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Industrial and Employment Relations Labour Market

Institutions and Policies

March 2017

Labour Institutions • Employment Contracts. • Mechanism for controlling and regulating employment contracts. • The organization and representation of labour: trade union, or trade or

craft associations. • The organization and representation of employers: employers

associations and business associations. • The dominant procedures for job search and rules for access to jobs of

different types. • The methods by which wages are paid. • The process of wage fixing. • Training and skill institutions. • The organization of jobs within the firm • The structure of ownership and control over production • The social and state regulation of self employment. • Social security and income guarantee systems. • The conventional standard of life - aspirations regarding consumption,

leisure, savings and work. • The organization of labour supply, both within and outside the

household. 2

Labour Market Institutions

A labour market is a market where a quantity of labour services (L) is offered in exchange of remuneration or wage (w). Are all L paid?

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• Rules, practices and policies • Formal Informal • Written Unwritten Affect how the Labour Market Works

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• Are embedded in law? • Are laws enforced? • Which are the objectives?

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• Forced Labour? • Discrimination in Employment?

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Labour Market Institutions (LMI)

• Provide constraints and incentives than influence individual choices over labour and remuneration.

• Have a long term horizon. • Individuals consider them a given.

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Labour Market Policies (LMP)

• Government policy choices. • Influence L supply and L demand and

their interaction.

• Passive: offset the loss of income resulting from unemployment

• Active: labour market integration for the unemployed and for those threatened by unemployment.

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Labour Market Regulation (LMR = LMI + LMP)

Regulation can be institution or policy. The distinction between policy and institutions is not precise. • Wage setting institutions. • Mandatory social benefits. • The unemployment insurance system. • Other labour legislation (minimum wage,

employment protection legislation, enforcement systems).

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Conceptual framework – Institutions and LM Policies

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Labour Market Regulation

Institutions

Employment Protection Legislation (EPL)

Minimum Wages

Collective bargaining –TU organisation

Unemployment benefits /transfers

Institutions

Policies (ALMPs)

Job search services

Training Programmes

Subsisdies/ hiring, wages

Public Employment Programmes

Enterpreneurship

Labour Market Regulation (LMR = LMI + LMP)

Most of economic analysis considers it as cost in a market, which per se, would be competitive and well working. Most of studies based on advanced economies.

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Labour Market in Developing Countries

Labour force grows fast. Low unemployment & high underemployment. Small formal economy. Large informal and rural economy- no soc. prot. Low productivity & wages. High working poverty. Fewer women in the formal sector. Large un/under-employed youth Low law enforcement

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Labour Market in Developing Countries

Not too much lack of jobs, but lack of better paid and more protected jobs. The experience of developed economies should be considered with care because of these differences.

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Labour Regulations that we consider here:

Employment Protection Legislation. Minimum Wage. Unemployment Benefits

+ Active Labour Market Policies

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Employment Protection Legislation

Minimum wages Wage

determination

Collective bargaining, TUs

Unemployment insurance,

monetary transfers

EMPLOYMENT PROTECTION LEGISLATION.

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Hiring and firing rules protecting the welfare of workers and providing some support during the dismissal of redundant workers. Norms and administrative procedures in cases of individual and collective dismissal. e.g. notice period, severance pay, compensation and reinstatement in case of unfair dismissal, rules for fixed- term and temporary work agency contracts

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Among others… Recommendation 119 - Termination of Employment Recommendation, 1963 Convention 158 – Termination of Employment Convention, 1982

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ILO Convention 158

Article 4 The employment of a worker shall not be terminated unless there

is a valid reason for such termination connected with the capacity or conduct of the worker Or based on the operational requirements of the undertaking,

establishment or service.

