based upon an integrated approach to implementing economic reforms, enhancing the business climate, and attracting FDI. Belgrade, August 2006

SERBIA LABOR MARKET ASSESSMENT OVERVIEW Like most formerly planned economies, Serbia has experienced a difficult transition from guaranteed full employment to a market-based employment model. Since the latest stage of reform began in late 2001, job losses have been large, as Serbia has embarked on a program of restructuring and privatization. At the same time, job creation in the private sector has been slow, despite fairly strong economic growth in recent years. The result is a weak labor market performance especially when judged by the standards of the more successful transition countries. Only about one-half of adults are employed and a substantial proportion is working in the informal sector. About one in five Serbs in the labor force is unemployed and many of these remain without jobs for very long times. The difficult labor market appears to disproportionately affect young people who have unemployment rates that are among the worst in Europe. Because of political events, Serbia is only now trying to catch up with the more successful reformers. The transition countries that have had some success in terms of labor market performance have generally gone through a lengthy two-stage process. In the initial stage, the labor market situation is dominated by substantial job destruction as the state sector is downsized. Productivity and even output may increase but, inevitably, unemployment remains high and even rises during this stage. This difficult process, however, is necessary in setting the pre-conditions for the second stage where growth is led by a dynamic private sector where new firms are being started and existing ones are expanding. A number of the Central and Eastern European countries that embarked on a complete and permanent reform in the early 1990s are well along in this process. Serbia, by only committing to a reform agenda early in this decade, has a lot of catching up to do. The Government has placed priority on employment both in terms of fighting poverty and underpinning economic growth. Creating more and better jobs is an explicit priority for the Government, as reflected in the Poverty Reduction Strategy. A National Strategy of Employment, based on a vision of convergence with Europe and eventual accession to the EU, has now been approved. The Government has just adopted a National Employment Action Plan to guide the implementation of the Strategy. The main message of this report is that Serbia needs to adopt a multi-sector jobs agenda to address the employment situation. This agenda calls for the completion of the restructuring program as soon as possible, while continuing to develop the foundation for a dynamic labor market where privatesector job creation is strong. The jobs agenda must be based on a comprehensive approach to employment. It requires macroeconomic stability, a business climate that encourages investment, labor market regulations that allow for the mobility of workers from declining to growing sectors, an education and training system that can produce a highly-skilled and flexible workforce, and a social safety net that provides adjustment support for workers while creating incentives to find employment.

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A A.. LLa ab bo orr M Ma arrkke ett TTrre ennd dss Despite the economic growth during the past five years, employment remains low and Disappointing labor market indicators unemployment is high. Beginning in 2004, the Republic Statistical Office has aligned the Labor Force 70 Survey (LFS) to Eurostat methodologies. The result 60 has been higher-quality labor market information and this report has relied on the survey for the past two 50 2004 2005 years to describe employment conditions. According to 40 the LFS, one-third of adult Serbs do not participate in 30 the workforce; only one-half are employed; and over one-fifth of those who are active are unemployed. The 20 situation did not improve between 2004 and 2005 10 despite GDP growth of almost 5%. In fact, 0 employment appears to have decreased by almost Participation rate Employment rate Unemployment rate 200,000. This seems to be part of a longer-term trend since 2000 although, because of the lack of comparable data over this period, it is not possible to quantify the job loss over that period. Labor market indicators are much worse than EU averages and the employment rate is far from the Lisbon target of 70%. Serbia’s employment rate lags behind the better performers in Eastern Europe (e.g., Czech Republic, Slovenia, and Romania) and is well behind the Lisbon standard adopted by the European Union of 70% to be achieved by 2010. The unemployment rate is more than double the EU15 average and among EU-10 countries, only Poland and Slovakia have unemployment rates near Serbia’s. The unemployment problem is exacerbated by the fact that, once many workers become unemployed, they remain without work for very long periods. Unemployment is dominated by long-term joblessness; in 2005, 79% of all unemployed workers had been without work for at least one year. There are various reasons for such a high incidence of very long unemployment spells. One is the lack of new job opportunities, especially in lagging parts of the country. Even where opportunities exist, many of the long-term unemployed do not have the required education or skills. Willingness or ability to move to more dynamic parts of the country may also be a problem. Finally, some of the long-term unemployed have lost their jobs through enterprise restructuring and are able to cope because of enhanced severance payments, extended unemployment benefits, and other forms of support. Labor market status is strongly correlated with economic well-being. There is a close relationship between poverty and the labor market. According to data from the Household Budget Survey, the unemployed and the inactive are roughly three times more likely to be poor than people with jobs. Qualitative evidence from the LFS on subjective perceptions of individuals about their household financial situation indicates that the employed clearly assess their financial situation more favorably than those who are not working. Marginalized and very poor communities, like the Roma, have extremely high rates of joblessness. Employment outcomes are considerably worse for women than for men. The employment rate for women in 2005 was 41%, about 20 points below the rate for men -- and way below the Lisbon target of 67% for female employment. At the same time, women are much more likely than men to be unemployed (27% vs. 18%). One factor in this picture is that, while part-time work offers flexibility and

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is an important type of employment for women in many countries, very few women work on a part-time basis in Serbia. Women also earn about 15% less than men after adjusting for other factors affecting wages. Although young people everywhere tend to have problems making the transition into the labor market, their situation in Serbia is particularly difficult. Serbia’s youth faces serious problems entering the labor market. Participation and employment rates are low. About one-half of those young people who are interested in working cannot find a job. Educational attainment does not reduce this unemployment rate. Among women between 15 and 24, the unemployment rate is 52%. When young people do find jobs, it is more often in the informal sector than in the formal sector. Youth have less success in Serbia’s labor market than elsewhere in Europe

EU 25 EU 15 EU 10 Romania Bulgaria Serbia

Youth unemployment rate 18.9 16.7 31.7 23.2 25.8 47.7

Youth/adult unemployment ratio 2.5 2.4 2.7 4.2 2.4 3.2

Youth labor force participation rate 45.1 47.6 35.0 35.8 28.9 35.8

Source: Eurostat for EU (2004), LFS 2005 for Serbia

Almost one-half of all of the jobs are still outside the private sector. The share of private sector employment in Serbia is still small – accounting for only 57% of total employment. The remainder is largely in the state sector and in socially-owned enterprises. However, according to the LFS data, the employment transition from the state- and socially-owned sectors to the private sector is happening quickly. The private-sector share of wage employment grew by about 5 percentage points between 2004 and 2005. In view of the privatization and restructuring program plus downsizing of the government administration, this trend is likely to continue.

Most jobs are outside the private sector

P rivate

State

So cially o wned

Other

The informal sector accounts for an important share of employment. Workers in this sector tend to be relatively poorly paid and do not easily move into formal-sector jobs. According to the 2005 LFS, 43% of all workers and 27% of wage-earners were informal, using the definition adopted for this report.1 The poorly educated and young people are significantly overrepresented in the informal sector relative to the formal sector. Even once other factors are taken into account, wages for informal sector workers are 20% below those in the formal sector. There is a high incidence of poverty among workers in informal jobs. Dynamic analysis using the 2004 and 2005 LFS data shows the segmentation of the labor market into formal and informal sectors, with small flows between the two; only about 10% moved from informal wage employment in one year to a formal job in the next, with the same percentage moving the other way. 1

This definition of informality includes: (i) self-employed individuals who have not completed postsecondary education; (ii) household helpers; and (iii) wage earners and owners in private firms with less than 10 employees. All wage-earners in the state- and socially-owned sectors are considered formal.

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BB.. C Co onnssttrra aiinnttss tto o JJo ob bC Crre ea attiio onn Understanding Serbia’s employment situation requires a multi-sectoral perspective that includes both economic and social factors and that addresses both labor supply and labor demand. In this report, we use a framework that considers the implications for employment of macroeconomic factors, the investment climate, labor market policies and institutions, education and skills, and safety net for workers (the MILES framework). By assessing all of these factors, the binding constraints to job creation can be identified. Although output growth has been reasonably good since reforms began, it has not been strong enough to generate net employment gains; however, this “jobless” growth is typical of countries in the early years of transition. Even in a region where jobless or near-jobless growth has been widespread, Serbia has been a relatively poor performer in translating increased output into more jobs over the first half of this decade. However, Serbia’s job creation record is comparable to that of other countries at a comparable stage in their transition. Similar to the early experience of all of these countries, Serbia’s employment stagnation reflects an initial stage of “defensive restructuring”. The more successful countries have moved beyond this stage to generate larger numbers of jobs through the creation of new private-sector firms and the expansion of existing ones. The restructuring and privatization program has led to large-scale redundancies that have “shocked” the labor market with substantial job losses. The release of productive resources -- including labor -- from old and inefficient enterprises is an essential step in building a strong economy and labor market. While it is a necessary condition, however, it is not sufficient. Ultimately, as has been the case elsewhere in the region, Serbia’s job creation record will depend on creating the environment for new firms to be created and for existing ones to expand. Experience in the region and internationally shows that market services will account for most of the new job creation. Serbia’s service sector is relatively undeveloped, even by the standards of the formerly planned economies. Transition countries, with a legacy of heavy industrialization, tend to have underdeveloped services although the more successful ones are moving towards Western European benchmarks. Serbia currently has a relatively low share of GDP in services even by regional standards, although to some extent, this is also a reflection of the late transition. This structural evolution is very important for job creation because evidence from all regions of the world shows that middle- and upper-income countries must rely on services as the primary generator of employment.

Serbia's output in services is still small Sl ovak Republ i c Hungar y* Pol and Cr oati a Sl oveni a* Eur ope &Centr al Asi a Russi an Feder ati on Macedoni a, FYR Czech Republ i c Bul gar i a Se r bi a & M ont e ne gr o 2 0 0 4

Al bani a Romani a 0

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30

40

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1996 Linear (Serbia)

A favorable investment climate is critical for moving through the transition process and stimulating job creation. Serbia has made clear progress in recent years in improving the laws and regulations that define its business climate but it still lags behind in international comparisons. Serbia and Montenegro was identified as the top reformer in the world in the recent Doing Business 2006 report.

