OECD Reviews of Labour Market and Social Policies Serbia 2008 by OECD

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									                                                            OECD Reviews of Labour Market
                                                            and Social Policies

                                                            A LABOUR Y
                                                                        MARKET IN TRANSITION
                                                            PR O D
                                                     R L AW
                                        ENT  L A BOU                                            N
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OECD Reviews of Labour Market and Social Policies

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                                                                                         FOREWORD – 3


           This report was prepared by the Directorate for Employment, Labour
       and Social Affairs under the auspices of the OECD’s Centre for
       Co-operation with Non-Members (CCNM). It is part of a series of similar
       policy reviews devoted to central and eastern European countries, designed
       to permit comparison with other countries in the region as well as with
       OECD member countries. Previous reviews in the series concerned
       Poland (1993), the Czech Republic and Hungary (1995) and the
       Slovak Republic (1996) – before their accession to the OECD – and
       subsequently Slovenia (1997), Bulgaria (1998), Romania (2000), the
       Russian Federation (2001) and the Baltic States (2003).
            The main report was written by Anders Reuterswärd, while
       Vladimir Gligorov, acting as a consultant to the Secretariat, wrote the annex.
       Delegates from the OECD’s Employment, Labour and Social Affairs
       Committee discussed the review with representatives of the Ministry of
       Labour and Social Policy, the Ministry of Employment and Regional
       Development, Serbian labour market associations and other Serbian experts
       at a meeting held in Belgrade on the 12 December 2007.

       John P. Martin                                                               Eric Burgeat
       Director                                                                         Director
       Directorate for Employment,                                       Centre for Co-operation
       Labour and Social Affairs                                            with Non-Members

                                                                                                      TABLE OF CONTENTS – 5

                                      TABLE OF CONTENTS

Executive Summary ............................................................................................. 9

CHAPTER 1. SERBIA’S OVERDUE TRANSITION ...................................... 15
Introduction ........................................................................................................ 15
A problematic legacy ......................................................................................... 21
From under-employment to labour shortage ...................................................... 23
       Population ageing and international migration ....................................... 24
       High unemployment and declining employment .................................... 27
The employment structure needs to change faster ............................................. 31
       Private-sector growth and its impact on job conditions .......................... 34
       Self-employment: from casual own-account work
       to small enterprises .................................................................................. 37
Concluding remarks ........................................................................................... 39

  FOR EMPLOYMENT ................................................................................ 41
Introduction ........................................................................................................ 41
The industrial relations system is under pressure .............................................. 41
Labour taxes, compliance and unreported work ................................................ 45
       Unreported work – and under-reported wages in formal jobs ................. 46
The labour inspectorate should be strengthened ................................................ 49
The problem of unreformed enterprises ............................................................. 50
       Phasing out social ownership .................................................................. 51
Employers often disregard the Labour Law –
    but seldom use the flexibility it allows ........................................................ 56
       Working time .......................................................................................... 56
       Employment protection legislation (EPL) ............................................... 56
Concluding remarks ........................................................................................... 60


  AND ITS PROGRAMMES ......................................................................... 61
Introduction ........................................................................................................ 61
Who are the registered unemployed? .................................................................. 64
New principles for registration from 2007 ......................................................... 71
A difficult challenge for job counsellors ............................................................ 72
Profiling and selection of priority groups .......................................................... 73
Active labour market programmes (ALMPs) .................................................... 75
Concluding remarks ........................................................................................... 79

Annex: Rights and Risks: Labour Market Challenges
   in a Post-self-managed Economy ................................................................ 81

References .......................................................................................................... 99

List of boxes
Box 1.1. Sources of statistics about the labour force and employment ............. 18
Box 2.1. The labour inspectorate ....................................................................... 49
Box 3.1. Unemployment insurance .................................................................... 70

List of figures
Figure 1.1. Serbia’s social product (SP) and GDP ............................................. 16
Figure 1.2. GNI per capita in transition countries .............................................. 16
Figure 1.3. Employed persons in 2001-2007 ..................................................... 19
Figure 1.4. Serbia’s population in 2007 by age and labour force status ............ 25
Figure 3.1. Registered job seekers: stock data ................................................... 65
Figure 3.2. The unemployed by duration of unemployment .............................. 65
Figure 3.3. Women as percent of the employed and the unemployed ............... 66
Figure 3.4. Employed and unemployed men: age distributions ......................... 67
Figure 3.5. Employed and unemployed women: age distributions .................... 67
Figure 3.6. Registered unemployed persons in August 2007:
      distribution by gender, age and education attainment ............................. 68
Figure 3.7. Employed and unemployed persons in October 2005:
      distributions by gender and education attainment ................................... 69
Figure 3.8. Registered job seekers: monthly flow data ...................................... 71
Figure 3.9. Registered vacancies: monthly flow data ........................................ 72

                                                    SERBIA: A LABOUR MARKET IN TRANSITION – ISBN-9789264045798 © OECD 2008
                                                                                                   TABLE OF CONTENTS – 7