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ILO Convention 158

Article 5 The following, inter alia, shall not constitute valid reasons for

termination: (a) union membership or participation in union activities outside

working hours or, with the consent of the employer, within working hours;

(b) seeking office as, or acting or having acted in the capacity of, a workers' representative;

(c) the filing of a complaint or the participation in proceedings against an employer involving alleged violation of laws or regulations or recourse to competent administrative authorities;

(d) race, colour, sex, marital status, family responsibilities, pregnancy, religion, political opinion, national extraction or social origin;

(e) absence from work during maternity leave.

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• Preliminary discussion with workers representatives.

• Cash payments (severance pay schemes) often related to the number of years worked with the employer.

• Individual and collective dismissal are differently treated.

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Employment Protection Legislation (EPL) Individual dismissal

• Economic and disciplinary dismissal. • Economic Dismissal: employees given

reasonable notice or financial compensation in lieu of notice.

• Right to appeal against individual dismissal.

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Employment Protection Legislation (EPL) Collective dismissal

• Large scale firm restructuring. • Dismissal of a percentage of employees. • Administrative procedures and formal

negotiations.

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Employment Protection Legislation (EPL) Measurement

• Easy the count of months of notice or the severance pay.

• What is “just cause”?

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Employment Protection Legislation (EPL) Measurement

There are summary indicators taking into account legislation for:

① Firing individual permanent workers ② Firing individual temporary workers ③ Collective dismissal

High numbers = rigid rules and high protection. They look at rules not at law enforcement. Small firms are often exempted from many laws. 25

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Big variety within OECD countries e.g. USA and France Bigger variety within non OECD e.g. Georgia and Nepal.

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Employment Protection Legislation (EPL) 2008

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Most developing countries provide relatively high protection to the workers in the formal sector. Even if, with low enforcement, even formal workers are not very protected. Differences between temporary and permanent contracts, e.g. Braz., Arg. And SAR have very flexible regular contracts. Some countries do not regulate collective dismissals (Indonesia, India and Brasil).

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In favour: Employees security at work (employment and $). A stable relationship fosters investment in human capital and productivity growth. Makes employees more willing to accept technological change and internal job mobility. It is a macroeconomic stabilizer. Against: It constrains firm behavior (it makes redundacies lengthly and costly and reduces employment. 33


In favour: EPL is intended to protect jobs and increase job stability by preserving workers and society from the costs of job displacement job stability contributes to higher productivity and internal flexibility Against: It also hinders firms wanting to adjust their workforce levels Makes it more expensive to fire workers So, firms also tend to be less willing to hire 34

Employment Protection Legislation (EPL) Empirical Findings

Cross-country evidence provides mixed results on the impact of EPL on youth employment.

EPL reduces labour turnover (Fires AND Hires), but unclear whether it increases or reduces youth employment (i.e. whether hires < fires or not)

Some countries have introduced specific (weaker) EPL for young people

Not proved very sucessful. 35


Favoured groups: Older workers Pregnant or in maternity women Disabled workers.

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It can push toward more: Irregular jobs Fixed term Seasonal Self employed Informal.

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Employment Protection Legislation (EPL) and youth

Reduces labour market flows but not (necessarily) youth employment.

The case for special EPL arrangements for youth is very weak.

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MINIMUM WAGE

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Minimum Wage (MW) Sets a wage floor applicable to wage earners, ensuring they receive a minimum level of pay protection. Mostly affects the low end of the wage distribution. Varies across nations.

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ILO Conventions and Recommendations

C131 - Minimum Wage Fixing Convention, 1970 (No. 131) R135 - Minimum Wage Fixing Recommendation, 1970 Followed: • C026 Minimum Wage-Fixing Machinery Convention, 1928

• R030 - Minimum Wage-Fixing Machinery Recommendation, 1928

• C100 Equal Remuneration Convention, 1951

• C099 Minimum Wage Fixing Machinery (Agriculture) Convention, 1951.

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ILO Convention 131

Section 1 1. Each Member of the ILO which ratifies this

Convention undertakes to establish a system of minimum wages which covers all groups of wage earners whose terms of employment are such that coverage would be appropriate.