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Despite these improvements, it is clear that further progress is needed: its overall ranking is still only 92nd out of the 155 countries included. Moreover, data from firm surveys (e.g., the Business Environment and Enterprise Performance Survey and the Productivity and Investment Climate Survey) show dissatisfaction with the prevailing business environment. The issue at hand is that, while important legal and regulatory changes are being made, managers and owners do not see the impact of these reforms yet. Continued improvements in the business climate will be needed in order to encourage more domestic and foreign investment and to produce a stronger job creation record. Currently, the skills of the workforce do not appear to be a particularly important binding constraint on job creation. However, there are some signs already of an emerging skills gap that could be a serious limitation in the future. Evidence from managers indicates that the skills and education of the workforce is currently a relatively minor impediment to doing business in Serbia. Many firms are still in a restructuring stage and/or in traditional industries. But once Serbia moves into a more robust jobcreation mode and the competitive advantage of firms becomes increasingly based on innovations in products and processes, the skills and education of workers will become a more serious constraint to employment. There are already some signs of this: employers report difficulties in hiring certain types of higher-skilled workers. Moreover, young firms and firms in the service sector – which is where the new jobs will come from -- report more skill shortages than other employers. Improvements in the education and training systems are needed now so that Serbia will be able to compete in the future on the basis of a higher-quality workforce than it currently has. Although educational attainment in Serbia is comparable to other transition countries, it will need to improve to approach the level of many European countries. Moreover, the international data on learning outcomes indicate that Serbia’s young people are lagging behind and are not well prepared for an economy where jobs and growth depend on knowledge and innovation. The secondary system is a particular concern, since this is universally considered to be the prerequisite level of education for participation in a modern labor market. The postsecondary system is not generating an adequate supply of well-educated graduates with the appropriate skills for the changing labor market. Opportunities to upgrade skills through adult education and training and active labor market programs are limited. Reforms at all levels will be needed to address these shortcomings. Wages did rise rapidly early in this decade but they had moderated by 2003, and have not been a major constraint on aggregate employment since then. Official wage data indicate that wages have dramatically increased in nominal, real, and foreign currency terms since 2000. However, a detailed review of these data undertaken for this report concludes that, for various reasons, these wage estimates have been upwardly biased. After 2002, average wage growth appears to have slowed and, according to our estimates, it has not exceeded GDP and productivity growth from 2003 onwards. However, the labor tax system that has been in place since 2001 is a regressive system that has raised costs for low-wage labor. The key policy concern is not the overall level of taxation but its distribution. In 2001, Serbia introduced new rules on the taxation of labor including social contributions. This reformed what had been a somewhat bizarre and largely unenforced system by broadening the tax base, lowering rates, and fully taxing fringe benefits. The concern with Serbia’s current system is not the level of taxation – it is still not high by regional standards, although it should be noted that Eastern Europe is a high-tax region by global standards. Rather, the issue is how the tax burden is distributed. The effect of the changes made in 2001 (with small amendments since) was to introduce a uniquely regressive system in which the tax burden is highest for low-wage labor and declines as earnings rise. While the tax wedge (which measures the burden of taxes levied on labor) is 47.1% in the case of workers earning 33% of the average wage; this falls to 42.2% for average wage workers; and continues to decline, down to 32.7% for workers earning 8 times the average wage.

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Since a high tax wedge on labor income hampers job creation, Serbia’s tax system places a large burden on firms and sectors employing low-wage labor. This discourages formal hiring in those segments of the labor market that are critical for addressing current unemployment and for driving job creation in the future. The impact of the tax system is disproportionately felt through the economy. It has particularly negative consequences for small, de novo private firms, especially in the service sector, that must be the engine for future job creation. The types of workers affected are likely to be in many of the groups experiencing difficulties finding employment including youth, the poorly-educated, and others suffering through very long spells of unemployment. The labor law reforms implemented in 2001 radically changed the basis of labor market regulation from the “self-management” system to a market-based model. The historical legacy of the traditional “self-management” system was a very high level of job protection and overall rigidity in the labor market. The 2001 Law was a major departure, transforming the legal framework to a market-based model, with provisions for substantially more flexibility in hiring and firing and labor deployment. Important changes were also introduced into collective bargaining. In 2005, a new Labor Law was enacted that was not a fundamental reform but did introduce some important changes – not all favorable from the perspective of the employer community. The 2005 Labor Law contains new rules in various areas, including compensation and employment protection. A key aspect of the new law is the change in how remuneration is to be structured and administered. Employers have expressed concerns that these reforms interfere too much with market principles for paysetting and that the new provisions are too complex. Employment protection rules were also changed, generally with the effect of strengthening job security through increased severance and restrictions on fixed-term contracts. While labor market regulation is still not one of the major barriers to doing business, the 2005 BEEPS survey indicates that it is a problem for about one-third of firms primarily because of the administration of the law. Nonetheless, on balance, Serbia’s labor market regulations under the 2005 Law are still not particularly rigid compared to other countries in the region and in the OECD. Moreover, limited inspection capacity undoubtedly reduces the extent to which labor laws actually affect labor market outcomes. Using different methodologies, the report’s assessment is that Serbia does not have especially rigid labor market regulations. It is broadly in the middle range when compared to OECD countries and more flexible than most other SEE countries. It also seems reasonable to conclude that the effect of the law is further reduced by the limited capacity of the Labor Inspection Department to fully enforce the legislation.

C C.. TThhe e SSa affe ettyy N Ne ett ffo orr W Wo orrkke errss As Serbia’s economy becomes increasingly market-based and oriented towards Europe and the global economy, its labor market will become more volatile and an effective safety net will be essential to support workers. Income support and active labor market programs are the key instruments in assisting workers to adjust to the inevitable shifts and dislocations in a flexible labor market. Currently, neither instrument offers more than very limited support to the large majority of unemployed or otherwise vulnerable workers. To this point, labor adjustment efforts have focused on workers made redundant due to enterprise restructuring and privatization. While the challenge of supporting these workers is understandably an integral part of the privatization process, the Government Social Program has required significant financial resources. The enterprise restructuring program has already led to substantial numbers of layoffs and it will lead to further large-scale redundancies over the next few years

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as there are still around 250,000 employees in state-owned and in socially-owned enterprises under restructuring. In 2002, the Government instituted the Social Program to compensate and support workers displaced from selected socially-owned and public enterprises undergoing restructuring or privatization. Under the Program, participating redundant workers can choose among different compensation options. The average redundancy payment has equaled around 130,000 dinars, which is a far more generous compensation than the registered unemployed with insurance records can claim. During 2002-2005, redundancy payments from the Transition Fund, established to cover the costs of the Social Program, were almost 20 billion dinars, roughly 0.5% of GDP annually. Most redundant workers find it very difficult to get reemployed, with the large majority remaining unemployed at the time of being surveyed. Tracer surveys have found that redundant workers are twice as likely to be unemployed than employed. This poor reemployment rate is not surprising given the fact that these workers tend to be older and whatever skills they have are generally specific to declining occupations and industries. The majority of workers surveyed see a lack of vacancies as the main obstacle to reemployment. It is important for the Social Program to wind down so that resources can shift to the labor force at large. Currently the unemployment insurance program provides benefits to very few workers. Although redundant workers released from the state- and socially-owned sectors have received a substantial share of the overall public funds allocated to jobless workers, they actually constitute a relatively small part of the overall unemployment pool. Most unemployed workers, in effect, do not have access to income support programs. In fact, only about 5% of all unemployed workers receive unemployment benefits. There are various reasons for the low coverage including exhaustion of benefits because of the high incidence of long-term unemployment and the fact that many unemployed workers – most often new entrants -- do not meet eligibility criteria. The UI system really does not play its intended role as a transitional safety net for workers temporarily out of work and searching for new jobs. In fact, most beneficiaries exhaust their eligibility after very long benefit durations. Only one out of 8 beneficiaries receives unemployment benefits for 6 months or less. Over half are on the unemployment rolls for over one year, with almost one-third getting benefits for 24 months which is currently the maximum duration. About 20% will receive benefits until they become eligible for a pension; this extended benefit was possible for those with more than 30 years of insurance history but was grandfathered under the 2003 Employment Law. As suggested by the long benefit durations, UI beneficiaries tend to be older workers; almost 70% are 45 or over.

Most claimants have very long benefit periods

1 year) (i) Eliminating • Unemployment rate incentives to remain for women is 27% registered for extended • Youth periods unemployment rate is nearly 50% • Vulnerable minorities have (ii) Better access to extremely high education and training, unemployment and especially for very low earnings vulnerable groups

(iii) Improving schoolto-work transition

Policy options (in the labor market) Short-run Longer-run

• Introduce exemption for wage income tax • Lower contribution base and raise contribution ceiling for social insurance • Improve capacity to enforce and interpret labor law • Simplify compensation rules • Reform agenda for secondary education

• Uncoupling registration from access to insurance • Better monitoring of job search effort by NES • Encourage supply of training providers • Incentives for marginalized groups • Labor taxation reforms (as above) • Introduce LM entry programs for youth • Labor taxation reforms (as above)

3. Ineffective social protection for workers • Social Program absorbs high share

Improve social protection through:

x

• Eventually eliminate wage income tax and introduce integrated personal income tax • Reduce labor taxes (after fiscal situation of social security plans improve) • Reform severance and fixed-term contract provisions in Labor Law • Reform agenda for primary, postsecondary, and “lifelong learning”

• Shorten maximum UI duration

• Education reforms (as above)

Main findings of funds • NES system matches poorly with “real” unemployed • UI protects very few of the unemployed • Arrears in UI payments • Little support offered through ALMPs

Action (in the labor market) (i) Finishing labor adjustment in privatization (ii) Reforms to UI system administration (iii) Build capacity for ALMPs

(iv) Focusing active and passive programming on the unemployed and vulnerable workers

Policy options (in the labor market) Short-run Longer-run • Completing Social Program • Eliminate arrears • Improve recordkeeping • Added resources for NES front-line support • Encourage private providers • Eliminating non-jobseekers from NES registry through improved monitoring and uncoupling registration from access to insurance (as above)

• Monitoring and evaluation • Increase resources for performance-based ALMPs • Improving efficiency, targeting, and impact of social assistance to support those ineligible for employment programs

1. Improving the climate for job creation Eliminating the regressivity of the labor tax system would encourage formal sector employment, specifically for low-wage labor. Reforms can be made to achieve this goal without changing the overall level of tax revenues. Reforming the regressive distribution of labor taxation would encourage employment in the low-wage sector. There is no “zero bracket” for the wage income tax; establishing an exemption would be a reform in the right direction. Regressivity would also be reduced if the minimum insurable earnings base was decreased and the maximum was increased. The Government has recently proposed a set of tax reforms that start to address these problems. (However, the proposals to encourage youth employment are problematic. See the box below for a summary and assessment.) Reforms to address the inequity of the current tax arrangements should be fiscally neutral at a minimum because of the large deficit in the social insurance funds. Over the medium-term, Serbia might consider eliminating the specific tax on wages and introduce a well-designed integrated personal income tax (on all sources of income). This would create horizontal equity and reduce the burden on income earned through wages. In the longer run, as the fiscal situation of the social insurance funds improves, labor taxes should be reduced. The July 2006 Tax Reform As this report was being finalized, the Government passed amendments to the Law on Citizens’ Income Tax and the Law on Compulsory Social Insurance Contributions. These changes are intended to provide tax relief, reduce the tax on low-income employment, stimulate the employment of young people, and offer tax breaks for certain industries and underdeveloped regions. The most significant amendments for the labor market include: • • •

Reduction of the income tax on gross wages from 14% to 12%; All wages of up to the amount of 5,000 dinars per month exempt from the wage income tax; Reduction in the minimum social insurance contribution base from 40% to 35% of average gross earnings;

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• • •

Exemptions from wage income taxes and social insurance contributions for 3 years if the employer hires probationary workers under the age of 30; and for 2 years if the employer hires unemployed workers under 30 who have been registered with NES for more than 3 months; Exemption from annual income tax reduced from 4 times to 3 times the average wage; Increase in the annual income tax rate from 10% to 15% on income above 6 times the average wage.