List of tables
Table 1.1. Household budgets in 2006 by income decile .................................. 20
Table 1.2. Unemployment: duration and individual backgrounds ..................... 28
Table 1.3. Employment/population ratios in 2006 for the working-age
      population and selected age and gender groups. OECD and selected
      Balkan countries ...................................................................................... 29
Table 1.4. Labour force status of the population in 2004 to 2007 ..................... 30
Table 1.5. Employment by economic sector and ownership ............................. 33
Table 1.6. Relative wages and employment by economic sector,
      2005-2006 ............................................................................................... 34
Table 1.7. Employed persons by tenure in the current main job ........................ 35
Table 1.8. Weekly working time ........................................................................ 37
Table 1.9. Employed working age and older persons by job status
      and main sectors ...................................................................................... 38
Table 1.10. Self-employed persons aged 15-64 without employees by place
      of work .................................................................................................... 39
Table 2.1. Employed persons and contributors to pension funds ...................... 47
Table 2.2. Number of employees and value added (VA) per employee
      in registered enterprises by ownership as reported in company
      statements for 2005 ................................................................................. 52
Table 2.3. Incidence of unpaid wages ................................................................ 53
Table 2.4. Relative wages by sector and ownership .......................................... 55
Table 2.5. The strictness of the employment protection legislation (EPL) ........ 57
Table 2.6. Reported job separations ................................................................... 60
Table 3.1. Active labour market programmes: estimated spending in 2006 ...... 76
Table 3.2. Participants in active labour market programmes ............................. 77

                                                                         EXECUTIVE SUMMARY – 9

                                EXECUTIVE SUMMARY

           Serbia has achieved high rates of economic growth since 2000, and its
       transition to a competitive market economy is well underway. But precious
       time was lost in the 1990s, with the result that GDP per capita is now
       among the lowest in Europe. The country suffers from a large labour
       surplus, and the restructuring of the economy is still in a phase when many
       jobs are bound to disappear at the same time as new ones are created.
           In this situation, it is crucial to establish the best possible conditions for
       creating more new jobs on market conditions. Key policy objectives must be
       to foster greater flexibility in employment, a consistent and equitable
       application of labour law and a transparent job market. The on-going
       transformation of the National Employment Service should be completed
       with a further shift of emphasis from administrative register functions
       towards counselling and job-search assistance to the unemployed.
           This report first reviews the labour market trends in the years
       after 2000 and the principal challenges to labour market policy. It then
       considers the available policy instruments, beginning with the institutional
       framework including industrial relations, labour law and issues about
       compliance and enforcement. This is followed by an assessment of the role
       of the public employment service and its different programmes.
           In all considered policy areas, Serbian policy makers have drawn
       significant lessons from experience in OECD economies and other
       transition countries. However, it is argued below that Serbia, in order to
       catch up economically, should aim to make its labour market more flexible
       than those of most EU countries.
           An annex takes a longer historical perspective. It considers the
       experience of the former Yugoslavia’s peculiar labour market model and
       draws some policy lessons from the ways in which the different successor
       states have dealt with this legacy.

       Major employment reductions have occurred

           Chapter 1 observes that employment declined in every year from 2001
       through 2006, followed by a small recovery in 2007. Over the period as a


     whole, major employment reductions occurred in big enterprises and
     peasant farming, while net job creation was observed mainly in small
     non-farm family businesses. The survey-based unemployment rate peaked
     at almost 22% in 2005 and 2006. But it fell to just under 19% by
     October 2007, reflecting the combination of economic recovery and a
     shrinking labour force.
         The working-age population is set to decline further as a result of
     population ageing and net emigration. However, Serbia still has large
     potential labour supplies because only about 50% of the working-age
     (15-64) population is employed. Employment rates are low by OECD
     standards for most demographic groups, especially youths, women and the
     elderly, although the situation is comparable in several countries in south-
     eastern Europe. Moreover, a significant but declining part of employment
     concerns subsistence farming and other low-productive forms of
     self-employment, which often are informal. In some part, the recent
     decline in total employment appears to reflect a growing reluctance among
     parts the population to accept the most low-paying types of work.

     Disappointing employment growth in small firms

         The economic transition has brought profound changes in the structure
     of the job market. Almost two-thirds of employment is now in the private
     sector, where labour turnover is on average much higher than in the public
     sector, and the average size of enterprises has declined significantly.
         However, a worrying weakness in Serbia’s recent labour market
     performance has been the anaemic growth of employment in new small
     firms. Non-farm self-employment still plays a modest role by international
     standards. The authorities have sought to facilitate business start-ups by
     streamlining administrative procedures, but international comparisons
     show that these are still relatively cumbersome. It should be a high priority
     for the authorities to remove these barriers and make the public
     administration more helpful to small firms.
         Chapter 2 finds that Serbia’s formal labour market regulations are
     broadly appropriate and in accordance with international standards. But
     this observation has limited consequence as long as implementation is
     weak. For the same reason, it can be difficult to determine to what extent
     various provisions in the law might in fact be too rigid if they were to be
     rigorously enforced in future.

                                  SERBIA: A LABOUR MARKET IN TRANSITION – ISBN-9789264045798 © OECD 2008
                                                                         EXECUTIVE SUMMARY – 11

       Serbia needs more flexible EPL than most EU countries have

           Numerous rules in Serbia’s Labour Law have been aligned with
       EU practice, which is relatively stringent on certain points such as
       employment protection legislation (EPL). As a result, EPL is now less
       flexible in Serbia than in most of the other transition economies, and much
       less flexible than in, for example, the English-speaking OECD countries.
       However, international experience shows that low and medium-income
       countries need more flexible EPL rules than those typically found in
       continental western Europe. Serbia should simplify its rules about
       dismissing workers and remove unnecessary restrictions on the use of
       temporary job contracts.
           The Labour Law cites collective bargaining as the preferred method
       for wage-setting, and it stipulates strict rules for recognition of trade
       unions and employer associations. But in reality, trade unions and
       collective agreements have little impact outside the public sector and large
       firms. Where unions do not exist, the law permits employers to decide on
       wages and working conditions.

