The Labor Divide


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Modern labour theories and practice. Covers issues like employment, unemployment, migration, brain drain, entrepreneurship, workaholism, and trade unions.

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The Labour Divide 2nd EDITION Sam Vaknin, Ph.D. Lidija Rangelovska Editing and Design: Lidija Rangelovska A Narcissus Publications Imprint, Skopje 2003-7 First published by United Press International – UPI Not for Sale! Non-commercial edition. 1


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© 2002-7 Copyright Lidija Rangelovska. All rights reserved. This book, or any part thereof, may not be used or reproduced in any manner without written permission from: Lidija Rangelovska – write to: or to Visit the Author Archive of Dr. Sam Vaknin in "Central Europe Review" Visit my United Press International (UPI) Article Archive – Click HERE! World in Conflict and Transition ISBN: 9989-929-27-0 Created by: LIDIJA RANGELOVSKA REPUBLIC OF MACEDONIA 2


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100 articles and essays (microeconomics and macroeconomics) by the same author - available! Sam Vaknin's "Central Europe Review" Author Archive: Additional articles about Business on the Web: 3


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Table of Contents I. Battling Unemployment II. The Labour Divide - I. Employment and Unemployment III. The Labour Divide - II. Migration and Brain Drain IV. The Labour Divide - III. Entrepreneurship and Workaholism V. The Labour Divide - IV. The Unions after Communism VI. The Labour Divide - V. Employee Benefits and Ownership VII. The Labour Divide - VI. The Future of Work VIII. Immigrants and the Fallacy of Labour Scarcity IX. The Morality of Child Labor X. The Iron Union - A Profile of IG Metall XI. The Demise of the Work Ethic XII. Industrial Action and Competition Laws XIII. Employees and Management Ownership of Firms XIV. Making Your Workers Your Partners XV. The Agent-Principal Conundrum XVI. Battling Society’s Cancer XVII. To Grow Out of Unemployment The Author - Sam Vaknin 4


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Battling Unemployment A First Draft Report Presented to the Minister of Labour and Social Policy By: Dr. Sam Vaknin Formerly Economic Advisor to the Government of the Republic of Macedonia Skopje, Republic of Macedonia April, 2007 Contents I. Recommendations II. The Facts III. Bibliography IV. Appendix – The Keynesian view of Unemployment, Stabilization Theory and Full Employment Budgeting V. Appendix – Unemployment throughout the World (Excerpts from an academic article by R.di Tella and R. MacCullouch, 4/1999) The author wishes to thank Mr. Rafael Di Tella from Harvard University (Harvard Business School) for his assistance in sharing with the author the article he has co-authored with Mr. R. MacCullouch of Bonn University. The author wishes to thank Ms. Lidija Rangelovska for sharing her Country Assessment Survey results for Macedonia with the author. Her survey was prepared in collaboration with the Harvard Institute of International Development (HIID) and Prof. Jeffrey Sachs. THIS WORK IS NOT FOR PUBLICATION Copyright permissions must be obtained from Messrs. Di Tella and MacCullouch and from arvard university and Prof. Jeffrey Sachs prior to publication. 5


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I. Recommendations Get the Real Picture No one in Macedonia knows the real picture. How many are employed and not reported or registered? How many are registered as unemployed but really have a job? How many are part time workers – as opposed to full time workers? How many are officially employed (de jure) – but de facto unemployed or severely underemployed? How many are on “indefinite” vacations, on leave without pay, etc.? The Statistics Bureau must be instructed to make the gathering and analysis of data regarding the unemployed (through household surveys and census, if necessary) – a TOP PRIORITY. A limited amnesty should be declared by the state on violations of worker registration by employers. All employers should be given 30 days to register all their unregistered and unreported workers – without any penalty, retroactive or prospective (amnesty). Afterwards, labour inspectors should embark on sampling raids. Employers caught violating the labour laws should be heavily penalized. In severe cases, closures should be enforced against the workplace. The Minister of Justice, in collaboration with the court system, should accord the persecution of violating employers a high and urgent priority. The number of trade inspectors should at least be tripled, as per standards in other developing countries. All the unemployed must register with the Employment Bureau once a month, whether they are receiving benefits, or not. Non-compliance will automatically trigger the loss of the status of “unemployed”. If a person did not register without good cause, he would have the right to re-register, but his “unemployment tenure” will re-commence from month 1 with the new registration. I recommend instituting a households’ survey in addition to a claimant count. Labour force surveys should be conducted at regular intervals – 6