These changes would reduce the tax wedge to 38.5% for workers earning the average wage. The current tax wedge is 42.2%. For a worker under 30 qualifying for the exemptions and earning the average wage, the tax wedge would fall from 42.2% to 19.8%. The most positive features of these amendments are the wage income tax exemption and the reduced minimum contribution base, which would introduce modest progressivity into the labor tax regime: the tax wedge for workers earning 50% and 300% of the average wage would be 36.6% and 39.9%, respectively. The objective of introducing progressivity would have also been served if the amendments had included a higher contribution maximum. However, the net employment gain from these amendments will almost certainly be small. According to our preliminary estimates, the changes in the wage income tax and the minimum social contribution base are likely to create less than 20,000 additional jobs. Whatever employment gains do result will be concentrated on low-wage labor. The special youth provisions will provide short-term relief for young people eligible for the exemptions. However, serious evaluations in other countries where similar interventions have been introduced have found that many subsidized workers who are hired under the new provisions will simply replace unsubsidized workers (i.e., the substitution effect) or would have been hired in any case (i.e., deadweight effect). In other words, the net employment effect will be small. An important consideration is the fiscal effect of the proposals on the social insurance funds and on the general budget. The costs could potentially be significant and need to be incorporated into planning for the sustainability of the social insurance system and into the macroeconomic program.

The labor laws do not seem to be an immediate constraint on job creation but better administration and enforcement would encourage formal employment. The prevailing regulatory framework is not a major constraint on employment. However, improving the limited capacity to enforce the law as well as administer disputes would serve both employers and workers well. Also, simplifying the compensation structure and reporting requirements would reduce disputes while allowing wages to more directly reflect market conditions. Over the longer run, some changes could be made to the Labor Law to encourage employment. First, consideration could be given to reducing severance payments for long-service employees so that they correspond to average levels that prevail in the ECA region. Second, the maximum period for fixed-term contracts should be removed. This is becoming the standard in industrialized countries. Comprehensive education and training reforms will be critical to upgrade the quality of the future labor force. Although the quality of the labor force is not a binding constraint to employment now, there are already signs that it will be a concern for the future when job creation picks up and the economy has a more modern structure. The education and training systems have shortcomings at all levels. Since it takes time to affect education reform, change needs to start now so that Serbia’s workforce will be able to compete in an open economy where productivity and income growth are increasingly based on knowledge and skills. The priority for reform is the secondary education level. As noted earlier, this is the prerequisite for participation in a modern economy. As well, the relatively poor education quality and labor market indicators for young people with secondary schooling underscore the priority for secondary education reform. The longer term agenda must move on to the other levels of formal education, as well as formal and informal adult learning.

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2. Broadening access to jobs The extremely high incidence of long-term unemployment means that many workers “lose touch” with the labor market. Administrative changes to reduce incentives to remain registered as unemployed are needed. The problems associated with tying health and social insurance access to unemployment registration are well known and the Government is seeking to resolve this. Once a workable solution is found and implemented, there will be a range of benefits both in terms of bringing jobless workers back into the formal labor market and freeing up resources to assist those who are truly looking for work. Closer monitoring of job search by the NES must also be part of any solution. Finally, shortening the maximum duration of unemployment benefits to one year would bring Serbia closer to regional norms. While many very long-term unemployed would no longer be able to access UI benefits, it would create incentives for the real job-seekers to look for work. The additional resources that would be available to NES once the registered unemployment rolls are cleaned up should be used to help these workers get back into the labor market. For those who are actually not searching for work, social assistance – not unemployment insurance -- is the appropriate income support instrument. The World Bank’s recommendations on social assistance are summarized at the end of this section. In some cases, training and other active measures would help the long-term unemployed and other vulnerable workers find jobs. Some people who, in effect, are excluded from the labor market would benefit from training and other ALMPs. For example, the experience in Hungary demonstrates some promising approaches for promoting employment and income-generating opportunities for Roma through grants and interest-free loans. However, the international evidence based on program evaluations shows that expectations need to be realistic. Labor market interventions cannot overcome serious education deficits or discrimination and, where they exist, these barriers need to be addressed if the employment situation for vulnerable groups is to improve. The youth need special measures to ease current difficulties in making the transition into the labor market. Improving youth employment outcomes will be a longer-run challenge that involves a better job creation environment and an education system that produces young people better suited to the needs of the market. However, policy-makers cannot wait for these eventual solutions. Young people (with other excluded groups) will be the principal beneficiaries of reductions in labor taxes for low-wage labor. Transition programs like internships also need to be considered although careful attention needs to be paid to their cost-effectiveness. 3. Broadening the coverage and effectiveness of social protection for workers The task of completing the downsizing of the state- and socially-owned enterprises and winding down the Social Program needs to be completed as soon as possible. This is an essential precondition for embarking on a serious reform of the safety net for workers. As we have emphasized throughout this report, this has been a difficult and costly process. As the Social Program winds down and closes, resources will become available for reallocation to the other unemployed and vulnerable workers. The scope for additional resources for unemployment insurance and active employment programs will also be increased when the NES registry is cleaned up. Reforms in the administration of the unemployment insurance system will extend the reach and effectiveness of both income support and ALMPs. Clearing the arrears in UI payments will extend coverage of the system and also eliminate one motivation for informal work. The revenues from contributions have improved with the 2004 changes to the Law on Social Insurance Contributions. As the collection base for UI broadens, the financial aspect of the system should continue on a path to a sounder footing in the future.

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The capacity to implement ALMPs that “work” on a cost-effective basis needs to be significantly upgraded. The current very limited capacity of the NES to provide ALMPs will improve as more resources are freed up when the Social Program winds down, the unemployment registry is cleaned up, and UI financing stabilizes. In the short run, the two important steps to take are (i) to use some portion of whatever additional resources exist to strengthen NES front-line support for unemployed workers, and (ii) to encourage private providers of employment services. Over the longer-term, Serbia needs to develop the capacity to deliver cost-effective ALMPs to unemployed workers. Policy-makers will need to be realistic about what active measures can achieve: they are not a panacea for addressing high unemployment. However, well-targeted and carefully designed programs can improve the employment prospects of participants. Accurate monitoring and evaluation is necessary in order to allocate Serbia’s limited resources to interventions that work on a cost-effective basis. Private agencies should be encouraged to compete to deliver programs. Active and passive labor market programs need to focus on the needs of those actively seeking work. This requires a functioning social assistance system for the poor. Resources available for unemployment benefits and ALMPs must be used to provide temporary adjustment support for workers until they find a new job. This is a different objective than providing a safety net for the poor. However, a functioning social assistance system is an essential complement to employment programs. The current safety net in Serbia is weak and very limited in coverage. Reforms are needed to improve its impact, efficiency, and responsiveness.2 These include (i) strengthening the safety net for the poorest households, by shifting funding from poorly-targeted programs to the well-targeted materijalno obezbeđenje porodice (MOP) program, and making further improvements to targeting through piloting new approaches to identifying the poor; (ii) streamlining delivery and cost-efficiency by modernizing information systems and improving data; (iii) improving responsiveness of services and benefits and planning for decentralization by both strengthening the capacity of local governments to deliver benefits and services and the capacity of the central government to oversee quality and equity; and finally (iv) consolidating the two main targeted benefit programs, the MOP and child allowances, to improve overall effectiveness of the system. These reforms should be undertaken within the existing budget for social protection, with savings over the long-term from efficiency gains.

2

These recommendations and the underlying analysis are presented in a report on social assistance and child protection (World Bank 2006b).

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CHAPTER 1: INTRODUCTION A A.. BBa ac ckkg grro ouunnd d 1. The success of Serbia’s reform process depends heavily on creating more and better jobs. Employment is the primary means for individuals to contribute to a society’s economic growth and share in the benefits of that growth. Moreover, political support for a sustained reform process is elusive in societies where unemployment remains high and too many citizens are excluded from opportunities to be productive in the labor market. Like other countries pursuing a place in the European Union, Serbia will need to demonstrate a strong labor market as a key qualification for eventual accession. 2. Like most formerly planned economies, Serbia has experienced a difficult transition from guaranteed full employment to a market-based employment model. Throughout Eastern Europe, job losses have been large as economies went through massive restructuring. Even with the resumption of economic growth in many parts of the region, job creation has not followed except among the leading reformers. A stronger employment performance throughout the region will require the effective completion of market-oriented reforms both inside and outside the labor market.3 3. Moreover, because of political events, Serbia is only now trying to catch up with the more successful reformers. While Serbia’s labor market situation shares much of the broader experience of transition countries, there are some country-specific factors that make it somewhat unique. As part of the FYR, Serbia had a different employment legacy than other ex-Socialist states (see Box 1.1). More importantly, unlike most other countries in the region, and especially the successful reformers, Serbia’s transition was delayed because of the political events of the 1990s. Although a “modern” legal and institutional framework was finally put in place in the past few years to regulate the labor market, it really has not yet taken root and remains unstable (as evidenced by the frequent introduction of new laws and amendments to existing ones). Box 1.1: The Unique Employment System in the Former Yugoslavia Today’s employment situation in Serbia has been shaped by the particular legacy of the “market socialism” system pursued in Yugoslavia from the early 1950s. This model was unique among the former socialist countries. Its main characteristics were the social ownership of productive assets and worker management. Social ownership meant direct government interference in the decision-making of firms and limitations on their use of capital. Worker management meant that workers carried out decision-making within the firm, as well as participating in decisionmaking in other areas (for example, in local governance and social services). Regarding employment policies, firms were severely restricted in the use and allocation of labor. Specifically, workers enjoyed job security; firms were forced to hire; and there were heavy restrictions on part-time and fixedterm work and redeployment of workers. This led to a high level of job protection and overall rigidity, and to huge labor hoarding. In terms of compensation, Government controlled the firm’s overall wage bill and workers determined its distribution within the firm on the basis of both work and solidarity criteria.