       Social dialogue should involve potential winners and losers

           Given Serbia’s history and the difficulty of its economic and labour
       market reforms, policy making must involve an element of social dialogue.
       For this purpose, tripartite Councils have been established at the national
       and regional levels, in which the existing labour market associations are
       represented. However, in policy matters of great importance for economic
       development, the social dialogue remains insufficient if it does not
       encompass both growing and declining segments of the labour market. In
       order to achieve this, it appears important to consider possible ways of
       giving voice to groups that are not well represented in the tripartite
       councils, as for example the workers of small firms. The range of
       participants in such discussions should be flexible and not necessarily
       linked with a status as collective-bargaining partner.

       Strengthen tax enforcement and the labour inspectorate

           Better enforcement is needed in several policy areas of relevance to
       employment, including labour law, social insurance, business and labour
       taxation, and occupational health and safety. The report identifies three
       types of compliance problems: i) many jobs are informal; ii) some formal
       enterprises are so low-productive that they cannot afford to fulfil their


     legal obligations; and iii) some rules, such as those on working time, are
     widely disregarded even in profitable formal enterprises.
          According to OECD experience, the most important instrument for
     formalising informal employment is usually the tax administration and its
     ability to promote good accounting standards. Enhanced tax enforcement
     should be coordinated with the on-going development of Serbia’s official
     registers of enterprises and entrepreneurs, as well as with that of the social
     insurance administration. Enterprises should not be allowed to stay in
     business if they cannot fulfil their obligations. The remaining socially-
     owned firms, which on average have the worst record, should be privatised
     or liquidated as planned.
         In order to fulfil its functions, the labour inspectorate needs more
     resources and stronger legal powers, for example in terms of its right to
     inspect various types of business and to decide about sanctions.

     Client-oriented employment services

          Chapter 3 is devoted to the modernisation of the National Employment
     Service (NES) and its programmes. These reforms are guided by national
     strategy documents that take account of international experience,
     reflecting Serbia’s cooperation with the European Union and various
     countries. Several strategy papers emphasise the need to develop client-
     oriented services to job seekers and employers. In Serbia as elsewhere,
     varying views have been expressed about the need to increase spending on
     the more expensive types of active labour market programmes, especially
     training. With about 0.1% of GDP devoted to such programmes in 2007,
     their annual participant intake corresponded to barely 5% of the stock of
     registered unemployed persons.
         To develop its main service functions, the NES needs to modernise
     the job-seeker and vacancy registers. These should concentrate on the
     actual information needs for job search and filling vacancies. An
     important step in this direction was taken in 2007, when the principles for
     registering clients as unemployed were changed and numerous persons
     not seeking jobs were eliminated from the register. Similarly, vacancy
     registers should focus on the job openings for which employers are
     actually seeking candidates.

                                  SERBIA: A LABOUR MARKET IN TRANSITION – ISBN-9789264045798 © OECD 2008
                                                                         EXECUTIVE SUMMARY – 13

       Limited capacity for counselling justifies a focus on benefit
       recipients and motivated clients

           Given a large stock of registered unemployed clients, and the likelihood
       of continued large inflows in the near future, the NES must prioritise. It
       recently introduced a system for profiling of clients, and individual
       employment plans are developed for those deemed most employable.
       Following current practice in many countries, unemployment benefit
       recipients are asked to sign mutual-obligations agreements with the
       employment service. However, only about 10% of the clients are eligible for
       such benefits, and even for them, the mutual obligations have questionable
       legal consequence because the benefit payments are in arrears (by
       four months in 2007).
            According to the profiling outcomes in 2007, a majority of the
       registered unemployed were considered as employable only after
       participation in substantial active programmes (training or job subsidies),
       if at all. But despite a recent increase in programme spending, budgetary
       and efficiency considerations make it unrealistic to expect such expensive
       programmes to play more than a very marginal role in resolving Serbia’s
       unemployment problem.
           In this situation, the best use the NES can make of its limited budget is
       to concentrate on the basic employment service functions, especially filling
       vacancies, job-related individual counselling and related group activities.
       Existing self-service systems for job information, which are accessible to
       anyone, should be developed, while available resources for counselling and
       monitoring of individual job-search efforts should target benefit recipients
       and the most motivated among the other registered clients.

                                                               CHAPTER 1. SERBIA’S OVERDUE TRANSITION – 15

                                              CHAPTER 1

                      SERBIA’S OVERDUE TRANSITION


           After a decade of economic and political distress, Serbia achieved a
       significant turnaround in the years that followed its democratic
       breakthrough in 2000. Successive governments in office since then have
       sought to restore lost momentum in the long-delayed transition to a market
       economy. A process of privatisation and economic restructuring has
       resumed, supported by numerous pieces of new legislation including a
       labour law from 2001, modified in 2005, and measures to facilitate
       enterprise start-ups. The social safety-net has been partly modernised
       within the narrow budget limits that can be afforded. As a framework for
       many of these reforms, the country has adopted a National Employment
       Strategy and a Poverty Reduction Strategy that take account of
       international experiences. This report reviews the key issues of labour
       market policy from an OECD perspective.
           Serbia is currently one of the poorest countries in Europe,
       notwithstanding over 40% real GDP growth between 1999 and 2006,
       corresponding to over 5% per year. Given a slightly negative population
       trend, the increase in GDP per capita was nearly 50% over the same
       period, or 6% per year. But this strong growth performance must be
       considered against the background of an extremely depressed starting
       point in 1999, the year of the Kosovo war when much of the formal
       economy had ceased to function, comparable only to a similar low point
       in 1993 (Figure 1.1).1

1.           GDP estimates are available only from 1997. Previous measures, called “social
             product” or “gross material product”, excluded several service sectors as
             “non-economic”. It would also be relevant to compare GDP or GNI trends in
             purchasing power parities (PPPs), but such data do not appear to be available over
             the considered period. In a preliminary estimate for 2007, the World Economic
             Outlook (IMF, October 2007) estimated Serbia’s GDP per capita at USD 7 265 in
             PPPs and USD 5 397 in nominal terms. This was higher than in Albania, Bosnia,
             Bulgaria and Macedonia in nominal terms; but in PPPs, only Albania among the
             neighbouring countries had a lower estimated per capita GDP than Serbia.