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regarding the structure of the workforce, its geographical distribution, the pay structure, employment time probabilities. The statistics Bureau should propose and the government should adopt a Standard National Job Classification. The Unemployment Benefits Unemployment benefits – if excessive and wrongly applied – are self perpetuating because they provide a strong disincentive to work. Health insurance should be separated from unemployment benefits. Unemployment benefits and health benefits should be paid independently of each other. Unemployment benefits should be means tested. There is no reason to pay unemployment benefits to the children of a multi-millionaire. Unemployed with assets (especially liquid assets) should not receive benefits, even if they are otherwise eligible. The benefits should scale down in accordance with wealth and income. Unemployment benefits should always be limited in time, should decrease gradually and should be withheld from certain segments of the population, such as school dropouts, those who never held a job, (in some countries) women after childrearing. Eligibility to unemployment benefits should be confined to those released from work immediately prior to the receipt of the benefits, who are available to work by registering in an employment bureau, who are actively seeking employment and who pass a means test. Benefits should be withheld from people who resigned voluntarily or discharged due to misconduct or criminal behaviour. In the USA, unemployment compensation is not available to farm workers, domestic servants, the briefly employed, government workers and the self- employed. Unemployment benefits should not exceed short-term sickness benefits (as is the case in Canada, Denmark and the Netherlands). Optimally, they should be lower (as is the case in Greece, Germany and Hungary). Alternatively, even if sickness benefits are earnings-related, unemployment benefits can be flat (as is the case in Bulgaria and Italy). In Australia and 7


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New Zealand, both sickness benefits and unemployment benefits are means tested. It is recommended to reduce the replacement rate of unemployment benefits to 40% of net average monthly wages in the first 6 months of benefits and to 30% of net average monthly wages thereafter in the next 6 months. Unemployment benefits should be limited in time. In Bulgaria, they are limited to 13 weeks, in Israel, Hungary, Italy and the Netherlands to 6 months and in France, Germany, Luxemburg and the United Kingdom – 12 months. Only in Belgium are unemployment benefits not limited in their duration. In most of these, countries, though, social welfare payments replace unemployment benefits following the prescribed period of time – but they are usually lower than the unemployment benefits and serve as a disincentive to remain unemployed rather than employed. It is recommended to limit the duration of unemployment benefits to 12 months. No health insurance should be paid for those unemployed for more than 6 months. No unemployment benefits should be paid to a person who refuses work offered to him or her on any grounds, except on medical grounds. I recommend a few pilot projects with the aim of implementing them nationwide, should they prove successful: A pilot project should be attempted to provide lump sum block grants to municipalities and to allow them to determine eligibility, to run their own employment-enhancement programs and to establish job training and child care assistance. An assessment of the success or failure of this approach in a limited number of municipalities can be done after one year of operation. The unemployed worker, who participates in the second pilot project, should be provided with a choice. He could either receive a lump sum or be eligible for a longer period of unemployment benefits. Alternatively, he can be provided with a choice to either receive a larger lump sum or to receive regular unemployment benefits. In other words: he will be allowed to convert all or part of his unemployment benefits to a lump sum. The lump sum should represent no more than 9 months of unemployment benefits reduced to their net present value (NPV). 8


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The state should provide matching funds if the person chooses to establish a business, alone or in partnership with other unemployed people (provide credits of 1 euro or a state guarantee for 1 euro against every 1 euro invested by the unemployed person). The third pilot project involves the formation of private unemployment insurance plans to supplement or even replace the insurance (compensation, benefits) offered by the Employment Fund. In many countries, private unemployment insurance is lumped together with disability and life insurance – all offered by the private sector within one insurance policy. The fourth and last pilot project involves the formation of “Voucher Communities”. These are communities of unemployed workers organized in each municipality. The unemployed exchange goods and services among themselves. They use a form of “internal money” – a voucher bearing a money value. Thus, an unemployed electrician can offer his services to an unemployed teacher who, in return will give the electrician’s children private lessons. They will pay each other with voucher money. The unemployed will be allowed to use voucher money to pay for certain public goods and services (such as health and education). Voucher money will not be redeemed or converted to real money – so it has no inflationary or fiscal effects, though it does increase the purchasing power of the unemployed. Encouraging Employers to Hire the Unemployed The principle governing any incentive scheme intended to encourage employers to hire hitherto unemployed workers must be that the employer will get increasing participation in the wage costs of the newly hired formerly unemployed workers – more with every year the person remains employed. Thus, a graduated incentive scale has to be part of any law and incentive plan. Example: employers will get increasing participation in wage costs – more with every 6 months the person has been unemployed by them. Additionally, employers must undertake to employ the worker a number of months equal to the number of months they received benefits for the worker and with the same salary. It would be even better if the incentives to the employer were to be paid for every SECOND month of employment. Thus, the employer would have an incentive to continue to employ the new worker. 9