3

These themes are considered in detail in the recently completed analysis of labor markets in Europe and Central Asia (World Bank 2005a).

1

The fundamentals of the system started to undergo change in the late 1980s with the 1988 Enterprise Law and the 1989 Law on Basic Rights Stemming from Work Relations (the Labor Code). However, during the 1990s, the reform process was severely hampered by political events. This historical legacy of self-management system of enterprises is still felt through very strong protection afforded to those with jobs in state industries and public services. In addition to these institutional differences, Yugoslavia also was unique in terms of actual labor market outcomes. Unlike other socialist countries, Yugoslavia recognized the existence of open unemployment in the 1950s, but it was kept at low levels until the early 1970s when the unemployment rate was around 3%. Notably, public employment services were established in Serbia in 1945 under the name of Public Labor Exchange. The mid-1960s reforms, emphasizing a more rational use of labor, curbed employment growth. In the early 1980s, the unemployment rate reached 9% and in the late 1980s, it had risen to 12%. Another feature of the Yugoslav labor markets was the massive exodus of workers to Western Europe which prevented a more rapid increase in unemployment. In the 1980s, the number of migrant workers exceeded 600,000. Source: World Bank (1991)

4. The current labor market indicators raise a number of concerns and more challenges are on the horizon. • •

• • • • •

According to new estimates presented in this report, only 51% of the working age population was employed in 2005. This is below employment rates of many countries in the region and well below employment rates of EU members. Despite relatively strong economic growth in recent years, employment appears to be falling. According to the Labor Force Survey data, total employment in 2005 was almost 200,000 lower than it had been in 2004. This “jobless growth” at least partly reflects the large job losses stemming from restructuring by enterprises. The unemployment rate in 2005 was almost 22%, which is among the highest in the region. Moreover, about 80% of unemployed workers have been without work for over one year. Labor market status is a significant determinant of economic well-being and being unemployed, in the informal sector, or in an otherwise “bad job” is strongly correlated with being poor. Young people have especially poor labor market outcomes. Almost one-half (48%) of the labor force between 15 and 24 years of age was unemployed in 2005. There is a general problem of exclusion from the labor market for certain groups including the Roma, refugees, and internally displaced persons. Further pressures on the labor market can be expected over the next few years as a result of more restructuring of the state- and socially-owned enterprises.

5. The Government has properly placed priority on the importance of employment both in terms of fighting poverty and underpinning economic growth. Creating more and better jobs is an explicit priority for the Government. The core pillars of the Poverty Reduction Strategy relate directly to this objective by pursuing conditions for dynamic and equitable growth that will create employment, promoting employment among the poor, supporting the reemployment of those affected by restructuring, and by empowering vulnerable groups to move out of poverty through acquiring new skills (Government of the Republic of Serbia 2003). 6. The Government has developed its first National Strategy of Employment, based on a vision of convergence with Europe and eventual accession to the EU. The National Employment Strategy covers the 2005-2010 period (Government of the Republic of Serbia 2005). This strategy broadly follows the goals of the European Employment Strategy, with a vision of convergence to the EU. The core principles

2

in the Strategy are (i) a regionally-based approach to employment; (ii) recognition that employment is a multi-sectoral issue with relevance to many policy areas; (iii) importance of social dialogue and social agreement; and (iv) managing progress against measurable indicators. 7. Some significant reforms have been introduced to modernize the labor market and move away from the traditional employment system. In 2001, a new Labor Code was passed which modernized many aspects of labor market regulation and removed many of the anachronistic features of the old employment model. The Labor Code was revised in 2005, which brought labor market regulations more in line with EU standards; however, it also reversed some of the liberalizing reforms in the 2001 legislation. Comprehensive labor taxation reform was introduced in 2001. The Social Program was adopted in 2002 to facilitate the process of large-scale redundancies due to privatization and enterprise restructuring. A Law on Employment and Unemployment Insurance was passed in 2003 which was intended to tighten the unemployment benefits system and modernize active labor market programs. A Change Strategy for the National Employment Service was approved in 2005. 8. However, this report argues that further reforms – both inside and outside the labor market – will be necessary for Serbia’s employment performance to significantly improve. Employment represents a complex challenge for any government because job creation is inherently a multi-sector phenomenon involving not only labor market policy but also sound macro policies, a favorable business environment, good education policies, and an effective social protection framework. Macroeconomic uncertainties, closely associated with political uncertainties, are very relevant for the country’s employment prospects. The business climate is also critical. Although Serbia and Montenegro was identified as the top reformer in the world in the recent Doing Business 2006 report, its overall ranking in terms of ease of doing business is still only 92nd out of the 155 countries included (World Bank 2005b). 9. The report specifies a set of priorities for reforms directly related to the labor market that need to accompany a more favorable economic and business environment. The analysis highlights the way forward for creating a labor market policy framework that will enable the creation of more and better jobs in Serbia. Table 1.1 summarizes the major labor market challenges, the key findings, and the proposed reforms for the short and longer terms. The policy reforms are discussed in detail in the overview to this report. Table 1.1: Summary of Main Findings and Policy Reform Options Main findings

Action (in the labor market)

1. Lack of employment growth Improve overall • Employment is climate for job decreasing; creation through: employment rate is only 51% • Unemployment is (i) Eliminating about 22% and has regressivity in labor been rising taxation system • Almost 30% of wage earners are in the informal sector • Economic environment and

Policy options (in the labor market) Short-run Longer-run

• Introduce exemption for wage income tax • Lower contribution base and raise contribution ceiling for social insurance

3

• Eventually eliminate wage income tax and introduce integrated personal income tax • Reduce labor taxes (after fiscal situation of social security plans improve)

Main findings

Action (in the labor market)

Policy options (in the labor market) Short-run Longer-run business climate are (ii) Improving • Improve capacity to • Reform severance and constraints administration of labor enforce and interpret fixed-term contract laws and legal reform • Some labor market labor law provisions in Labor policies also a Law • Simplify compensation barrier rules (iii) Raising the quality • Reform agenda for • Reform agenda for of the workforce secondary education primary, postsecondary, and “lifelong learning” 2. Labor market exclusion • 80% of unemployed Broaden access to jobs through: are long-term (>1 year) (i) Eliminating • Uncoupling registration • Shorten maximum UI • Unemployment rate incentives to remain for women is 27% from access to duration registered for extended insurance • Youth periods • Better monitoring of unemployment rate is nearly 50% job search effort by NES • Vulnerable minorities have (ii) Better access to • Encourage supply of extremely high education and training, training providers unemployment and especially for • Incentives for very low earnings vulnerable groups marginalized groups • Labor taxation reforms (as above) (iii) Improving school- • Introduce LM entry • Education reforms (as to-work transition programs for youth above) • Labor taxation reforms (as above) 3. Ineffective social protection for workers • Social Program absorbs high share of funds • NES system matches poorly with “real” unemployed • UI protects very few of the unemployed • Arrears in UI payments • Little support offered through ALMPs

Improve social protection through: (i) Finishing labor adjustment in privatization (ii) Reforms to UI system administration (iii) Build capacity for ALMPs

(iv) Focusing active and passive programming on the unemployed and vulnerable workers

• Completing Social Program • Eliminate arrears • Improve recordkeeping • Added resources for NES front-line support • Encourage private providers • Eliminating non-jobseekers from NES registry through improved monitoring and uncoupling registration from access

4

• Monitoring and evaluation • Increase resources for performance-based ALMPs • Improving efficiency, targeting, and impact of social assistance to support those ineligible for employment programs

Main findings

Action (in the labor market)

Policy options (in the labor market) Short-run Longer-run to insurance (as above)

BB.. FFrra ep po orrtt am me ew wo orrkk a annd d SSttrruuc cttuurre eo off tthhe e RRe 10. This labor market report follows a multi-sector approach to analyzing and interpreting the employment situation. The report recognizes that the challenge of job creation can only be addressed through a comprehensive strategy that has both economic and social elements and that addresses both labor supply and labor demand. The framework for the analysis considers the implications for employment of Serbia’s macroeconomic performance, the investment climate, labor market policies and institutions, education and skills, and safety net for workers. This is called the MILES framework which is the acronym summarizing these five determinants of job performance (Table 1.2). By assessing all of the factors, this analysis can determine the binding constraints to the creation of more and better jobs, and thus identify policy priorities. Table 1.2: The MILES Jobs Framework Macroeconomic conditions Investment climate

Labor market policies and institutions Education and skills Safety net for workers

Policy issues Conditions for growth Macroeconomic stability Regulatory environment Government transparency Taxes Financing Infrastructure Legal environment Labor market regulation Wage-setting Non-wage costs Basic education Higher education Training and lifelong learning Income support Active labor market policies

11. The new analytical contribution of this report involves an up-to-date, detailed empirical assessment of Serbia’s labor market trends and a policy discussion that focuses specifically on labor market reforms. In following the multi-sectoral approach, the report relies heavily on existing Bank work in the areas of macroeconomic policy, investment climate, and education and skills.4 The new analysis also benefits from ongoing work on social protection that has been prepared in tandem with this report.5 4

In particular, it draws on the latest Country Economic Memorandum for Serbia (World Bank 2004a), the latest poverty assessment (World Bank 2003), the Doing Business 2006 report (World Bank 2005b), the 2005 Business Environment and Enterprise Performance Survey (with EBRD), and the Investment Climate Assessment for Serbia (World Bank 2004b). 5 The social protection report looks specifically at social assistance and child protection. It examines program objectives and expenditures; coverage and targeting; and issues related to delivery and decentralization. See World Bank (2006b).

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12. The report is organized as follows. The next two chapters provide a quantitative analysis of the labor market based on the 2004 and 2005 Labor Force Surveys. Chapter 2 presents an overview of current conditions and examines trends since 2000. In Chapter 3, we look more deeply at a set of particularly important issues in the labor market: long-term unemployment; the labor market situation of youth; informality and flexibility; and the determination of wages. The next three chapters then apply the multisectoral MILES framework to explain the employment situation and what the barriers are to the creation of more and better jobs. Chapter 4 examines the labor market context, including the macroeconomic environment, the investment climate, and the education and skills of the workforce. In Chapter 5, we turn to factors within the labor market affecting employment – labor market regulation and labor costs. Finally, the social protection of workers is considered in Chapter 6. This includes an analysis of labor adjustment stemming from privatization and enterprise restructuring, and an assessment of active and passive labor market policies.

