Agnieszka
Ziomek
Economic
Policy and Development Planning Chair
Poznan
University of Economics
Poznan,
Poland
Formal and informal institutions on the labor market in Poland
Introduction
Economic
literature suggests two methods of economy transition process. It is the method
presented by gradualist economists and the method of "shock therapy"
supporters. The first one was applied to Chinese economy transition. The latter
is based on "The Washington consensus" and was applied to the
transition of Polish economy. Despite the fact that transition reforms were
applied to several economies in the world, one model of transition isn’t known yet. However,
the general interpretation of complex transition process can be proposed in the
following order: the beginning - to protect society against robbery, State will
legislate property laws and formal institutions. As the next step to create the
base of effectiveness and completeness of contracts, State will introduce the
reforms of liberalisation of prices and trade, opening possibility to evolusion
of internal and external competition. The State will put serious effort into
adjustment of monetary policy, appropriate for the market economy and
development of capital market. The intense demand for the regulation leads to the
existance of productive economy. State turned out to be the supplier (sometimes
in too wide a scale) of health, education, insurance services. The second
aspect of regulation creation is too strong institution development, mistakes
in public regulation sphere, and the lack of proper regulations, as well. This
situation often leads to interception of advantages by organisation being the
subject of such a regulation. The period since fundamental reforms in Poland
were undertaken is the period when the positive and negative results are
visible. The implemented "shock therapy" in Poland brought quick (positive,
and some negative[1])
results.
The
transition period in accordance with the gradual or “shock therapy” approach, is
the basement for the new instiutional system creation and for changes of the
previouse institutional order, as well. According to the institutional point of
view[2]
it is worth asking, what are the formal and informal institutions on the labor
market in Poland(?) and analyse their character and interacion between
transition reforms and deterioration of social status. Institutions in accordance
to F. Hayek[3] are
defined as the rules of social life which occurred by accident to solve a kind
of current problem. Furthermore, institutions as the human activity product
create the structure of market coordination. As the process of institution
creation requires a period of time, by giving the time for institutions
creation we can avoid the transition chaos which occurred in the past as a
result of shock therapy and deterioration of human life as well.
The background of the institutional order on the labor
market in Poland
It is 15
years now since the beginning of fundamental reforms took place in Poland.
Among the countries which undertook the transition experiment, Poland turned
out to be the
first economy which achieved the success of positive GDP increase (in 1992,
after two years). The Polish experience of transition process concerns
the period of 1989-2001. During this time the most important reforms were
implemented. The transistion process effort started with the currency
stabilisation and inflation decrease (640% in 1989, 249% in 1990, 30% in 1993[4]).
Additionally, it is worth mentioning that no transformed country among CEE’s
was affected by such high inflation, public debt and foreign debt as Poland.
The decisions about money market stabilisation were connected with the rate of currency
devaluation and as some economists argue: the devaluation rate equal to 9500
zł. = 1 USD was too high at that time. This restrictive monetary policy
was one of the reasons of inflation increase. The opened borders and rapid
trade development with the currency devaluation brought the increase of import
prices and lastly inflation increase. It was the only reason for inflation growth. The reason for inflation growth was also the
appearance of the inflation surplus from before 1989[5].
The consequences of restrictive policy occurred in the form of difficulties in
business performance. Many of them were closed and wide wave of unemployed was
registered. As a result, the social central budget and public debt increased.
During the money market stabilisation the State began quick privatisation and
restructuring of chosen sectors. The progress in private-owned sector (mostly
foreigh-owned) increased enormously and
in economy it was clearly visible through the growing share of private sector
in genaral value of sold industrial production. It started from 17,4% in 1990,
in 1993 this value was doubled in percentage points and in 1999 this value
reached 70,1%[6]. As a
commentary we can ad here that quick privatisation was stimulated by the
budgetary demand for the money inflow. The privatisations that followed were
interpreted as a success. Furthermore, companies were sold to foreign capital,
but domestic ones, relatively weaker, were on the “second position” also
because of disadvantageous regulations.