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Employers will receive benefits for a new worker only if he was registered with an unemployment office for 6 consecutive months preceding his new employment. I recommend linking the size of investment incentives (including tax holidays) to the potential increase in employment deriving from the investment project. ALTERNATIVE TEXT PROPOSED BY MACEDONIAN EXPERTS There are two types of incentive schemes intended to encourage employers to hire hitherto unemployed workers. In the first method the employer gets increasing participation in the wage costs of the newly hired formerly unemployed workers – more with every year the person remains employed. Thus, a graduated incentive scale has to be part of any law and incentive plan. Example: employers will get increasing participation in wage costs – more with every 6 months the person has been unemployed by them. In the second method (preferrale in Macedonia’s conditions), employers must undertake to employ the worker a number of months equal to the number of months they received benefits for the worker and with the same salary. It would be even better if the incentives to the employer were to be paid for every SECOND month of employment. Thus, the employer would have an incentive to continue to employ the new worker. Employers will receive benefits for a new worker only if he was registered with an unemployment office for more than 12 consecutive months preceding his new employment – or if he or she is a recipient of welfare payments and social benefits through the Employment Bureau. This is much like the very successful American and British schemes of “Welfare to Work”. I recommend linking the size of investment incentives (including tax holidays) to the potential increase in employment deriving from the investment project. 10


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Encouraging Labour Mobility Workers must be encouraged to respond promptly and positively to employment signals, even if it means relocating. We recommend obliging a worker to accept any job offered to him in a geographical radius of 100 km from his place of residence. Rejection of such work offered (“it is too far”) should result in a loss of the “unemployed” status and any benefits attaching thereof. On the other hand, the Employment Bureau should offer financial and logistical assistance in relocation and incentives to relocate to areas of high labour demand. The needs of the unemployed worker’s family should also be considered and catered to (kindergarten or school for his children, work for his wife and so on). Fixed term labour contracts with a lower cost of dismissal and a simplified procedure for firing workers must be allowed (see details below). I recommend altering the Labour Relations Law to allow more flexible hiring and firing procedures. Currently, to dismiss a worker, the employee has to show that it has restricted hiring, applied workforce attrition and reduced overall overtime prior to dismissing the worker. The latter has recourse to the courts against the former. This recourse should be eliminated and replaced with conciliation, mediation, or arbitration (see below for details). Reforms in the Minimum Wage The minimum wage is an obstacle to the formation of new workplaces (see analysis in the next chapter). It needs to be reformed. I propose a scaled minimum wage, age-related and means tested and also connected to skills. In other words, the minimum wage should vary according to age, other (nonwage) income and skills. Administrative Measures: Early Retirement Macedonia must allow the employer to encourage the early retirement of workers which otherwise might be rendered technologically redundant. 11


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Early retirement is an efficient mechanism to deal with under-employment and hidden unemployment. Romania ameliorated its unemployment problem largely through early retirement. Offering a severance package, which includes a handsome up-front payment combined with benefits from the Employment Fund, can encourage early retirement. A special Early Retirement Fund can be created by setting aside receipts from the privatization of state assets and from dividends received by the state from its various shareholdings, to provide excess severance fees in case of early retirement. ALTERNATIVE TEXT PROPOSED BY MACEDONIAN EXPERTS An employer with technologically redundant employees should be allowed to offer to them the following retirement scheme: 1. They will be considered pensioners for the purposes of every applicable law and benefit (for instance, for the purposes of the Health Fund). 2. Thus, they will not be “fired” but “retired”. 3. Upon retirement, they will receive a lump sum, which will represent their compensation for their accumulated work tenure, in accordance with the law (=their severance fee). 4. They will begin to receive monthly pension payments, as per their entitlement, work tenure, level of last salary, etc. only when they reach the age prescribed by law (63 – 65) – LIKE EVERY OTHER PENSIONER. NOT RECOMMENDED Administrative Measures: Reduction of Working Hours Another classic administrative measure (lately implemented in France) is a reduction in the standard working week (in the number of working hours). For reasons analyzed in the next chapter, we recommend NOT to implement such a move, despite its obvious (though false) allure. NOT RECOMMENDED Administrative Measures: Public Works 12