2. The competent authority in each country shall, in agreement or after full consultation with the representative organizations of employers and workers concerned, where such exist, determine the groups of wage earners to be covered.

(…)

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ILO Convention 131

Section 2 1. Minimum wages shall have the force of law and

shall not be subject to abatement, and failure to apply them shall make the person or persons concerned liable to appropriate penal or other sanctions.

2. Subject to the provisions of paragraph 1 of this Article, the freedom of collective bargaining shall be fully respected.

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ILO Convention 131

Section 2 The elements to be taken into consideration in

determining the level of minimum wages shall, so far as possible and appropriate in relation to national practice and conditions, include--

(a) the needs of workers and their families, taking into account the general level of wages in the country, the cost of living, social security benefits, and the relative living standards of other social groups;

(b) economic factors, including the requirements of economic development, levels of productivity and the desirability of attaining and maintaining a high level of employment.

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ILO Recommendation 135

Section 1 1. Minimum wage fixing should constitute one element

in a policy designed to overcome poverty and to ensure the satisfaction of the needs of all workers and their families.

2. The fundamental purpose of minimum wage fixing should be to give wage earners necessary social protection as regards minimum permissible levels of wages.

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Section 2 . In determining the level of minimum wages, account

should be taken of the following criteria, amongst others: (a) the needs of workers and their families; (b) the general level of wages in the country; (c) the cost of living and changes therein; (d) social security benefits; (e) the relative living standards of other social

groups; (f) economic factors, including the requirements of

economic development, levels of productivity and the desirability of attaining and maintaining a high level of employment.

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Section 3 . 4. The number and groups of wage earners who are not

covered in pursuance of Article 1 of the Minimum Wage Fixing Convention, 1970, should be kept to a minimum.

5. (1) The system of minimum wages may be applied to the

wage earners covered in pursuance of Article 1 of the Convention either by fixing a single minimum wage of general application or by fixing a series of minimum wages applying to particular groups of workers.

(2) A system based on a single minimum wage-- (a) need not be incompatible with the fixing of different

rates of minimum wages in different regions or zones with a view to allowing for differences in costs of living;

(b) should not impair the effects of decisions, past or future, fixing minimum wages higher than the general minimum for particular groups of workers.

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Section 3 • 6. The minimum wage fixing machinery provided for in Article 4

of the Convention may take a variety of forms, such as the fixing of minimum wages by--

• (a) statute; • (b) decisions of the competent authority, with or without

formal provision for taking account of recommendations from other bodies;

• (c) decisions of wages boards or councils; • (d) industrial or labour courts or tribunals; or • (e) giving the force of law to provisions of collective

agreements.

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Section 3 7. The consultation provided for in paragraph 2 of Article 4 of the

Convention should include, in particular, consultation in regard to the following matters:

• (a) the selection and application of the criteria for determining the level of minimum wages;

• (b) the rate or rates of minimum wages to be fixed; • (c) the adjustment from time to time of the rate or rates of

minimum wages; • (d) problems encountered in the enforcement of minimum

wage legislation; • (e) the collection of data and the carrying out of studies for

the information of minimum wage fixing authorities.

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Minimum Wage Key Features: • Fixing procedures (legislated or collectively

bargained). • Coverage rate. • Eligibility. • Different minima (according to time frames). • Subminimum wage for specific groups. .

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Minimum Wage (MW) In developing countries with limited collective bargaining, with few low paid workers in the trade unions, plays an important role in protecting the purchasing power of low paid workers. It is a reference for other benefits.

It is a de facto reference for salaries of informal workers.

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Minimum Wage (MW)

Data. • Ratio minimum wage / average wage* • Share of workers at or near the minimum

wage. • Frequency of its adjustment. * The average wage may depend on the minimum wage

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Minimum Wage (MW) / average wage

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Minimum Wage average wage

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Multiple MW in many countries, depending on:

Occupations Industries Geographical regions

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Minimum Wage Economics

In a competitive labour market it would reduce employment and increase the equilibrium wage level.

