Combining Flexibility with Security for Workers

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Combining Flexibility with Security for Workers

• Raymond Torres
• Director of International Institute for Labour
  Studies, ILO
• CICERO FOUNDATION
• 12 October 2007

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Outline of presentation

• 2 lessons from experiences of how to combine
  flexibility with security
• 3 unanswered questions

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How to reconcile job creation with social
protection?

• Globalisation requires firms dynamism and
  workers mobility
• Welfare benefits often seen as an obstacle to
  adjustment
• and labour regulations as a rigidity
• But this is not necessarily the case why?

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1) Welfare benefits may be designed in a manner
that promotes participation

• High benefit levels reduce work incentives, but
  this can be offset by well-designed activation
  policies
• Activation should be part of a mutual
  obligations approach
• Effective (re-)employment services are essential
• Tax-benefit reform can help ensure that work pays
  versus benefit receipt
• This may be done through well-designed in-work
  benefits combined with moderate minimum wages

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2) Employment regulations can be designed in a
manner which provides flexicurity

• No clear links with aggregate unemployment,
  though overly-strict EPL may affect adjustment to
  shocks and duration of unemployment
• Much depends on the design of regulations

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EPL index, 2003 (based on Employment Outlook
2004)
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Impact of EPL theory

• Positive
• EPL can make firms pay for layoff decisions
  (reduces free-riding)
• EPL protects against discrimination, abuse
  (good for workers commitment to firms, specific
  human capital)
• Negative
• EPL makes hiring and firing more expensive,
  affecting job creation
• It may reduce mobility, thus rigidify labour
  markets

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Impact of EPL practice

• Design of EPL matters a lot -key role of
• protection of temporary versus permanent
  contracts gt too much a difference leads to
  duality and affects productivity
• predictability of dismissal costs and simplicity
  of procedures gt reduced uncertainty
• portability of benefits gt mobility

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There are ways to combining flexibility with
security

• Reducing judicial uncertainty
• limit the role of judges in deciding whether a
  layoff is economically justified or not (Dutch
  court system)
• ensure speedy and simple procedures
• avoid risk of reinstatement of the worker
• and yet penalise layoff in case of discrimination
  

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How to combine flexibility with security?
(contd)

• Making severance pay more predictable to firms
  (Austria individual savings accounts)
• Reasonable and perfectly predictable severance
  pay growing with seniority, whatever the contract
  
• Reasonable trial period
• Portability of severance pay key to facilitate
  mobility

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How to combine flexibility with security?
(contd)

• Experience rating of unemployment benefits (US)
• Firms fund the unemployment benefit system partly
  depending on their layoff record
• In Europe, needs to be examined with caution
  given the cost of benefits and presence of
  temporary contracts

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How to combine flexibility with security?
(contd) d) Danish flexicurity

• Moderate EPL
• High benefit levels reduce work incentives, but
  this can be offset by well-designed activation
  policies
• Activation should be part of a mutual
  obligations approach
• Effective (re-)employment services are essential
• Extending mutual obligations to recipients of
  non-employment benefits (avoid mis-use of
  benefits, activation, family-friendly policy)

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No single road to Rome, but not every road leads
to it!
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Unanswered questions 1) how to fund flexicurity?

• Problem of overall costs and their effects on the
  economy
• Are work incentives affected?
• Does this lead to emigration of the talented?
• Problem of structure of financing
• How to tax labour vis-à-vis capital?
• How to reduce the risk that domestic producers
  are penalised vis-à-vis foreign producers?

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Unanswered 2) How do deal with rising sickness
and disability incidence?
Source EULFS.
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A significant proportion of working-age
individuals move into disability benefits every
year New disability benefit claimants, per
thousand of working age population
Source National insurance authorities NIA
(Norway), IV (Switzerland) and ZUS (Poland).
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And few people on disability benefits go back to
work
of disability benefit recipients that recover
and leave these benefits
Source National Labour Force Surveys.
Note Data refer to 2004 for Norway, Poland and
Switzerland and 1999 for the other countries
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Trend rise in spending on disability and sickness

Spending on incapacity benefits ( of GDP)
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Why is a change needed?

• Situation will become economically unsustainable
• Trend rise in sickness and disability spending is
  problematic
• More is spent on these benefits than on education
• Labour shortages will intensify with ageing
• and is also socially unfair
• 27 of inactive disabled people would like to
  work (and most of them had worked in the past)
• If nothing changes, benefits of disabled people
  who cant work will have to be cut

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Unanwered 3) older workers

• Obstacles to employment of older workers need to
  be addressed
• But
• How to change work practices (mandatory
  retirement, mentality of older workers
  themselves, etc.)
• How to take into account long careers, tough
  jobs, differences in life expectancy
• How to change mentality of public employment
  services