Restructuring
in industrial sector is not finished yet. Specially the mining industry still requires
special attention. The public sector with the support of EU specialists had
been transformed fluently in the case of administration structure but the
education, health and pension systems were reorganised only in the mid 90’. The
differentiation of the restructuring progress among regions is visible today
through the unemployment rate. The dispersion between low and highly developed
regions equalled 14,2 percentage points in 2004, (in cental voivodships
revealed 15,0%, in North-East, 29,2%[7]).
The “Washington Consensus” applied to
Polish economy assumed the increase of interest rates, liberalisation in trade,
devaluation of currency, the low level of budget deficit. The restriction of
the monetary policy was the element of “shock therapy” plan and led to the decrease
of inflation in a relatively short period. There is no intention here to
minimise the advantage of this effort but the reason to criticise this way of
inflation is a serious neglect of social sphere by the State in public programs
and regulations. For example in 1993 the implementation of wage increase bokade
had its side effects. Namely, reduction of disposal income didn’t awake any
sources of help. The concentration of inflation stabilisation brought irreversible
losses. According to J. Stiglitz, it is impossible to restore companies once
gone bankrupt[8]. Interest
rates icrease restricted the speed of labor force absorbtion by private sector.
People who lose their jobs don’t accept the partnership rules or see the possibility
for self-employment. This is the result of solid job security within the past
and shock effect. The State help was restricted only to unemployment benefits.
As the shock result the third sector development occured only in 1997 and the
partnership rules are known today only in some regions. So the period till 1997
was characterized by informal institutions development. The figure below presents
the permanent increase of GDP. The quick increase untill 1997 was the result of
restrictive policy of National Bank. In the same time, according to statistics,
the unemployment dynamics show the second bottom of succesfull economy when the
social status deteriorated and the informal institutions developed what became
the base for its evolution and copied by any other market participants.
Figure 1: Number of unemployed and
real value of sold industrial production in Poland in the period of 1990-2001
Source: Central
Statistical Office, Statistical Bulletin, years from 1990 to 2001.
Currently tasks
for the economy seem to be less concrete and more problematic. Politicians are
not positive whether to continue privatisation or to stop the process to save
the rest of capital for public poverty. The integration with EMU in the near
future is also the subject of active adjustment of macroeconomic variables to
EU standards. These are the challenges of the economy today.
The serious
problems among the above enumerated reforms are connected with labor market
stabilisation. Before transition process open unemployment was unknown. On the other
hand employment was guaranteed by
constitution law. Therefore the rate of employment was incredibly high. Every
worker enjoyed job security at their own workplace. The situation changed rapidly after 1989. The employment
rate significantly declined and unemployment occured. Simultaneously job security
disappeared. Formerly, a company existed forever and ever; nowadays, they are
formed and go bankrupt overnight.
As the sources of unemployment at that
time we can enumerate the following facts:
1) The reduction of workplaces as
the result of restructuring and privatisation of companies. The latter wave of
unemployment was the effect of privatisation contracts termination. These
contracts included social secure rules for workers, such as rules of remuneration,
dismission.
2) Limitation of production
potential and production level in public sector.
3) Low economic growth, and
recession within the first three years of transition.
4) Demographic changes. Within
the period of 1995-2003 the number of potential workers increased by 1,4 mln people,
which increased the unemployment of youth to 24,3% in 2004. The decrease of
employment in the same period was equal to 2,8 mln.
During transition the average age of
the unemployed was about 33 . The education structure of unemployment is dominated
by vocationally educated people, it is about 2/3. The most advantageous
situation present the young well educated people, who account for only about 5%
of the unemployed. The characteristic feature of “ the transition unemployment”
is high percentage of long time unemployed. It was as much as 52,2% in 2004.
These were the people seeking a job
within 16 months[9].
Institutional aspects of the labor market
1) Development of labor market formal institutions
One example of a formal institution
was the appearance of social dialog
institutions[10]. Such
kind of institutions create social partners. During the past period of
transition unfortunately social partners limited their activity to consultation
services and observation of labor market changes. Moreover, there occurred the idea of Employment Pact as some kind of social agreement which would be a
way of development of employees and unemployment problems building a compromise
between trade unions represenatives, employers and local authorities.