                                              Figure 1.1. Serbia’s social product (SP) and GDP
                                              Alternative trend estimates for 1985-2006 at constant prices



             Billion 2006 dinars



                                                                                                  SP, old estimates
                                                                                                  SP, recent estimates

Source: Secretariat calculations based on the NBS Statistical Bulletin, various issues;
www.nbs.yu accessed 8 May 2007.
                                              Figure 1.2. GNI per capita in transition countries
                                                                      EMU = 100




                                   30                                                                                 1995

                                   20                                                                                 2005



* For 1990: UN data, not fully comparable. This also applies to 1995 in the case of Serbia and
Source: WDI, Atlas method, comparing GNP at current US dollars with the European Monetary Union
average = 100.

                                                                 SERBIA: A LABOUR MARKET IN TRANSITION – ISBN-9789264045798 © OECD 2008
                                                               CHAPTER 1. SERBIA’S OVERDUE TRANSITION – 17

           The necessary restructuring and modernisation of the economy is still at
       an early stage. Serbia lags several years behind other transition economies in
       central and eastern Europe, of which a majority have experienced relatively
       steady growth since the early or mid-1990s. Economies like Hungary, the
       Slovak Republic and the Baltic States, which in 1990 appeared about as
       productive as Serbia, are now generating much higher per-capita incomes.
       Serbia has also fallen behind the previously less developed economies of
       Poland, Romania and Bulgaria (Figure 1.2).2
            Such comparisons must be treated with caution because of definitional
       problems and different starting points in the transition, but they suggest that
       Serbia has a potential to catch up on EU countries if it can adapt and make
       better use of its resources. The country’s experience of previous industrial
       development, as reflected in its human capital, infrastructure and
       institutions, is now largely out-dated, but elements of this legacy could still
       be advantageous if used in an innovative manner. For example, there is no
       doubt that the inherited former Yugoslav institutions of self-management
       and social ownership were economically unsustainable (see Annex). The
       still-existing remnants of social ownership must be phased-out, as planned,
       but this defunct system leaves in its wake an acquaintance with
       decentralised management. In the emerging new institutional framework for
       entrepreneurship and corporate governance, which must respect the distinct
       roles of capital owners and managers, relevant parts of this experience may
       well be useful.
           Aggregate employment has probably declined in every year
       from 2001 through 2006. Figure 1.3 shows official summary estimates
       using different data sources (cf. Box 1.1), which suggest an average
       employment reduction by about 2.5% per year over the mentioned
       period. It is unclear to what extent the overall trend would change if it
       were possible to take better account of the most informal and casual
       types of employment. But there is no doubt that major employment
       reductions have occurred in large and medium-sized enterprises and in
       peasant farming. These retrenchments have been only partly
       compensated for by job creation elsewhere, principally in small non-
       agricultural family businesses. Until 2004, some marginal net
       employment growth was also recorded in registered enterprises with
       under 50 employees, but this enterprise category has recently been
       stagnant in employment terms. As discussed further below, much of the
       recent employment reduction concerned the most low-productive

2.           Figure 1.2 compares GNI, which differs from GDP by including income received
             from abroad (e.g. remittances) while excluding income sent abroad (e.g. profits
             which foreign investors take home).


      segments of the economy. Combined with the GDP growth observed
      since 2000, these employment trends point to a significant improvement
      of productivity. But while this has facilitated some export growth in
      recent years, it has not yet been sufficient to prevent a continued
      widening of Serbia’s trade deficit.
         Judging from the 2007 labour force survey – published in February
      2008, when this report was at a final editing stage – the long-lasting
      employment decline may have come to an end. Between October 2006 and
      October 2007, employment reportedly increased by 1.0%.

      Box 1.1. Sources of statistics about the labour force and employment

    Labour force surveys (LFS) are conducted during one week in October each year. Methods
and definitions have essentially followed the recommendations of the ILO and Eurostat since
2004. The 2006 survey covered 6 500 households and 17 000 persons (0.3% of the population
aged 15 or more). The surveys conducted before 2004 were not comparable.
     For registered enterprises, the Statistical Office of Serbia publishes administrative
statistics on employees and average wages. Data are collected in March and September each
year from all registered enterprises with 50 or more employees and from a sample of smaller
registered enterprises. Annual averages are calculated from the March and September data,
while monthly updates refer to reduced samples. These statistics have been available for
several decades.
     Statistics about registered “entrepreneurs” (self-employed persons) and their employees
have until now been collected from the health-insurance authority. A new register of
entrepreneurs, set up in 2006 (see Chapter 2), will probably be used for such statistics in
the future.
    Concerning peasants – self-employed persons in agriculture – administrative data can be
obtained from the farmers’ pension fund (see Chapter 2), but only the LFS gives information
about unpaid family workers.
     The Statistical Office of Serbia regularly compiles an “employment balance” (see
Figure 1.3), designed to give adequate coverage of all labour market segments while permitting
longer time series than is possible with the LFS alone. It combines the above-mentioned
administrative statistics about registered enterprises with health-insurance data about
entrepreneurs and their employees and LFS data about peasants.
     Unreported employment is not covered in administrative statistics, and it is not known to
what extent it may go undetected in the LFS as well. Chapter 2 makes partial estimates of
informal employment by comparing LFS-employment with enrolment in the principal
pension funds.
    The National Employment Service produces monthly statistics about registered
unemployed persons, other job seekers, vacancies, hirings and job separations.