6

CHAPTER 2: LABOR MARKET TRENDS 13. This chapter provides an overview of labor market developments. Regrettably, data deficiencies make it difficult to accurately assess trends prior to 2004. However, the 2004 and 2005 Labor Force Surveys have greatly improved the situation since then. Even with the resumption of economic growth, employment has decreased and unemployment is high and appears to be rising. Further labor market pressures can be expected for the next few years while the process of enterprise restructuring continues. Labor market exclusion is a serious problem with many workers, once they become unemployed, remaining without work for very long periods. Youth (especially young females) have very poor employment outcomes. In fact, new entrants account for almost half of total unemployment. The less educated also experience considerable problems in the labor market. Even after the reforms of the Labor Code, flexible forms of contracting (part-time and temporary work) are almost non-existent. Flexibility is achieved through informal employment.

A A.. RRe ec ce enntt LLa ab bo orr M Ma arrkke ett D De evve ello op pm me ennttss 14. Since 2004, the Labor Force Surveys have improved the information available to analyze labor market trends. This section relies on the Labor Force Survey (LFS) for 2004 and 2005 to describe the most recent conditions in the labor market. The survey is described in Box 2.1. Since 1995, the Federal Statistical Office and, after 2003, the Republic Statistical Office (RSO), have relied on the LFS for their publications on national labor force statistics. It should be noted that the 2004-2005 estimates in this section have been based on calculations made by the World Bank using a definition of the working-age population that differs from the one used for the official statistics published by the Government, and cited in the next section on long term trends.6 Since 2004, the LFS has largely followed Eurostat methods and this has improved the quality of the country’s labor force estimates. However, international experience as well as experience in Eastern European countries still raises concerns about the reliability of labor market indicators, even when originating from well done labor force surveys. This is particularly the case in countries where informal sectors are large, statistical administrative capacity is still being developed, and where reporting might be affected by incentives associated with government programs. To cite just one example, it is hard to understand how low employment rates and such long unemployment durations (documented later) could coexist with Serbia’s relatively weak safety nets. These concerns notwithstanding, the LFS is the best source of data on the country’s labor market situation and we will make use of it throughout this report.

6

The definition used by the Statistical Offices has been 15 years and over while the World Bank has used the international standard of 15-64 years. This definition excludes those 65 years and older. In reality, the difference is not too significant since, according to 2005 LFS data, 89% of this group is not in the labor force. The remainder is almost all either self-employed (63%) or unpaid family workers (28%).

7

Box 2.1: Labor Force Survey 2004-2005 The Labor Force Survey (LFS) has been carried out on an annual basis since 1995. In 2004, the sampling, design and overall methodology were adjusted to comply with Eurostat definitions. For a comparison of the two surveys, see Box 2.5. In 2004 and 2005, the surveys covered 17,728 and 17,320 individuals respectively. The data are representative nationally, for urban and rural areas, and at the level of three macro-regions (Belgrade, Central Serbia, and Vojvodina). The sample was drawn from the 2002 Census according to a two-stage stratified random sampling design. Primary sampling units were enumerated districts and the ultimate sampling units were households. Data are collected in October of each year. The survey modules include demographics, education, migration, labor market participation, and subjective perception of welfare. The labor market module for the two years collects information on labor market status, job search, employment, occupation, sector of activity, compensation, nature of the employer, tenure, size of the firm and working time. A drawback of the survey is that no information is collected on social security registration; this has implications for our analysis of informality in the labor market since registration usually provides a very good indicator of informal wage employment. In the 2004 and 2005 LFS, all employed individuals (including employers and self-employed) in the formal and informal sectors were asked the amount of the last net payment in cash. However, due to lack of reliability on earnings data of owners and self-employed, this study only deals with earnings of wage employees. All the households surveyed in 2004 were used for the sample frame in 2005. Roughly three-fourths of the 2004 individuals were re-interviewed in the panel (12,500 individuals). Individuals who had left their original household were not followed to their new household, but replaced. This implies attrition problems, even though it should be noted that migrants do not constitute an important group in this context. Some sample replenishment was undertaken in 2005. In order for the sample for 2005 to be representative at the country and regional level, some re-weighting has been undertaken by RSO. However, changes in the population have not been accounted for. Annex Table 2.1 defines the main variables we have used in the analysis of the LFS data.

15. According to the LFS estimates, the unemployment rate is high and seems to have worsened significantly between 2004 and 2005. According to LFS data, the ILO (international standard) unemployment rate increased from 19.5% to 21.8% from October 2004 to October 2005.7 This increase is not due to increased labor force participation (which actually decreased), but to job losses as employment dropped by more than two points (Table 2.1).

7

Given that there might be concern about attrition and that labor market characteristics would most likely be correlated with this attrition we analyze the same indicators using panel data (i.e., the common pool of individuals surveyed in both years). Similar results are obtained when panel data is used (unemployment rates are 19.4% in 2004 and 21.3% in 2005).

8

Table 2.1: Labor Market Indicators, Adult Population 15-64 years, 2004-20051

Labor Force Participation Rate Employment Rate ILO Unemployment Rate Long-Term Unemployment2

2004 Male 75.1 63.1 15.9 75.7

Total 66.4 53.4 19.5 77.5

Female 57.9 44.0 24.1 79.0

Total 65.2 51.0 21.8 79.0

2005 Male 74.3 61.3 17.6 78.4

Female 56.2 40.8 27.4 79.6

1. Definitions in Appendix Table 2.1 2. Percentage of unemployed individuals unemployed for one year or more. Source: LFS 2004/05

16. Despite economic growth in the past two years, employment appears to have decreased. This labor market shares many of the typical characteristics of transition economies (see Table 2.2 below); in addition to high unemployment, job creation has been very slow. The decrease in employment in 20042005 seems to be part of a longer-term trend since 2000. In the later chapters, reasons for this poor employment performance will be considered. 17. Labor market indicators are much worse than EU averages and the employment rate is far from the European Union Lisbon target of 70%. Only slightly more than one-half of Serbia’s workingage population reports being employed. This record lags behind the better performers in Eastern Europe (e.g., Czech Republic, Slovenia, Romania) and is well behind the Lisbon standard adopted by the European Union of 70% to be achieved by 2010 (Table 2.2). Serbia’s unemployment rate is more than double the EU-15 average and among EU-10 countries, only Poland and Slovakia had unemployment rates near Serbia’s (18.8% and 18.0%, respectively). The table also compares Serbia’s labor market indicators (in 2004) with those of other SEE countries; on most dimensions, Serbia is in the middle of this group. Table 2.2: Key Labor Market Indicators, Western Balkans, 20041 Participation Rate

Employment rate

Unemployment rate

Long-term unemployment2

Albania

63.7

60.1

5.6

68.4

Bosnia and Herzegovina

59.0

46.0

22.0

n/a

Macedonia

51.2

32.0

37.2

84.5

Serbia

66.4

53.4

19.5

77.5

Montenegro

65.1

40.6

23.0

85.0

EU-15

70.8

64.8

8.1

42.4

EU-10

65.5

56.0

13.4

53.8

1. Definitions of working age vary across countries. 2. Share of unemployed with duration of 12 months or more. For Montenegro, based on registered unemployed. Sources: ILO for Macedonia. Eurostat for EU. World Bank estimates for other countries.

18. Labor market status is strongly correlated with economic well-being. The recent World Bank (2006a) Poverty Update finds a close relationship between poverty and the labor market. Using 2005 Household Budget Survey data, the analysis finds that the unemployed and the inactive (not including students or retirees) have poverty rates (15.8% and 16.6%, respectively) well above the national average

9

of 9.4%. Employees have a relatively low poverty rate (5.4%), which has been declining since 2002.8 More qualitative evidence from the LFS on subjective perceptions of individuals about their household financial situation further underscores the relationship between labor market status and economic wellbeing (see Box 2.2). Box 2.2: Labor Market Status and Subjective Perception of Household Financial Situation Labor market status is correlated not only with objective measures of economic well-being, but also with subjective perceptions. In the LFS, individuals are asked how they feel about their financial situation. The table below shows, for the working age population 15-64, simple tabulations of the answers by labor market status. Subjective Perception of Household Financial Situation

All

Employed

Unemployed

Inactive

Very good

2.7

3.3

1.0

2.5

Predominantly good

28.6

34.6

12.0

26.6

Predominantly bad

27.0

28.3

22.9

26.8

Bad Source: LFS (2005)

41.7

33.8

64.1

44.2

We can distinguish three different patterns depending on the labor market status. First, employment is associated with a better assessment of household financial situation, even though by no means does having a job guarantee a positive view. Second, unsurprisingly, being unemployed is associated with a negative perception of the financial situation. Finally, being out of the labor force does not seem to be correlated with any particular view of financial situation. The finding that non-participation is not associated with perception of a bad financial situation is consistent with what we report later in this chapter. That is, it seems that individuals reporting they are not in the labor force are really not interested in being active (i.e., they are not discouraged). In many other countries in the region, the out-of-the-labor force group often includes large numbers of hidden unemployed who want to work but are not searching primarily because they see no job opportunities. Truly unemployed workers seem to report themselves as unemployed in the Serbia LFS.

19. Participation, employment, and unemployment rates are considerably worse for women than for men. Women only represented 40% of total employment in 2005 (Table 2.3). This corresponds to a very low employment rate of 44%, way below the Lisbon target for female employment (67%). Female participation rates are also low. On the other hand, women are overrepresented in unemployment (54%), and their unemployment rate is eight points higher than for men.

8

Labor market categories are defined as: employees, self-employed (including farmers), unemployed, students, retirees, and other inactive.