Unfortunately this project was not realised. But instead of this idea the Employment
Councils make up a system of information and consultation inside a company. Participants
of this organisation receive a package of information from employers. In
reality the existance of Employment Councils doesn’t give real rights to the presentation
of ones own opinions, discussion of
company policy. The only example of cooperation were negotiations between
social partners concerning mining sector restructuring law in 1998, railroad sector
in 1999, metallurgy and military sector in 2000. The accepted projects of
restructuring regulations assumed high reduction of labor potential. It would
be a good question to ask now about the
comparison of the costs and advantages of high dismissions, which didn’t improve
the outcome of these sectors companies.
Another example of formal
institutions are employment agencies. These organisations develop the
nongovernmetal aid for work seeking people. Employment agencies realise such
activities like consultancy on work inside a country or abroad, for different
sort of qualifications, temporary employment agencies. The commercial sector of
labor market services supports the effectiveness of workers flow. This is the
way of activisation of this market, regulated and controlled by the State
before transition period. The past experience and short time for adjustment to
market conditions didn’t leave much time for change in a human beeing.
According to statisics only 8% of unemployed ask for help in an agency, most of
them (approximately 70%) are represented by people not older than 24 years. It
is not an optimistic perspective when people are not used to seek for
professional help. Don’t forget here that most of workseekers were forced to
reorientate their own qualifications and the professional help would be needed
in this case.
A well
organised structure of employment consultancy can be found inside companies[11].
Here we have the employers effort, labor unions activity, social organisations
represented by church. Trade unions from the beginning were the important force
in social dialog. Still better known is their work on the consultancy on
regulations proposals at the central or local level[12].
Labor unions tourned out to be the significant partner in dialog with workers.
The structure of central, local, sectoral, inside companies dialog was created
shortly after closing the time of the first recession (in 1992). At the
beginning of transition labor unions activity was directly related to the speed
of transition. This is because of the fact that the “shock therapy” brought
a significant result on workers’ life
standard. During the transition the strength of the fight got weaker also
because the number of members diminished as the share of state-owned companies
shrinked very quickly. The scale of the employment in state-owned sector was
much lower than in the private one (See: Table 1).
Tabel 1: Changes in the number of workers in public and private sectors
in 1990-1995
(in thousands)
|
Period |
Altogether |
Public |
Private |
|
1990-1993 |
-2631 |
-3219 |
+588 |
|
1994-1995 |
+187 |
-479 |
+666 |
Source: ONZ Report, 1995.
From 1989 to 1993 a new structure
of employment admnistration was organised[13].
Thanks to EU support the standards of its acivity was adjusted to European requirements
in the fields of registration, information, work agency. Since 1993 the model
of this structure was transformed to independent administration, reporting to
Ministry of Work and Social Policy. After 1997 administration used the measures
of efectiveness of labor market policy and stability of employment achieved
through the workshops, public works, loans, employment subsidy. Since 2005 the
local activity in the unemployment reduction is supported by Ministry funding
namely Local Information Centers, responsible for gathering information and monitoring of labor market stability on
the local level, offering services on consultancy business foundation, the
possibility of financial support, receiving concessions, telecomputering.
The formal institution created
after the beginning of transition was the insurance system. From the 1990 the system
was dominated by necessary protective transfers. Almost everyone who became
unemployed (about 80% of unemployed) received wage level related unemployment
benefits, without time restrictions. The enormous cost for State budget had to
be reduced. So, currently only 15% of the unemployed get benefit support for a limited
period of time. The budget expenditures were also increased by a wave of the early
retired. At the beginning of transition about 800 thousand people were retired.
The protective purpose of labor market policy was substituted by motivation
policy in the mid 90’ when the economic growth was much stronger than earlier
and budget incomes increased.
At that time one of the regulations
was the source of resignation from an unemployment status. The significant
requirement was (currently also exists) the regime of periodical confirmation
of work seeking activity in Unemployment Office. People unwillingly visited office
and finally gave up their registration. The changes in labor market policy from
more to less motivated occurred in periods of restructuring reforms[14].