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                                                                        CHAPTER 1. SERBIA’S OVERDUE TRANSITION – 19

                             Figure 1.3. Employed persons in 2001-2007





                              Non-farm self-employed persons
                              Employees of the non-farm self-employed
                              Employees in enterprises with up to 50 workers
                              Employees in enterprises with over 50 workers

Source: Data about employees from semiannual surveys of enterprises, institutions and organisations
in all ownership categories, with supplementary sample surveys for enterprises with up to
50 employees. The non-farm self-employed and their employees: Health insurance data. Peasant
farming: Labour force surveys in October.
            The income distribution has remained moderately unequal, implying
       that a large majority of the population now have low incomes by European
       standards. In 2006, the average household budget per month was estimated
       at EUR 137 per capita (or EUR 178 per adult-equivalent consumption unit;
       see Table 1.1). The median value per capita was about EUR 120, with about
       20% earning over EUR 200 and nearly 20% earning under EUR 60
       (EUR 2 per day).3 Work income accounted for at least about half of the total
       in all income deciles; but in the poorest decile, almost half of the work
       income was earned in-kind, essentially from farms. The existence of
       numerous low-income households whose heads are employed – the
       “working poor” – often reflects a combination of low productivity and
       uneven working time, especially in agriculture but also among other
       self-employed groups and in enterprises that impose unpaid leaves or fail to
       pay wages regularly.

3.           Source: Household budget surveys of the Statistical Office of Serbia. The concept of
             “household budget” corresponds broadly to the conventional concept of “disposable
             income”, but it includes some additional items such as consumer credits. Based on
             the same surveys, the Office has estimated that the Gini coefficient for household
             consumption declined from 0.29 in 2003 to 0.25 in 2005. As measured for income, it
             was estimated at 0.33 in 2002 (World Bank, 2003, p. 54).


                           Table 1.1. Household budgets in 2006 by income decile
                                                                      Deciles                              Average
                                                1      2    3     4     5     6   7    8     9   10

A. Available budget, Euros per month
Per capita                                      33    59   78 94 109 128 150 177 217 399                    137
Per adult-equivalent consumption unit*          44    78   102 123 143 166 193 226 277 502                  178

By source, percent distribution
Work income                                     51    57    56   59     62   63   60   61   64   49          58
  Of which:
 Wages                                          20    32    37   40     48   48   50   50   56    41         45
 Other non-farm work income                      6     5    3    4      4    3    4     2   2     3          3
 Money income from agriculture                  3      4    2    3      2    5    2     4   3     3          3
 In-kind income (mainly agriculture)            22    17    13   11     7    8     5    5   3     2          6
Pensions (old-age, disability and other)        27    28    32   29     25   25   29   26   24   18          24
Other social benefits                           10     5     4   2      3    2     2    1    1   2            2
Capital income, gifts, transfers, credits and
other                                           11     9    9    10     10   10   8    11   11   32          16

B. Consumption expenditure (Jan-Sept.)
Amount per capita, Euros per month              43    69    86   95    110 120 143 160 191 307              128
Food share in consumption, percent
 (Engel coefficient)                            54    48    45   44     43   42   40   37   35   27          38

Each decile represents 10% of the households.
* The number of adult-equivalent units per household = 1 + (number of adults - 1) * 0.7 + (number of
children under 15) * 0.5.
Source: Data from household budget surveys submitted by the Statistical Office of Serbia.

             Another indication of modest living standards is that the share of food in
         household consumption expenditure is over 40% for most deciles, and over
         25% even for the top decile (Table 1.1, Panel B). In western European
         countries, food typically represents around 15% of the average household’s
         consumption. Such household budget data must be used with caution,
         however, in view of the risk of under-reporting of incomes and spending,
         not least in the top deciles. However, the apparent absence in Serbia of a
         large upper-middle class with rising relative incomes can also be taken as a
         sign of slow economic restructuring. Judging from the experience of other
         transition countries, the type of wage differentiation that is based on
         individual qualifications can be expected to increase as the transition
         proceeds, which, in turn, may lead to a rise in income inequality.
              The rest of this chapter seeks to identify and illustrate the main
         challenges. After some general observations about the conditions inherited
         from the past, the chapter reviews available labour force statistics and seeks
         to illuminate how labour market and social conditions depend on specific
         structural problems in the economy and how they are affected by its
         on-going restructuring. A final section summarises the policy conclusions
         that will be considered in subsequent chapters.

