2007 Oxford Business & Economics Conference ISBN : 978-0-9742114-7-3
Why politicians are a threat to job creation: The case of Slovenia
Polona DOMADENIK, University of Ljubljana, Ljubljana, Slovenia
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Tjaša REDEK, University of Ljubljana, Ljubljana, Slovenia
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ABSTRACT
One of the key problems in labour markets today is the tradeoff present in the labour market regulation reforms. It is also a huge and very sensitive political topic, which governments are reluctant to tackle, although they are aware of the neccessity of the reforms (see Botero et al 2004). Why? And where is the tradeoff? Labour market reforms, which go in the direction of increasing labour market flexibility, actually favour the unemployed at the expense of the employed (Saint Paul 2002). Labour market reforms go in the direction of lowering the protection of employed (making workers easier to fire and lowering compensation at fire). This means that the firms know when employing that firing a worker in recession will not be that expensive. That consequently means that the firms will in times of economic prosperity be much more inclined to hiring. And that means that the unemployed will have a higher chance of getting employment.
And the tradeoff? But economies face the traditional problem of selfish politicians. Their primary goal is not the declared 'working for the benefit of nation', but to stay in position. Therefore, the voice of the interested public (the employed) has the decisive impact on the speed and characteristics of the labour market reform. The employed fear the possibility of losing a job. Also the employed are the majority in the labour force and are also well organized (Saint Paul 2002, Saint Paul 2000). Therefore the voice of the employed (usually also unionized) is well heard and has significant impact on politician's inclination towards reforms in both employment laws and social security laws.
The problem is especially strong in transition economies because of the recent experience with high unemployment due to transition recession (see Aslund et al 1996, Berg et al 1999). Transition caused significant economic restructuring enhanced additionally by globalization forces. Unemployment related to these two forces was high and what is even more problematic, it was mainly structural. Re-employment is thus more difficult.
Additional problems in the labour markets in transition economies are caused by socialist legacy (Kornai 1992). Premature welfare state was characteristic of all transition economies and the beginning of transition and the rise in unemployment did not change that. To keep social peace and enable the continuation of transition reform, the system of unemployment benefits was generally quite generous. Also, the employment legislation, which was traditionally quite protective of the worker, did not lower the costs of firing. Therefore, the burden of employing and weathering recessions with the burden of potentially excessive employment is carried directly mostly by firms. Although in the end, this burden is carried by the unemployed, which can find work mainly in the grey economy, while in the official sector, firms employ mainly through contracts for fixed period of time. Systematic discrimination in the labour market or its segregation is thus a direct characteristic of rigid regulation.
The article will present the problems in the transitional labour market through a theoretical model of the changes in labour market institutions. The focus will be on the political dedication to reform within a transition specific environment. The theoretical model will be based on a game-theoretic model for institutional analysis (see Aoki 2001) supplemented by the logic of the search and matching model (e.g. Pissairides 2000) and public choice theory (see Siebert 2006). The model will examine the role of politicians and their aim of winning the next election in the process of labour market institutions reform, that is regulatory changes. The model will show that politicians slow down the reform process both in times of economic expansion and recession (when logically the inclination to labour market reform would be stronger (Saint Paul 2002). Therefore politicians in the longer run harm both workers and firms and consequently also have a negative impact on economic performance in an economy. Especially in transition economies, labour market rigidities were and still are very important for slowing down the restructuring (e.g. Gomulka, Lane 2001, Blanchard 1997). Also, the motivation of politicians to stay in power is in transition economies possibly even stronger than in established market economies. Privatization that is (was) taking place was a source of significant rents to those in power. Thus the inefficiency and the lack of desire for potentially painful reform was even bigger. The model will be applied to the case of transition economies, focusing on Slovenia.
Structure of the paper:
1. Introduction (motivation, theoretical background)
2. Transition and labour market regulation: the case of Slovenia
a. Unemployment in transition (main characteristics of labour markets in transition, characteristics of unemployment)
b. Regulation of the labour market in transition economies (main characteristics of labour market regulation across transition economies, comparative analysis with Slovenia)
c. Increasing labour market flexibility as a measure for increasing job creation: presentation of reform plans in Slovenia and why they are being postponed (a motivation of the theoretical model)
3. Politics, union power and labour market reform: a theoretical approach
a. Game-theoretic approach in the search and match model of labour market (theoretical background)
b. Utility functions of politicians, unions and unemployed, derivation and results
c. Dependency of the game on the economic situation (recession, boom, restructuring)
4. The application of the model to the Slovene case
Selected references:
[1] Aoki, M.: Toward a Comparative Institutional Analysis. Cambridge Massachusetts : MIT Press, 2001. 467 p.
[2] Aslund, A.; Boone, P., Johnson, S.: How to Stabilize: Lessons from Post-Communist Countries. Brookings Papers on Economic Activity, 1996, Washington, pp. 217-313.
[3] Berg, A.; Borensztein, E.; Sahay, R.; Zettelmeyer, J.: The Evolution of Output in Transition Economies: Expaining the Differences. IMF Working Paper Series, WP/99/73, 1999
[4] Blanchard, O.: The Economics of Post Communist Transition. Oxford : Oxford University Press, 1997
[5] Gomulka, S.; Lane, J.: The Transformational Recession under a Resources Mobility Constraint. Journal of Comparative Economics, 29(2001), New York, p. 403-416.
[6] Kornai, J.: The Socialist System. Oxford University Press, 1992.
[7] Saint Paul G.: Macroeconomic fluctuations and the timing of labour market reform. Lecture presented at International Economic Association congress, 2002
[8] Saint Paul G.: The political economy of labour market institutions. Oxford: Oxford University Press
[9] Botero J.C., Djankov S., La Porta R., Lopez-de-Silanez F., Shleifer A.: The regulation of labour. Quarterly journal of economics, November 2004, pp. 1339-1382
[10] Pissarides C.: Equilibrium unemployment theory, MIT Press, 2000
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June 24-26, 2007
Oxford University, UK