10

Table 2.3: Distribution of Working Age Population, Employed, and Unemployed by Demographic Characteristics, 2005

Men Women Age 15-24 25-54 55-64 Education Less than Elementary Elementary Vocational Secondary College or More Region Belgrade Central Serbia (without Belgrade) Vojvodina Urban1 Rural

Share in Pop 15-64 49.3 50.2

Share in Unemployment 45.6 54.3

Share in Employment 58.3 40.1

19.2 62.1 18.6

23.1 71.6 5.3

7.0 80.0 13.0

7.4 24.1 20.2 35.3 13.0

4.0 16.9 27.7 40.4 11.0

5.4 17.2 22.7 36.5 18.2

21.3 50.9 27.8

19.5 54.6 25.9

21.3 50.4 28.4

58.7 41.4

60.1 39.9

57.0 43.0

1. RSO rural/urban classification in 2004 and 2005 derives from the Census 2002. Source: LFS (2005)

20. Labor market outcomes are very poor for young people. Serbia has extremely low youth employment rates (19%) and only 36% of people 15-24 years of age participated in the labor market in 2005. Labor market problems are especially pressing for young women. Table 2.4: Labor Market Indicators by Age Groups, 2005 Total 65.2 51.0 21.8 79.0

Labor Force Participation Rates Employment Rates Unemployment Rates (ILO definition) Long-term Unemployment

15-24 35.8 18.7 47.7 67.8

25-54 82.0 65.6 20.0 82.5

55-64 39.5 35.4 10.3 81.6

Source: LFS (2005)

21. Although youth unemployment rates tend to be high in most countries, they are extremely high in Serbia. The unemployment rate for youth in 2005 was 48%. Furthermore, new entrants account for almost half of total unemployment, and 78% of the youth unemployed are new entrants. Chapter 3 analyzes this problem in more depth and sheds light on the links between youth unemployment and education outcomes. 22. Better-educated workers have more favorable employment outcomes; however, even those with postsecondary schooling have fairly high unemployment rates. Education is generally associated with

11

better outcomes. Individuals with college education or higher have the highest labor force participation and employment rates and the lowest unemployment rates. However, their unemployment rate is still fairly high at 14.4% in 2005. Workers with elementary education or less have the lowest participation and employment rates and among those unemployed, an extremely high percentage has been looking for a job for a year or more. Unemployment is actually highest for those with completed vocational or general secondary education. Table 2.5: Labor Market Indicators by Level of Education Completed, 2005 Less than Elementary

Elementary

Vocational

Secondary

College or More

Labor Force Participation Rates

45.6

46.3

76.7

69.1

83.2

Employment Rates

37.8

36.3

57.2

52.8

71.5

Unemployment Rates

17.2

21.6

25.4

23.6

14.4

Long-term Unemployment

83.1

86.9

80.9

76.4

70.6

Source: LFS (2005)

23. Labor market exclusion is a serious problem; many workers, once they become unemployed, remain without work for very long periods. The majority of unemployed workers remain unemployed for at least one year -- this share of long-term unemployment was 79% in 2005. For certain groups, including the Roma communities, exclusion from employment opportunities is very high (see Box 2.3). As shown in Table 2.2, Serbia shares the problem of very high and long-duration unemployment with the other FYR countries. The next chapter analyzes the issue of long-term unemployment in Serbia in more depth. Box 2.3: Employment in the Roma Communities There are several marginalized groups in Serbian society, as well as in the labor market, including internally displaced persons (IDPs), refugees, and the Roma community. Unfortunately, data from the labor force surveys do not allow identification of IDPs or refugees; however, the Roma community can be identified in the LFS.1 The Roma community has a very poor labor market situation. In 2005, LFS data indicated that 53% of working-age adults in the Roma community were unemployed. Furthermore, 89% of this group reported they had been unemployed for more than a year. Of those who are employed, 48% work in informal jobs. Education is one of the key problems. Many Roma face difficulty in adapting to the demands of the labor market because they lack required educational and vocational qualifications and expertise. The educational attainment level in the Roma is very low: 89% of those aged 15–24 and 82% aged 25–55 have not gone beyond primary school. In addition to the education deficit, Roma also face discrimination in gaining access to many employment opportunities. 1

According to the 2002 Census, Roma constituted 1.4% of the population (over 108,000 individuals), while estimates by NGOs and international organizations place the Roma population at between 4-6% (300-460,000 individuals) (Bodewig and Sethi, 2005). In the LFS, Roma constitute about 2% of the sample.

24. Geographical data suggest little regional variation in participation, employment, and unemployment rates. Table 2.6 shows labor market indicators by urban-rural and major regional groupings. Unemployment rates are relatively similar between urban and rural areas, and regional differences are not significant either. Participation and employment rates are slightly worse in urban

12

areas. The overall geographical similarities are somewhat surprising given the observed labor market slack in some parts of the country. As well, previous reports based on other survey evidence shows differences (e.g., World Bank 2004a). Finer geographical disaggregation might show more insightful results; however, the LFS is not representative at a lower level. If regional employment and unemployment indicators are, in fact, similar, it may be due to wages that respond to labor demand. We will see in Chapter 5 that significant wage regional differentials do exist. Table 2.6: Labor Market Indicators by Geographical Groupings, 2005

Labor Force Participation Rates Employment Rates Unemployment Rates Long-term Unemployment

Urban

Rural

Belgrade

Central Serbia 1

Vojvodina

64.2

66.7

63.8

65.8

65.1

49.6 22.7 76.9

52.9 20.5 82.2

50.8 20.3 71.8

50.5 23.2 83.9

51.9 20.2 74.0

1. Without Belgrade Source: LFS (2005)

25. Total employment according to the 2005 LFS amounted to close to 2.6 million, of which wage employees comprised 75%. This employment figure encompasses all forms of work, including those in the formal and informal sectors. In 2005, wage-earners represented 75% of all employment (Figure 2.1). Although it is difficult to get comparable statistics across countries, this is a high share. The proportion of self-employed is low, at 14% and owners of big and small firms account for 4%. See Annex Table 2.1 for definitions of these different categories of employment. Figure 2.1: Distribution of Employment by Status, Total Economy, 2005 Owner 4%

Household Help 7%

Self-Employed 14%

Employee 75%

Source: LFS (2005)

26. Self-employment accounts for one of the lowest shares of employment among CEE and SEE countries. The most internationally comparable indicator of the role of micro-enterprises and entrepreneurs in creating employment is the share of non-agricultural self-employed in total nonagricultural employment. This share is only about 7.5% in Serbia, compared to 15% in Albania, over 10% in Slovenia, Hungary, Poland, and the Czech Republic, and about 14% in the OECD and EU-15. This

13

finding highlights the slow progress in entrepreneurial activity to this point compared to the more advanced transition economies in the region. 27. Almost half of all of the jobs are still held outside the private sector. The share of private sector employment in Serbia is still small; only 57% of total employment belongs to the private sector. The share in state-owned enterprises is 25% and 13% are in socially-owned enterprises, with the remaining 5% in mixed enterprises, cooperatives, or enterprises of unknown ownership. 28. Furthermore, less than one-half of wage-earners are in the private sector. Wage-earners work mostly in the public sector, with 50% employed in SOEs and socially-owned enterprises in 2005 (Table 2.7). This is larger than the private-sector share (44%). Note that wage employment in services is still heavily oriented to the state- and socially-owned sectors, with only 41% in the private sector. While there is still more overall wage employment outside the private sector than within, the 2004 and 2005 LFS data suggests that the transition is happening quickly. The private-sector share grew substantially in all sectors and about 5 percentage points overall. In view of the privatization and restructuring program plus downsizing of the government administration, this trend is likely to continue.9 Table 2.7: Employment by Ownership and Industry, 2004-2005 Private Agriculture Manufacture Construction Services Total

2004 64.4 42.0 52.8 38.3 39

2005 68.1 51.5 68.9 41.1 44.3

State Owned Enterprises1 2004 2005 11.4 6.9 16.1 15.1 13.4 11.1 37.5 39.8 33 33.4

Socially Owned Enterprises 2004 2005 16.3 15.4 31.7 24.1 23.8 16.3 19.2 15.3 21.6 16.9

Others 2004 8.0 10.3 10.0 5.0 6.5

2005 9.7 9.3 3.8 3.8 5.4

Total 2004 100 100 100 100 100

2005 100 100 100 100 100

1. Includes government employees Source: LFS 2004-5

29. Wage earners in the private sector are less educated than in other sectors. Figure 2.2 shows that wage earners in the private sector are more likely to be vocational school graduates or have only elementary education (or less) and less likely to be college graduates than workers in the non-private sector. Also, private sector employees tend to be younger.

9

Given the substantial changes in one year, this analysis was undertaken only with the panel component of the 2004/5 LFS to see what happened to this constant pool of people. The results are similar. Private sector employment increased from 38 to 41%, socially-owned enterprise employment decreased from 22 to 18%. SOE employment increased by 2 percentage points according to the panel analysis, and only by 0.5% using cross-sectional data.

14

Figure 2.2: Distribution of Wage-earners by Ownership According to Demographic Characteristics, 2005 90 80 Private Non-private

70 60 50 40 30 20 10

Age15-2425-5455-64 Region Gender FemaleMale BelgradeVojvodina Education Primary VocationalUniversity Central Serbia Less than Primary General Secondary

Source: LFS (2005)

30. Even after the reforms to the Labor Code in 2001 and 2005, flexible forms of employment contracting are still almost non-existent. Only around 4% of the employed usually work less than 30 hours a week (i.e., part-time), with a similar number holding temporary jobs. There are at least two possible hypotheses on why part-time and temporary jobs are not widespread in Serbia, despite labor laws that now permit them. First, before the transition in Serbia, flexible forms of employment were nonexistent. Therefore, it is plausible that, given the late process of transition, there is still an entrenched tradition of full-time work in the country. Second, given low wages in the country, employees cannot afford to work part-time since associated costs in relation to earnings are too high (transport, meals, clothes, children care, etc.). It is notable that Serbia has very low part-time employment rates among women (Table 2.8). Table 2.8: Incidence and Composition of Part-time Employment, 20041

Bulgaria Czech Republic Hungary Poland Romania Serbia Slovakia Turkey EU-15

Part-Time employment as a proportion of employment Total Men Women 0.7 0.4 1.0 3.1 1.5 5.2 3.6 2.2 5.1 12.0 7.5 17.5 16.4 14.3 18.6 4.4 3.4 5.8 2.7 1.3 4.5 6.6 3.7 14.8 17.4 6.6 31.2

Women’s share in parttime employment 66.5 72.9 67.7 65.7 53.6 53.0 73.0 59.4 78.6

1. Part-Timers are those individuals who usually work less than 30 hours a week in their main job (not only wage earners) Source: OECD (2005), LFS (2005) for Serbia and ILO (KILM 4th edition) for Bulgaria, Romania, and Turkey.