In a more realistic non perfectly competitive labour market the result is less clear.

e.g. --single buyer (monopsonist) of labour --dual market A possible effect on aggregate demand. Anyway small effects on labour demand.

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Minimum Wage Empirical Findings

Better enforced in urban setting. (Kenya)

Affect a lot the bottom and less the rest, even the informal economy.

Positive effect on full time self employed men. (Costa Rica and Colombia)

Incentive towards informality: no (Costa Rica)

yes (Brazil)

Insignificant effects on employment.

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Minimum Wage Empirical Findings

Few studies on income distribution and poverty.

Few studies on development countries outside Latin America.

Studies usually ignore interactions.

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UNEMPLOYMENT BENEFITS

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Unemployment compensation schemes. Objectives: • Partial income replacement. • Maintain a standard of living. • Means to search a suitable job. • Stabilizers of the economy.

Insurance or assistance.

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Unemployment Benefits

Unemployment Insurance. Most common in OECD countries Typically funded by contributory schemes. Compensation related with previous

earnings. For a limited period of time.

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Unemployment Benefits

Unemployment Assistance. Flat rate-non-contributory cash transfers. In a number of (mostly rich) countries. Close some gaps. Cover the no more or the never entitled. Often means tested. A social scheme. In low income countries, severance

payments and legal protection (e.p.l.) instead.

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Unemployment Insurance

Worker Oriented. Pooled contributions paid by

workers and employers. Usually paid. Periodical payment. Non related with company.

Severance payment

Job oriented. Employers’ liability. Pressure on ailing enterprises. Maybe not paid. Lump sum. Related with company, wage

and job tenure.

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In Latin America experience rated unemployment insurance.

Partially based on ondividual contributions (UISA) ,

partially on a subsidized solidarity fund. Possible regressiveness, low coverage, high

administrative costs.

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Wage Guarantee Funds (Italy).

A special public fund to protect workers' income, financed by companies and the state.

Makes up the pay of employees affected by lay-offs (see suspension of work ) or short-time working , up to 80 per cent. of the lost pay.

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A Theory of Unemployment Benefits

Mostly for formal workers. May reduce poverty, but may create

disincentives to work. Increases the reservation wage. Reduces the fear of unemployment and

puts upward pressure on wages. Increases job match quality.

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Empirical Research on Unemployment Benefits

Shorter benefit, shorter unemployment spell (Slovenia).

High benefits long term unemployment. Less benefit more mobility. Little research on developing countries. Little knowledge of effects on informality. No analysis of inequality and its effects. 68

ACTIVE LABOUR MARKET POLICIES (ALMP)

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What do we mean by Active Labour market Policies? Labour market policies are measures aimed at influencing

labour supply and demand, as well as their interaction Active Vs. Passive

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What do we mean by Active Labour market Policies? Passive labour market policies (PLMPs) are measures aimed

at offsetting the loss of income resulting from unemployment.

e.g. Unemployment benefit and assistance. Active labour market policies (ALMPs) seek to improving the

functioning of the labour market by enhancing mobility and easing the redeployment of laid- off workers. They also seek to improve the matching of unemployed with vacancies.

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Actives Labour Market Policies (ALMPs)

ALMPs

Placement, Assistance for Job

search

Tranining, Labour market integration

Subsidies hiring/ wages

Public work Programmes Public Employment

Subsidies or tax exemptions to enterpreneurs

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Types of Active Labour Market Policies:

Employment services/Job Search Assistance Subsidised Employment Public works/Public employment programmes Subsidised employment with (private) companies (Education &) Training Self-employment/Entrepreneurship

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Objectives of ALMPs

1. Promote and stabilize Labour Demand : To keep existing jobs (subsidies…) To create new jobs (public work, enterpreneurship…)

2. Improve the level of employability of job seekers and those who are outside the labour force

3. Addressing skills mismatch 4. Supporting job search 5. Provide sociale protection coverage 6. Target vulnerables groups in the LM: youth, female,

people with disabilities, migrants…

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What ALMP are not • Labour Market Institutions • Passive LMP (however they are related to

ALMP – activation strategies) • Other policies that impact indirectly on

Labour S. and D., for example: Development policies, Macroeconomic policies, Sectoral strategies, Education, Training policies….