The promotion of motivation and employment appeared only in 2002 and got
stronger after 2004 when the European Social Fund was applied to labor market
in Poland.
2) Development of
informal institutions on labor market
According to
the A. Hayek thesis not the full market system but probably only the part of
institutional order is created by itself without external intervention[15].
Development of this system is the answer to regulations package. Market participants
evaluate each regulation before they accept it. The results sometimes don’t
follow the authors expectations. People often interpret rules in a personally
more convenient way. Moreover, it happens sometimes that regulations are faulty.
The significant signal of informal
institution development is the increase of grey area. According to Central
Statistical Office the number of grey area workers was estimated at 805
thousand in 1995 and 924 thousand in 2003. There are some reasons stimulating
such a phenomenon. They are[16]:
a)
too high social taxes,
b)
employers prefer young experienced workers. It is difficult to find such
a worker and sometimes even impossible,
c)
the low level of education, 32% with secondary education, 33% with vocational
secondary education. Changes in production process cause the dismission of poorly
educated workers,
d)
too long period of protective policy. People are used to living with
demand for free support.
One of all results of the grey area
of development is the existence of some patterns of human behaviour. These
phenomena copied by other participants become a kind of informal institution.
Moreover they are reinforced by law system. Another source of informal
institutions is the sort of regulations created during transition. Part of
these regulations lead to law abuse possibilities by the unemployed. Nowadays,
such copied human behaviour is a kind of the informal instution in accordance
with institutional school of economics. For example:
1. In order to receive an unemployment status and unemployment benefits a
person needs to present the confirmation of labor offer rejection. So, it
happens that the employer is forced by them to prepare this kind of
confirmation.
2. Another example of a similar phenomenon is the registration of
unemployment in order to receive medical
care, or during the winter period because of low demand or the lack of illegal work in construction
sector abroad.
3. The kind of work place subsidy lets employers offer work for a 3-months
period with reduced costs of social tax. It causes the “carousel effect“, when
worker is fired after subsidy period in order to be registered at the local
employment service agencies. After receiving unemployment status the subsidised
work place is once again offered to him.
4. Self-employment had been used by employers as a possibility for labor
cost reduction. Until the employment definition was corrected, in some sorts of
business activity workers were forced to establish their own firm. Namely, it
was present in wood sector, medical care[17].
Summary
The above examples of formal and
informal institutions show the patterns of human behaviour which were created directly
by the transition shock in the meaning of rapidly increased interest rates,
rapid privatisation, and restructuring reforms applied to many sectors at once.
Answeing the question: what are the institutions in Poland on the labor maked,
a list of the examples had been presented. Among the big group of institutions on the
labor market the formal institutions enumerated here are: the social dialog
institutions on the central, regional and company level in a country,
employment consultancy system in firms, employment agencies, trade union
structure, structure of employment admnistration, the unemployment insurance
system. These institutions (some of them
are organisations, firms, foundations, associacions, administration
institutions) are the answers to the growing society needs. Sometimes they
require legal base and sometimes their performance is very good without any law
reinforcement. It is necessary to point out that social development as institutional system creation is an integral
part of market rules implementation. When someone neglects regulation in social
sphere, and supports only the economic one, the consequences can be difficult
or sometimes impossible to be neutralised by economic policy. The mis-regulated
sphere is often the source of informal institutions. People willingly copy a behaviour,
if it meets their preferences. Finally, it is important to remember that the
institutional system has a dynamic nature. Institutions, especially informal ones
are created by man and vanish without any control system. Simultaneously they
influence the processes in economy. For example, on the labor market the
processes of losting and finding a job, implementation of labor market programs
is strongly affected by human reaction to a concrete situation. This brings
about the complicated nature of economic policy realisation, applying a path of
reforms, testing economic policy projects. So the results can prove shocking
for society constituting the main part of any market. The interesting topic of
interaction of institutions and economic policy is worth studying but is not
the subject of interest of the presented part of analysis.
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