15

31. The lack of flexibility is also evident in the hours worked, with almost all workers working 40 or more hours weekly. On average, Serbian workers work long hours compared to many other countries. The mean number of hours worked in a week is 44 for wage earners and 45 for all employed individuals. Evidence from other European countries shows significantly lower mean weekly hours of work.10 Table 2.9 shows the distribution of hours worked in a week. Most workers are found in the 40-49 hour bracket. When analyzing men and women separately, we find a higher tendency for men to work long hours. These data on hours worked suggest that employers in Serbia meet greater demand through longer hours, not necessarily with new hiring, which is consistent with the relatively low rates of job creation. Table 2.9: Weekly Hours Worked, All Employees and Wage-earners, 2005 Weekly Hours Worked 10 or less 20 -29 30 -39 40 -49 50 -59 60 or more Total

Percentage All employed 1.1 2.2 3.8 54.2 21.5 17.2 100.0

Wage-earners 0.4 1.0 2.0 63.6 21.9 11.1 100.0

Source: LFS (2005)

32. Flexibility is essentially achieved through informal employment. Without much flexibility evident through formal contracting, it seems that the informal sector provides whatever flexibility exists in the labor market. We analyze informal employment in the next chapter. In this analysis, informality is defined as including (i) self-employed individuals who have not completed postsecondary education; (ii) household helpers; (iii) wage earners in firms with less than 10 employees; and (iv) owners of firms with less than 10 employees. According to that definition, 43% for all individuals employed, and 27% of wage-earners, were employed informally in 2005.11

BB.. LLo onng g--tte errm m TTrre ennd dss 33. Understanding labor market trends requires good data; unfortunately, there are many issues regarding the long-term data available in Serbia. It is difficult to analyze long-term trends – even since the post-Milosevic transition -- because of a lack of comparable (and reliable) data over time. First, although the LFS data have been available since 1995, the survey has had quality problems that have only improved beginning in 2004 when the methodology was brought into line with Eurostat definitions. This change in methodology implies a break in the long-term trend – results from before 2004 cannot be properly compared with results since. Second, even though LSMS data are of high quality, they are only available for two years (2002-2003) and the World Bank (2004a) has already analyzed this panel extensively. Third, there are two sources of registered data: employment numbers provided by the RSO Group of Employment Statistics and unemployment figures from the NES. As we explain below, both 10

According to LABORSTA latest data, mean weekly hours of work for different European countries are as follows: Lithuania 37.4, Latvia 39.6, Bulgaria 33, Czech Republic 39.6, Poland 39.8, Romania 39.4, Slovenia 36.5. Only Turkey has higher number of hours a week worked (49.3). 11 Not including farmers.

16

sources might present only a partial and, in some ways, distorted picture of the labor market situation (see Box 2.4). RSO numbers only account for registered employment in the economy and NES unemployment data might potentially have sample problems given the many incentives for individuals to register as unemployed, even when not looking for jobs. Box 2.4: General Issues in Measuring Unemployment (and LM Activity) with Registration Data Simply put, “unemployment” should apply to working-age people who are not working (either formally or informally) but would like to. Most countries without reliable and regular household data surveys have had to rely on labor office registrations to measure unemployment. This is a very common occurrence in developing countries and some transition countries. There are some countries, however, that continue to rely on registrations as the primary measure of unemployment even when unemployment can be accurately calculated from household surveys. For different reasons, registered unemployment may either overestimate or underestimate actual unemployment. This is because workers tend to make decisions on whether to register on the basis of how they perceive the benefits relative to the costs. Registered unemployment rates can be lower than the “real” level of unemployment in some situations. For example, in some countries, workers who are not working and seeking jobs may not register if they see no advantage (i.e., unemployment benefits may not be available or are not being paid; other social benefits may not be tied to registration; active labor market programs may either not be available or may not be seen as useful). On the other hand, people may register as “unemployed” with the labor bureau in order to become eligible for benefits unrelated to the labor market, even if they are not truly without work or looking for work. This is the case for Serbia, where many “registered unemployed” may not actually be searching for work – they may be out of the labor force or they may be employed in the informal sector – but register in order to get certain benefits, such as health insurance e. Where enforcement capacity is weak or the government does not want to deny benefits, these workers will be counted as unemployed even if they actually are not. In this case, the registered unemployment rate will be higher than the true (unobserved) rate. Survey-based unemployment rates that follow international standards should accurately capture true unemployment – i.e., those working-age adults who are not working and are actively seeking work. It should be noted that that, under proper methodologies, work in these surveys is defined as covering both formal- and informal-sector activities. In the annex to this chapter, the definitions of “unemployment” used with the LFS are described.

34. In this section, we try to describe trends during this decade using available survey and administrative registration data. Figure 2.3 presents labor market indicators from 2000 until 2005 using both the administrative and LFS data. These statistics are only available for those 15 and over. There have been earlier reviews of long-term trends in Serbia (World Bank 2003, 2004a; Arandarenko and Paunovic 2005; and Krstić, 2003) and this section builds on that work.

17

Figure 2.3: Labor Market Indicators for Ages 15 and Over (thousands), based on LFS and Registered Data, 2000-2005 3500 3000 2500 2000 LFS Employed LFS Unemployed NES Unemployed Registered Employed

1500 1000 500

20 05

20 04

20 03

20 02

20 01

20 00

0

Source: Enterprise and NES data, and own calculations based on RSO communications.

35. Even though comparable data over time do not exist, there is agreement from earlier reports that participation and employment rates have been stable or slightly decreasing, and that unemployment rates were increasing slightly in the period 2000-2003. While trends might be similar, levels are surprisingly different. For instance, Arandarenko and Paunovic (2005) present five different unemployment rates for 2002, ranging from 26.3% according to the NES registered data to 14.5-15.4% according to the LFS (depending on whether one includes “temporary active individuals” as employed or unemployed).12 36. The LFS data seem to confirm this pattern of an increase in unemployment and a decrease in employment. According to the LFS, employment decreased slightly until 2003. Unemployment had been rising and reached just above 500,000 individuals in 2003 for the 15+ working age population. 37. From 2000 to 2003, there were relatively smooth yearly changes in the LFS indicators; however, a discontinuity appears in 2004, especially noticeable in the jump in the unemployment numbers, and therefore in labor force participation. Most likely, this is a result of changes in the LFS methodology introduced in 2004 to provide a better count of the unemployed. (For a detailed explanation of the methodological changes adopted by the Republic Statistical Office, refer to Box 2.5) Given that the new sampling framework is now based on the 2002 Census, the total population 15 and over represents a discontinuity in 2004 as well (see Annex Tables 2.2 and 2.3).

12

These rates are for those aged 15-64.

18

Box 2.5: Methodology: LFS 1995-2003 vs. LFS 2004-2005 The Labor Force Survey (LFS) has been conducted continuously since 1995 in Serbia. From 1995 to 2003, the LFS framework for sample selection had been the 1991 Census and the sample size was around 3,900 households. As expressed in previous World Bank reports (World Bank 2003 and 2004a), there is concern about these data because questionnaires, definitions, and training of interviewers did not follow international guidelines. For instance, the unemployed were defined as those who reported not having worked in the last month but having looked for a job (availability to start working in the next 2 weeks was not assessed). The definition of employment was based on a reference month instead of the usual reference week. The definition of employment used remains unclear, but it is likely to include individuals who, even though they may have worked in the reference month, would not be considered employed according to the ILO definition. Finally, LFS publications before 2004 would divide employment status into: paid employed, helpers, farmers, temporarily active, other active. These categories are impossible to match with the new ones: employers, self-employed, employees, and helpers. (See Appendix Table 2.3) The new LFS 2004 is now conducted by the Republic Statistical Office and the framework for sample selection is the 2002 Census. All research tools were completely revised and fully adjusted to the last recommendations and definitions of ILO and Eurostat. As a result, estimates of labor market indicators are now consistent with international standards. In this new survey, active search for employment and availability to start working are properly assessed when accounting for the unemployed, and employment definitions are properly based on the internationally comparable definitions. According to the ILO, employment is defined as individuals who worked at least one hour for pay in the reference week, and those persons temporarily not at work because of illness or injury, holiday or vacation, strike or lockout, educational or training leave, maternity or parental leave, reduction in economic activity, temporary disorganisation or suspension of work due to such reasons as bad weather, mechanical or electrical breakdown, or shortage of raw materials or fuels, or other temporary absence with or without leave should be considered as in paid employment provided they had a formal job attachment.

38. Even though there appears to be a smooth transition in LFS employment numbers from 2003 to 2004, this is clearly just a coincidence. The number of employees in 2003 according to the LFS was 2.919 million and in 2004, 2.931 million. However, this ostensibly smooth transition cannot be reflecting the real evolution of employment. As summarized in Box 2.4, there have been significant changes in methodology which imply that these seemingly similar numbers are not measuring the same things. 39. Clearly, administrative data underestimates employment given that it does not consider farmers, part-time workers, and informal workers. There is a sharp contrast between LFS and administrative data indicators (Figure 2.3). Employment is much lower according to registration data. In 2005, while the LFS data estimates employment at 2.7 million (15 years and over), the registration data figure is 2.1 million. 40. On the other hand, the registered unemployment figures are grossly overestimating unemployment given the non-work incentives to register with the NES, especially to receive health insurance. According to administrative data (NES), the unemployment rate in 2005 was 32.4% compared to the 22% estimate based on the LFS.13 The larger number of registered unemployed compared to survey unemployed (about 1 million versus 700,000) can be attributed to incentives to register as unemployed at the NES, especially to receive health insurance. 41. Furthermore, there is a sizeable group of individuals registered with the NES as unemployed, who are working according to the ILO definition of employment. Using information on registration included in the LFS, it is possible to compare registration status with actual labor market activity (Table 13

LFS unemployment rate using ILO definition for working age population 15-64.

19

2.10). First, 125,736 of the true (survey) unemployed were not registered with NES. On the other hand, 318,678 of the registered unemployed had jobs in the informal sector; 263,619 were inactive according to ILO definitions (see Annex Table 2.1).14 In Chapter 3, we make use of the group of individuals who, while registered with the NES as unemployed, are employed according to ILO definitions. Since this group cannot be working in registered jobs, they offer clues on the characteristics of those informally employed. Table 2.10: ILO (LFS) and Registered Unemployment, 2005 ILO unemployed, not registered

125,736

Registered unemployed and ILO unemployed

593,037

Registered unemployed, ILO employed

318,678

Registered unemployed, ILO inactive

263,619

Source: LFS 2005

C C.. LLo ennd dss oo okkiinng g FFo orrw wa arrd d –– D De em mo og grra ap phhiic c TTrre 42. The population is aging but Serbia is in a relatively better position than the European average. Population growth rates have been significant for the 65-and-over group and projections (for Serbia and Montenegro) show that this trend will continue for the next three decades (Table 2.11). By the second quarter of the century, the demographic profile will look considerably older than it does now. However, in the shorter term, the overall share of those over 65 will remain relatively small (i.e., less than 15% over the next decade). At the other end, the under-15 group, which has been declining since 1995, will continue to shrink in both absolute terms and as a share of the overall population. Still, Serbia not aging as quickly as many other countries in Europe.15

14

Individuals have incentives to register mainly because of pension and health insurance benefits, but not because it is necessary to register to collect unemployment benefits in cash. Only a small percent of those registered receive the cash benefit. 15 In 2005, Serbia and Montenegro’s median age was 36.5, compared to 39.0 for Europe. Projections (UN 2004, medium variant) are 38.8 and 41.8, respectively, in 2015.