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                                                               CHAPTER 1. SERBIA’S OVERDUE TRANSITION – 21

A problematic legacy

            Serbia’s industrial structure was shaped largely between the early 1950s
       and the late 1970s, a period of rapid industrialisation and rural-urban labour
       mobility. High rates of growth were then driven by investments and job
       creation in socially-owned enterprises. As discussed in the Annex, studies
       have found that this peculiar form of ownership and the related “worker
       self-management” – both typical of socialist Yugoslavia – often had a
       distorting impact on resource allocations. On the whole, however, the
       current restructuring needs do not appear exceptionally difficult in the
       former Yugoslav economies compared with many other countries of the
       former socialist bloc. The transition policies followed by Slovenia and
       Croatia have been relatively successful. The comparisons made in the
       Annex between Yugoslav successor states suggest that alternative
       approaches to privatisation and institutional reform can be successful, but
       they must focus on the need for good management in enterprises.
            The OECD has previously observed that while Serbia’s move to embrace
       economic reforms appeared irreversible, the country was facing a major
       challenge in implementing such reforms (OECD, 2003). The present report,
       which focuses on labour market issues, finds evidence of further progress in
       institutional reform. But in terms of the restructuring of the economy and the
       job market, the achievements until now are uneven and somewhat
       disappointing. A considerable number of enterprises have not been privatised,
       often due to concerns about their poor performance – a fact that should make
       it all the more urgent to speed up the process. Such uneconomic enterprises
       continue to represent a financial cost to the government and a cause of market
       distortions that can discourage job creation in other firms. A 2003 survey of
       Serbian enterprises found that privatised firms were 90% more productive
       than socially-owned ones, while new private firms were over three times as
       productive.4 The analysis below of employment and wage trends up to 2006
       (see Chapter 2) finds signs of continued malfunctioning in a number of public
       and socially-owned enterprises.
           The Reassessed OECD Jobs Strategy of 2006 identifies product-market
       competition as a key factor behind international differences in labour market
       performance. Anti-competitive product-market rules tend to generate rent-
       seeking, to reduce employment and output and to slow down restructuring.
       Compared with leading OECD economies, these product-market distortions
       and their negative employment effects were generally greater in transition
       countries. This conclusion also seems to hold for Serbia, judging from a study
       in 2002 (Center for Liberal-Democratic Studies, 2002). Competition has

4.           World Bank (2004, p. 7).


      undoubtedly increased since then as a result of foreign trade and domestic
      adjustments, but constraints in transport and distribution systems continue to
      restrict local markets, as does the weight of monopolies in public utilities.
           Perhaps the most worrying weakness of the Serbian economy – in terms
      of its capacity to generate new jobs – concerns its small-business sector,
      which is growing at an anaemic pace. Without much more vigorous growth in
      new and innovative enterprises, aggregate employment will continue to
      stagnate or decline, which would make the necessary downsizing of
      uneconomic firms even more painful for the population. An OECD survey in
      2002, covering a sample of small registered enterprises in Serbia, found that
      only about 20% of them were then under five years old.5 An encouraging sign,
      however, was that many managers gave positive assessments of the
      institutional conditions for business as reformed by 2002. The most
      often-mentioned obstacle to business growth was the local market’s low
      purchasing power. However, as shown below, job creation in small enterprises
      has not picked up after 2002 despite rising household incomes.
          In Serbia, as elsewhere in the Balkans, the business climate suffers from
      administrative complications inherited from the past. An important step was
      taken in 2004 with the creation of a new Business Register Agency, which
      has begun to coordinate several administrative functions that previously
      required contact with different authorities. From 2006, this Agency also
      keeps records of “entrepreneurs”, i.e. self-employed own-account workers
      with or without employees, and handles their enrolment in social insurance.
          In recognition of this reform, Doing Business in 2006 (World Bank,
      2005) mentioned Serbia as the “leading reformer” amongst 155 countries.
      However, further reforms are needed. Notwithstanding the Business
      Register Agency’s goal of becoming a “one-stop shop”, Doing Business
      in 2008 (World Bank, 2007) found that the setting-up of a new business in
      Serbia still requires 11 administrative procedures and takes 23 days. The
      situation is similar in many neighbouring countries, but Serbia’s global
      ranking is now only 86th on the summary indicator “ease of doing business”
      and 90th on “starting a business” (this time amongst 178 countries). Even
      less favourable rankings were obtained for “dealing with licenses”,
      “registering property” and “paying taxes” (despite a low rate of business tax,
      see Chapter 2).6

5.        OECD (2003, Annex II).
6.        Following the praise for Serbia in Doing Business in 2006, the subsequent Doing
          Business in 2007 reported further progress, notably with respect to contract
          enforcement and bankruptcy procedures. But Doing Business in 2008 found no

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                                                               CHAPTER 1. SERBIA’S OVERDUE TRANSITION – 23

            The administrative simplifications that began in 2005 should facilitate
       business growth when they are fully implemented, but such effects are
       hardly visible in available statistics for 2006. Non-agricultural
       self-employment in any form – registered as enterprises, “entrepreneurs” or
       not at all – continues to play a moderate role by international standards,
       accounting for about 10% of all employed persons in 2006. A closer look at
       data from labour force surveys (see below) suggests that this figure includes
       an element of irregular or casual activities, often with short working time
       and no fixed place of work. Some of those concerned are probably working
       informally, and so represent a challenge to the Business Registers Agency,
       social insurance and tax authorities.7
            The “formalisation” of informal employment must be a priority goal.
       OECD experience suggests that an efficient collection of taxes and social
       insurance contributions is an important instrument to achieve this objective.
       It should be accompanied by recurrent revisions of employment and product
       market regulations in order to make them less onerous for formal-sector
       employers. Studies in many countries have found that formal businesses are
       more likely than informal ones to grow and to enhance productivity.
       Informal employers tend to have few legitimate business contacts and
       limited access to credits and legal protection, while informal jobs are
       typically insecure and low-productive.8
           The following sections seek to quantify the principal challenges with the
       help of statistics, especially from labour force surveys, considering first the
       conditions of labour supply and subsequently the employment structure and
       some indicators of qualitative job characteristics.