• National Employment Policies (broader: include programmes for quality job creation)

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Labour Market Policies and NEP

Macro

Sectorial

Labour Market Policies

National Employment

Policies

• Macro • Sectors/Industries • Labour Market • Entreprenership • Skills Dev. • Measures / vulnerable groups • Gender equity

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A group of persons who may experience a higher level of difficulty in the labour market: Youth

Persons with Disabilities

Migrant workers

Older workers

Women

Long term unemployed

WHAT ARE TARGET GROUPS?

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Issues in Active Labour Market Policies:

• Job Search Assistance – cost effective (but limited) • Training vs. employment subsidies • On-the-job training appears to be more effective than off-

the-job training. • Public vs. Private

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Issues in Active Labour Market Policies:

Business Cycle: Micro studies - Training Vs. Subsidised employment Macro studies - ALMPs can mitigate negative employment

effects of a recession Targetting targeted programmes are more effective targetting disadvantaged youths = more effective

Comprehensive interventions: e.g. Youth Guarantees USA = mixed experience EU/ Latin America – positive experience (e.g. Scandinavia,

UK New Deal, YG)

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Issues in ALMP: Social Partners

Involvement of social partners is likely to enhance the effectiveness of programmes. Commitment Programme Quality: Numerous studies have demonstrated

that programmes which are more closely linked to private employers are likely to be more effective.

• Employers may use programmes as a recruitment and/or screening device.

• Relevance of training is greater in the context of private employer involvement.

• Involvement of workers’ organizations can help avoid some of the pitfalls of work experience and training programmes: Training content, monitoring/substitution, churning

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WAGE SUBSIDIES (one of ALMPs)

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What do we mean Wage Subsidies?

Transfers to employers/employees that cover (part of) wage or

non-wage labour costs: Payroll tax reductions Hiring/general wage subsidies

• All employees • New employees

Paid to individual (e.g. voucher) or firm

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What are Wage Subsidies meant to do? Improve employment prospects by: Overcoming demand-side constraints:

• Insufficient demand • Risk discount (lack of information) • Low (perceived) skills (and other non-cognitive

characteristics) Change in payoff to job search

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What are Wage Subsidies meant to do? Raise employment prospects in the short-run (during the life

of the subsidy) Raise employment prospects in the longer-term (in general

more effective in this respect than public works) some form of ‘skills’ acquisition is required (or, at least,

strongly recommended)

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Complementarities between LMI

• LMIs may act to reinforce each other or to mitigate specific effects:

• MW & EPL: strong EPL tends to reduce and dis- employment effects of MW

• EPL & ALMP: ALMPs tend to reduce the negative effect of strong EPL on Hiring and Firing (by making labour market matching more efficient)

• ALMPs & MW – depends on the specific rules • ALMPs & PLMPs: e.g. wage subsidies and unemployment

benefits

ALMP and PLMP = Active or Passive Labour Market Policies. 85

Group Work

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Time: 40 minutes and 5 min for presentation Groups of 4 to 5 persons Nominate a rapporteur who will present the key ideas discussed in the case of the countries represented in the group 1- Make a list of measures

/ALMPs in your country (that you may know) according to the 5 categories : Placement/JSA, Training, PEP, Subsidies/hiring, Enterpreneurship.

2- Undertake a SWOT analysis of

the identified measures . 3- Discuss possible

options/solutions to the existing constraints for each type of measures.

THANK YOU!

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