Unemployment: Systemic Problem of Slovak Economy

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Lack of jobs remains the key problem of the Slovak economy despite the currently declining unemployment rate. Government policies keep coming up with new labour market measures but these often prove ineffective, generating only temporary jobs by selectively supporting chosen jobseekers.

Measures are needed to remove obstacles arising mostly from high tax and regulatory burdens on labour. These are the factors that most affect people with insufficient education who account for the vast majority of the unemployed and find it most difficult to find a job.

Jobseekers from disadvantaged backgrounds are considered a separate category. This is particularly true of the Slovak Roma people. The spiral of poverty and unemployment that started out in some communities decades ago has become a nation-wide social problem1. Although this issue can only be solved on a long-term basis, with several policies working in conjunction, we can still lay the foundations today. Involving people with low qualifications in the labour market is a prerequisite for improving their situation.

In developing this study, INESS conducted two separate surveys. The first concerned employers and various barriers standing in the way of job creation. The researchers focused only on small business owners with up to 20 employees to keep the survey relevant. Another survey focused on mayors of the municipalities with high unemployment rates or a higher percentage of Roma population. Again, the survey investigated the conditions and barriers to employment.

Based on the results of the surveys and the economic view of the labour market problems, we have presented a number of proposals to promote job creation. The key suggestions include:

  1. Extend the low-income tax deductible item to social security contributions to reduce costs for employers;

  2. Repeal contribution liability for agreement contracts of up to EUR 200 per month;

  3. Simplify the employment process.

Lower labour costs will help create new jobs and, on the other hand, legalize the existing jobs that remain outside the legal economy due to external costs. In an environment of minimum skills and lack of qualifications, as shown by the survey, a minimum wage set too high is also an obstacle to employment – which is one of the reasons why the validity of this institute should be suspended in the case of high unemployment in the area.

The final point on the agenda is also crucial. If employing a person for one year requires 84 administrative acts by the employer, it is understandable that many small business owners are reluctant to create jobs. Growing job creation and an easier process of employment could help the disadvantaged jobseekers willing to work in finding occupation. Thus, good examples of working people whose life situation is improving may encourage other community members and boost their motivation to seek work too.

In the analysis, the basic measures are complemented by other proposals aimed at facilitating business and hence job creation. The authors of the analysis focused on this area even though they are well aware that these actions alone are not a sufficient condition to improve the situation. Indispensable are also measures with a positive impact on a supply side – the willingness of the unemployed to work today. The Parliament has already adopted a provision that “cuts off” the material need benefits on gradual basis, so financial uncertainty should not be an obstacle to the willingness to work when commencing employment.

It is necessary to redefine the rules of debt collection (executions) to make sure the entire higher net income of the debtors does not become an immediate income of their creditors. The willingness to work may not be enough if one cannot move for work. While the state subsidises social housing, it should not only do it where there is no housing at all, but also (and especially so) where jobs are available. It is easier for workers to move for work than to move a factory for the unemployed.

The study presents measures to help further cut unemployment and involve the officially inactive part of the population in the labour market. Of course, this does not mean that the suggested measures are ideal and that they will immediately cut the nation-wide unemployment rate below 5% – low qualifications, lack of work habits, persisting stereotypes in the labour market and too few new manual jobs are the factors that cannot be overcome merely by lowering taxation or cutting red tape. Nevertheless, the proposed measures are necessary if Slovakia intends to create a barrier-free environment with no obstacles to progress in these areas.

Suggested measures:

Extend the payroll tax deductible item

The currently valid payroll tax deductible item did not produce the needed reductions in labour costs. But it did keep the 2014 income costs that had been the result of sharp increases in the minimum wage. Extending the payroll tax deductible item to social security contributions would allow for reductions in the basic cost of labour even without the need to change the minimum wage.

Return contribution burden for performance contractors back to where it was before the changes introduced in 2013

Long-term employment is everyone’s dream. However, the previously flexible performance contracts had been instrumental in gaining the work experience needed to make this dream come true. Reducing the contribution burden for incomes of up to EUR 200, for instance, would facilitate employment of the unemployed today.

Make employment easier by cutting red tape and fee burden

It is vital to cut red tape, a relic of the past millennium. Sadly, the public administration still duplicates a huge amount of information, which poses an excessive burden on job creators.

Regionalise the minimum wage

A survey among small business owners has shown that increasing minimum wage leads either to dismissals or a slowdown in job creation. Low purchasing power does not allow for a high added value in services and manual labour. Since too high minimum wage sets the target too high, its validity should be suspended unless unemployment drops.

Reduce tax on corporate profits back to the 19-per cent rate; abolish tax licenses

As much as Slovakia does not want to be an assembly hall, the truth is that people with no education or language skills cannot get a job in foreign companies’ customer centres. Income tax rate is another way of our fighting for foreign investments that bring along jobs. Today, corporate tax in Slovakia is the highest out of all V4 countries.

No contributions or red tape for self-employed persons under 26; licenses for traders

Simplifying self-employment will help those whose skills and willingness to work are valuable for more than one customer at a time. Licenses are an instrument to eliminate red tape and keep the tax burden at an acceptable level.

Return the Labour Code back to before the changes introduced in 2013

Before 2013, the Labour Code offered more flexibility in job creation. The current Labour Code, with its high direct and indirect costs, only adds to the reluctance of employers to enter new markets and create new jobs.

Consolidate public finances in expenditures; remove pressure on further growth of public revenue

In Slovakia, the consolidation of public finances was implemented mainly by increasing tax burden. Nevertheless, there has not been a single fundamental reform in the field of public expenditure. The Government’s unwillingness to reduce tax burden on labour would not be so persistent, if the high public deficit was not the result of inefficient public spending.

The article is an excerpt from the forthcoming study to be published by end of June 2015.

1 Not a fiscal one, as demonstrated in this study: Ján Dinga, Radovan Ďurana: Rómovia a sociálne dávky / Roma and Social Benefits, INESS, Bratislava, 2014 <available in Slovak at http://www.iness.sk/mytus/ and in English at http://www.iness.sk/myth/>