From under-employment to labour shortage
           Like many European countries, Serbia is facing at the same time a labour
       surplus and a prospect of future labour shortages. The current surplus includes
       not only the 585 000 persons who were unemployed in October 2007 – about
       19% of the labour force, down from about 700 000 or 22% a year earlier – but

             comparable reforms in the twelve months up to June 2006, with the result that
             Serbia fell back significantly in ranking terms.
7.           The reported numbers of self-employed persons are similar according to both
             the LFS and health-insurance records, but it is not known to what extent the two
             sources cover the same individuals.
8.           See OECD (2004), Chapter 5. Negative effects of informality have been observed
             for example in central and eastern Europe and Mexico (Belev, 2003; Winkler,
             1997). Informality has been found to contribute to low productivity growth and
             uneven economic development in Latin American countries (e.g. Gonzaga, 2004).


      also various forms of under-employment and “hidden” unemployment.
      Depending on definitions, the latter can be considered to include employed
      persons whose jobs are “inadequate” in one way or the other (e.g. they may
      involve few hours, be part-year or not utilise the individuals’ skills and
      qualifications), as well as inactive persons who might be able to work but are
      not seeking jobs. It is notable that the inactive, as estimated in LFS, are more
      numerous than the unemployed among women in almost all age classes and
      among men aged 50 and above (Figure 1.4).
          To sustain economic growth in a period of population ageing, Serbia
      needs to reverse a downward trend in labour force participation (see below).
      Both demand and supply-side factors are important. On the side of labour
      demand, economic growth should permit a gradual recovery in aggregate
      terms, once the lion’s share of the necessary downsizing has been
      accomplished in the many enterprises now slated for restructuring,
      privatisation or liquidation. A subsequent section probes into these
      developments with the help of data about the changing composition of
      employment. On the supply side, it is relevant to consider the main
      demographic parameters and the possible role of various obstacles to labour
      force participation, especially among youths, women with children, elderly
      persons and the disabled.
      Population ageing and international migration
          The latest population census in 2002 recorded 7 498 000 inhabitants in
      Serbia excluding Kosovo, with a declining trend since a historical peak at
      7.8 million was reached during the 1990s. The actual peak number including
      refugees was possibly even higher. For the period after 2002, official
      estimates based mainly on data on births and deaths indicate a further
      population decline of 25 000 to 30 000 persons per year, suggesting a total
      population of a little less than 7.4 million in 2007.
           Serbia’s population is ageing. Judging from population estimates used as
      a frame for the LFS, the biggest population cohorts in 2007 were already
      50-59 years old – an age when numerous women are about to retire while
      most men have just a few more years to work (Figure 1.4). About one-fifth
      of the inhabitants were aged 65 or more. By European standards, Serbia’s
      demographic imbalance is not extreme as measured by its crude birth rate of
      nearly 11 per 1 000 inhabitants in 2006 (after a recent increase) or by its
      total fertility rate of about 1.5 children per woman, close to the EU average.
      However, in contrast to western Europe, net migration to Serbia has turned
      negative and emigrants are probably younger on average than most of the
      recent immigrants, of whom many were refugees. The elderly population is
      set to grow further as a result of a projected rise in average life expectancy,
      which in 2005 was only 70 years for men and 75 for women.

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                                                                                                   CHAPTER 1. SERBIA’S OVERDUE TRANSITION – 25

                                                     Figure 1.4. Serbia’s population in 2007 by age and labour force status

  Thousands of persons per 5-year age class




                                              150                                                                               Inactive
                                              100                                                                               Employed


                                                    0-4   5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75+

  Thousands of persons per 5-year age class






                                                    0-4   5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75+

Source: Labour force survey; for children, estimates based on birth data.


          No reliable statistics are available about international migration
      after 2002. By way of comparison, about 350 000 persons appear to have
      emigrated between the two census years of 1991 and 2002. The outflow was
      then compensated for by immigration, principally of refugees from Croatia
      (about 240 000 persons) and Bosnia and Herzegovina (about 140 000) and
      displaced persons from Kosovo (around 250 000), altogether 600 000 to
      700 000 individuals.9 Some of them have now returned to their countries of
      origin or moved elsewhere, but over 400 000 including many elderly
      persons appear to have settled permanently in central Serbia or Vojvodina.
          Assuming no further large refugee movements, future migration will
      depend on employment and education opportunities in Serbia compared with
      prospects in the main receiving countries. Net emigration will probably persist
      for some time, even under a hypothesis that foreign countries take no further
      steps to facilitate immigration from Serbia. A progressive (re)integration of
      Serbia’s labour market in its regional and wider international context appears
      both desirable and inevitable in the medium term, notwithstanding many
      obstacles. More open borders would create new opportunities for job seekers
      and employers, and this would put additional pressure on enterprises to make
      their job openings attractive. For individuals, it would also give stronger
      incentives to acquire market-relevant skills, e.g. via higher education. The
      effects on unemployment are less certain: emigration reduces domestic labour
      supply, but the resulting upward pressure on wages can also reduce labour
      demand. Another effect of emigration consists of remittances and other
      foreign transfers to Serbian households, a source of income that has been
      important for a considerable time, amounting to around 10% of GDP.10
          International experience suggests that many migrants would probably
      return to Serbia if its economy continues to catch up, bringing with them
      valuable financial and human capital acquired abroad. But it is seldom
      possible to predict the extent of such returns or when they might occur.
      The 2002 census identified 415 000 Serbian citizens with work or residence
      permits abroad, most often in Germany, Austria and Switzerland, while the
      actual number is probably higher.11 Vukovic (2005) estimated the Serbian

9.        Estimates based on UNHCR data (www.unhcr.org/statistics/ accessed 30 April 2007).
10.       In the national accounts for 2006, current transfers to and from Serbia corresponded
          to, respectively, 14% and 5% of GDP. In addition, some smaller amounts counted
          elsewhere, e.g. as income and capital transfers, may be due partly to emigration
          (Alfieri et al., 2005). These data do not include remittances that bypass formal
          channels through the financial sector.
11.       In Germany alone, the official foreigner register identified 317 000
          non-naturalised residents with Serbian or Montenenegrin citizenship at the end of
          2006 (www.destatis.de accessed 6 May 2007).