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All the medically capable unemployed should be compulsorily engaged in public works for a salary equal to their unemployment benefits (Workfare). A refusal by the unemployed person to be engaged in public works should result in the revocation of his “unemployed” status and of all the benefits attaching thereto. Generally, we would not have recommended public works. From the Encyclopedia Britannica: “The weakness in the proposal to use disguised unemployment for the construction of social overhead capital projects arises from inadequate consideration of the problem of providing necessary subsistence funds to maintain the workers during the long waiting period before the projects yield consumable output. This can be managed somehow for small-scale local community projects when workers are maintained in situ by their relatives – but not when workers move away. The only way to raise subsistence funds is to encourage voluntary savings and expansion of marketable surplus of food purchased with these savings.” But public works financed by grants or soft loans can serve as an interim “unemployment sink” – a buffer against wild upswings in unemployment. The situation in Macedonia is so extreme, that it is comparable only to the Great Depression in the USA. In the USA, in 1932, the Civilian Conservation Corps (CCC) was established to tackle nature conservation work for the young and unmarried men. They planted trees, erected flood barriers, put out forest fires and constructed forest roads and trails. They lived in work camps under a semimilitary regime. They were provided with food rations and a modest monthly cash allowance, medical care and other necessities. The CCC employed 500,000 people at its peak – and 3 million people throughout its existence. In any case, there is always the danger that public works will simply displace existing employment. Labour union and local municipality endorsements should, therefore, be strictly observed. 13


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Administrative Measures: Public Education and Dissemination of Information – The Functioning of the Employment Bureau The dissemination of information regarding employment practices, opportunities, market requirements, etc. should be a prime component of the activity of the Employment Bureau. It must transform itself from a mere registry of humans to an active, computerized exchange of labour. This can be done through computerized employment exchanges and intermediation. To change the image of the Employment Bureaus from places where the unemployed merely registers and receive benefits to a labour exchange can be done by publishing examples of successful job placements. I recommend to prominently display and disseminate information regarding the rights of the unemployed, their obligations and services available to them and to publish weekly or daily employment bulletins. I recommend to place computer terminals in all bureaus with the latest data regarding jobs offered and sought. Both employers and the unemployed should be able to directly access and update the system from PCs or laptops or by submitting forms. To organize seminars for the unemployed and to employers in which the rights of the unemployed, their obligations and the services offered to them and to their potential employers will be described. This can be combined with employment fairs. Separately, the unemployed should be taught in these seminars how to find a job, prepare a curriculum vita (biography), entrepreneurial skills, preparation of business plans, marketing plans, feasibility studies, credit applications and interview skills. The Employment Bureaus in collaboration with the local authorities should organize job clubs, labour exchanges and employment fairs – places where employers can meet potential employees, currently unemployed. These should not be one-off, haphazard events. They should be periodic, regular, and predictable. I recommend to oblige the mass media by law to dedicate at least an hour weekly (could be broken to as many as 4 segments of 15 minutes each) to unemployment: disseminate information, organize a televised labour 14


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exchange, a televised entertainment show (where employers will offer a job to a winner) and so on. I recommend to link by a Wide Area Network (WAN) or Intranet with firewalls the National Employment Bureau, the Health Fund, the Pension and Disability Insurance Fund and the Social Security Office. To cross and compare information from all these bureaus on a real time basis (to specifically cater to the needs of an unemployed person) and on a periodical basis for supervision and control purposes. The National Employment Bureau should maintain a regular presence in employment fairs abroad. Many fairs are global and work can be obtained in them for Macedonian workers (especially the more skilled). I recommend the creation of a special office within the Ministry of Labor and social Work with the aim of actively soliciting employment abroad for qualified and skilled Macedonians (from construction workers to computer programmers). This office will: - Scan for job offers in foreign countries - Make contact with government structures, public sector, and private sector employers abroad - Sign agreements with said employers and negotiate with them all employment terms and conditions. These terms and conditions are bound to be better than anything individual laborers can obtain by themselves. - Advertise for workers in Macedonia, based on the agreements afore signed. - Match workers with job offers abroad, based on the signed agreements. - Self-finance by collecting a commission based on a the first pay of every placed worker. A National employment Contract A “National Employment Contract” should be signed between the government, the trade unions, the employers (Chamber of Commerce) and the Central Bank. All parties will have to concede some things. The Employers will guarantee the formation of new work places against a freeze on employee compensation, a separate treatment of part time labour (exclusion from collective bargaining), flexibility on minimum wages and with regards to job security, hiring and firing procedures, social and 15



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