20

Table 2.11: Demographic Trends for Serbia and Montenegro, 1985-2050 1985 015 1564 65+

1990

1995

2000

2005

2010 2015 2020 2025 5-year growth rates1

2030

2035

2040

2045

2050

0.5

-2.7

-9

-8.7

-5.8

-3

-2.4

-2.2

-2.3

-2.6

-2.6

-2.5

-2.6

2.7

3.3

0.3

0.6

1.3

-1.2

-3.1

-2.3

-2.2

-2.5

-3.2

-3.9

-4.5

14.1

23.6

15.3

7.1

-0.3

5.5

11.3

5.7

3.7

3.3

4

5

5.1

Shares 015 1564 65+

24

23.4

21.9

20

18.3

17.3

16.9

16.6

16.4

16.2

16

15.8

15.7

15.6

67.4

67.1

66.7

66.9

67.6

68.6

68.2

66.7

65.7

65.1

64.4

63.4

62

60.5

8.6

9.5

11.4

13.1

14.1

14.1

14.9

16.8

17.9

18.8

19.7

20.8

22.2

23.9

1. Growth rates are for five-year intervals, e.g., 1990 stands for the growth rate between 1985 and 1990 Source: UN projections for Serbia and Montenegro. http://esa.un.org/undp/

43. Serbia’s working age population will start decreasing both in absolute terms and as a share of the total population after 2010. The dependency ratio which measures the proportion of the population outside the working age (i.e., 0-14 and 65 and over) has been declining, but this trend will reverse in 2010 because of the rapid increase in older people. This means that the working-age population will decrease in relative terms; it will also decline in absolute terms -- between 2005 and 2020, the population in the age group 15-64 will drop by more than 210,000. 44. The decrease in the working-age population can be compensated by increases in participation rates. Aging has the potential to most negatively affect countries with low participation rates, not only among older people but also for the adult population as a whole (World Bank 2006c, forthcoming). Currently, as we have seen, the participation rate in Serbia is only about 65% and among those between 55 and 64, it is under 40%. So over the next decade, it will be important to raise these rates in order to adjust to the demographic trends.

21

Annex Annex Table 2.1: LFS Main Labor Market Variables and Definitions Inactive Owner Unemployed ILO Definition Unemployed Relaxed Definition Self-Employed Employee Household helper Formal worker Definition 1 Formal worker Definition 2 Formal worker Definition 3 Formal worker Definition 4 Formal worker Definition 5 Formal Worker Definition 6 Full-time worker Working Age Population Wage: Definition

Not working in the last seven days + NOT looking for a job in the last four weeks + NOT willing to take up a job in the next two weeks Owner/co-owner of a company/institution, shop, farm, doctor’s office, lawyer’s office, etc Not working in the last seven days + looking for a job in the last four weeks + willing to take up a job in the next two weeks Not working in the last seven days + willing to take up a job in the next two weeks (whether looking for a job or not) Independent worker with no employees Employee Unpaid family worker Employee in a public or socially owned enterprise, or employee in a medium or large enterprise (size 50 or more) Self-employed with university education or more Owner with fifty or more employees Same as Definition 1, but more relaxed in the size of firm for employees and owners. Employee in a public or socially owned enterprise, or employee in an enterprise size 10 or larger. Same as Definition 1, but more relaxed in the size of firm for employees and owners. Employee in a public or socially owned enterprise, or employee in an enterprise size 5 or larger. Same as Definition 1, but different for employees. Employee in a public or socially owned enterprise, or employee with an openended or fixed-term contract Only employees for whom contributions to the Employee Pension Fund are currently made. Only employees, excluding farmers (RSO registered employment) Individuals working 30 or more hours a week in their main occupation (Eurostat definition). Individuals aged 15-64 How much was your last net payment for work last month? Values (Dinars) deflated to 2005 according to the national average Consumer Price Index.

Annex Table 2.2: FSO/RSO Labor Market Indicators (000s) for Working Age Population 15+

Population 15+ Active Employed Unemployed

2000

2001

2002

2003

2004

2005

6173 3519 3094 426

6177 3538 3106 433

6169 3460 3000 460

6138 3419 2919 500

6485 3596 2931 665

6456 3453 2733 720

Source: Staff calculations using RSO communications

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Annex Table 2.3: LFS Employment Categories According to Two Different Methodologies LFS 2003 6,138

LFS 2004 6,485

Census 1991

Census 2002

Total employed

2,919

2,931

Paid employed1 Employees Self-employed Owners Helpers Farmers Temporarily active2 Other active

1,972

Total population Sampling Framework

177 501 243 26

2,059 514 145 213

1. Paid employed persons include employees, self-employed, and owners in 2003 2. Temporarily active population comprises persons who, during the reference period, performed some works for money, but which were not a permanent and regular source of income.

23

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CHAPTER 3: SPECIFIC ISSUES IN THE LABOR MARKET 45. This chapter looks at four specific issues in the labor market: long-term unemployment, wage determination, informality, and youth employment. Unemployment on its own is a very worrying phenomenon but it is especially so when such a high proportion is of a very long term. Wage differentials by gender, education, region, and ownership suggest segmentations in the labor market. In addition, the informal sector is fairly large and seems to be increasing. Finally, youth in Serbia show extremely high unemployment rates, as well as low employment rates.

A A.. LLo onng g--tte errm mU Unne em mp pllo oyym me enntt 46. Overall, Serbia not only experiences high unemployment, but most of it is of a long-term nature. According to the 2005 LFS, 79% of the unemployed aged 15 to 64 had been unemployed for a year or more, a situation which has largely prevailed over the last decade (World Bank 2004a). Furthermore, in view of the ongoing privatization and restructuring program plus downsizing of the government administration, this trend is likely to continue. 47. Serbia shares the problem of long-term unemployment with several SEE countries; however, it is in a much more difficult situation than more advanced European countries. Table 2.2 in Chapter 2 shows that much of the unemployment in the SEE region is long-term in nature. Even though Serbia seems to be in a slightly better situation than Macedonia and Montenegro, EU-10’s proportion of longterm unemployment is almost half of that of Serbia. Table 3.1 highlights both the significantly higher incidence and rate of long-term unemployment in Serbia compared to other more advanced European countries. Table 3.1: Long-term Unemployment: Rates and Incidence, 20051 Long-term unemployment rate (%)2 8.3 8.6 3.9 2.5 9.8 17.3 10.7 3.9 2.5

Incidence of long-term unemployment (%)3 55.3 56.4 49.9 42.2 49.7 79.0 61.1 56.5 24.4

Bulgaria Croatia Czech Republic Hungary Poland Serbia Slovakia Slovenia Turkey 1. Proportion of long-term unemployed among individuals in the labor force. 2. Percentage of ILO unemployed looking for jobs for twelve months or more. Source: LFS (2005) for Serbia, KILM 4th edition for the rest

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48. The pool of long-term unemployed is composed mostly of women, the middle aged, the poorly educated, and those in Central Serbia (without Belgrade) and urban areas. Table 3.2 shows shares of long-term unemployment by demographic characteristics. According to these tabulations, women, the prime-aged (25-44), poorly-educated individuals, those living in Central Serbia and in urban areas represent a larger share in long-term unemployment than do the other groups. 49. Surprisingly, the probability of being unemployed for over a year does not seem to be associated with personal characteristics. Even though women are much more likely to be unemployed than men, their long-term unemployment incidence is similar (Table 3.2). Also, for the age groups 25-44, 45-54, and 55-64 and among those with secondary education or less, the proportion of long-term unemployment is almost the same. Only the geographical variables seem relevant in determining the probability of being unemployed for more than a year: the proportion of long-term unemployment in Central Serbia exceeds that in Belgrade or Vojvodina, and those in rural areas spend more time looking for jobs than those in urban areas. This finding can be explained mainly by heavier restructuring process in Central Serbia compared to the other regions. Table 3.2: Long-term Unemployment Rates and Duration in Serbia, 2005 Average Duration in Months Median Mean Total

Share in Long-term Unemployment

Incidence of Long-term Unemployment

48

66.3

100

79.0

Female

48

70.8

54.6

79.6

Male

48

60.8

45.4

78.4

15-24

24

29.9

20.2

67.8

25-44

60

74.8

57.1

82.2

45-54

48

74.6

17.1

83.1

55-65

48

84.7

5.6

81.6

Less than Primary

72

114.7

4.3

83.1

Primary

60

76.1

18.6

86.9

Vocational

48

65.4

28.3

80.9

General Secondary

48

60.1

39

76.4

University

36

51.2

9.8

70.6

36

53.2

17.7

71.8

48

69.4

58.1

84.0

Vojvodina

48

68

24.2

74.1

Rural

60

71.9

41.5

82.2

Urban

48

61.9

58.5

76.9

Gender

Age

Education

Region Belgrade Central Serbia

2

1. Not including Belgrade. Source: LFS 2005

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50. A conditional analysis, controlling for other factors, confirms these findings. A probit regression shows that those with college education and young people are less likely to be long-term unemployed than the other education and age groups, respectively. Individuals in urban areas are equally likely to be long-term unemployed as those in rural areas, but workers in Central Serbia have a significantly higher probability of long-term unemployment than those in Vojvodina or Belgrade. 51. Since only a small proportion of the unemployed is eligible for unemployment benefits, overall effects of UI on the level and duration of unemployment are not strong. Chapter 6 shows that unemployment insurance benefits actually cover only a very small percentage of unemployed workers in Serbia. The LFS data show that the long-term unemployed are more likely to register with the NES than those who are short-term unemployed (85% against 73%).16 52. The long-term unemployed are only slightly more likely to perceive economic hardship than the rest of the unemployed. According to individuals’ own assessment of the financial situation in their households, those who have been looking for jobs for a year or more report only a slightly more negative view about their financial situation than the “short-term” unemployed (Table 3.3). Table 3.3: Subjective Perception of Household Financial Situation Unemployed >=1 year