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                                                               CHAPTER 1. SERBIA’S OVERDUE TRANSITION – 27

       and Montenegrin “diaspora” (regardless of citizenship) at almost 4 million
       persons, of whom 1.2 million were in Bosnia and Herzegovina, over
       300 000 in other neighbouring countries and 2.4 million spread across
       Europe, North America, Oceania and elsewhere.12 Furthermore, in the
       Balkan region, several non-Serbian groups that are familiar with Serbia’s
       language and other conditions must be regarded as potential sources of
       emigration to the country, especially if Serbia should achieve stronger and
       more sustained economic growth than some of its neighbours.

       High unemployment and declining employment

           About 22% of the working-age labour force was unemployed in 2005
       and 2006, falling to 19% in 2007, with a very high proportion of long-term
       unemployment. Some 81% of the unemployed had been so for at least a year
       and 37% for over five years (Table 1.2, Panel A). By comparison, the
       incidence of unemployment spells longer than one year was under 40% in
       most OECD countries, though it was 50 to 60% in several European
       countries, with the Slovak Republic’s 72% as the highest incidence (figures
       for 2006 in OECD, 2007).
           With a relatively high incidence of long-term unemployment, many of
       those who become unemployed are at risk of permanent exclusion. This
       concerns numerous young persons without work experience as well as
       middle-aged job losers. As measured by the LFS, 40% of the unemployed
       are seeking their first job and the proportion who are younger than 30 is
       37% – in contrast to the employed workforce, where only 15% are aged
       under 30. Amongst unemployed persons with work experience, over half
       have been dismissed or their employers have gone out of business
       (Table 1.2, Panel B).13 Chapter 3 considers the situation of unemployed
       persons in more detail with the help of the National Employment Service’s
       administrative statistics.

12.          According to Vukovic (2005), the largest communities of Serbian or Montenegrin
             origin outside the Balkans lived in the United States (650 000), Germany (450 000),
             Austria and Canada (each 200 000) Australia (150 000) and France (140 000).
13.          The distribution of unemployed persons by educational attainment was similar to
             that of the employed in 2006, except that the share with university education was
             lower. However, because the unemployed were younger on average than the
             employed population (median age: 34 vs. 44), their educational disadvantage was
             greater compared with employed persons at the same age.


                   Table 1.2. Unemployment: duration and individual backgrounds
                           Serbia (average)           Belgrade*          Vojvodina                 Central Serbia
                                                                                                  except Belgrade
                        2005 2006 2007         2005 2006 2007          2005   2006    2007      2005 2006 2007
A. Incidence of long-term unemployment
Percent of total unemployment
1 year or more            80     81      81      72      83       85     75     78     78        85     84      82

2 years or more           65     67      66      54      63       65     60     62     63        71     70      67
5 years or more           36     38      37      26      29       35     34     33     36        40     43      39
10 years or more          10     14      12      5        8        8     11     13     13        12     17      12

B. Reasons for unemployment
Percent distribution
First-job seekers      39   43           40      40      46       45     33     31     35        42     47     41

Previously employed       61     57      60      60      54       55     67     69     65        58     53     59
Of which:
Dismissed                 13      14     13      15      20       10     15     13     13        12     12     14
Firm liquidated           17      17     18      14      15       17     15     16     15        18     17     20
Seasonal work              9      9      11      7        6       7      14     16     17         7      6      9
Quits and other           22      18     19      23      14       21     23     25     21        21     17     17

Total unemployment:
Thousand persons          720    693    585     140     118       97    186    165    164        394   410    324
Unemployment rate          21     21     19      20      17       14     20     18     19         22    24     20

* Some of the smaller figures are uncertain, especially for Belgrade.
Source: Labour force surveys in October each year.

                The employment rate – employed persons as percent of the working-age
            population – fell from 53.5% in 2004 to about 50% in 2006, before
            recovering in 2007 to 51.5% (Table 1.3, first panel, and Table 1.4). For
            youths aged 15-24, the employment rate was only 20% – lower than in any
            OECD country. The corresponding rate of 55% in 2006 for prime-age
            women and the 33.5% reported for 55-64 year-olds of both genders are also
            modest by OECD standards (Table 1.3, second to fourth panels). Even for
            prime-age men, the employment rates given for Serbia in Table 1.4 are
            modest, although in this case the difference between countries is smaller.
                As seen in Table 1.3, countries with low employment in one
            population group often show low employment for other groups as well,
            suggesting that general economic factors may be most important.14
            Econometric studies in OECD countries confirm that some general
            characteristics of a labour market (e.g. its business cycles, taxes and
            benefit systems) often have similar effects for different labour market
            groups, although youth employment is typically more sensitive to cyclical

14.               Based on Table 1.3, a correlation coefficient of 0.62 was estimated between
                  youths’ employment rate and that of elderly persons. The correlations are weaker
                  (about 0.45) between prime-age women and any one of the other two groups.

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                                                               CHAPTER 1. SERBIA’S OVERDUE TRANSITION – 29

        changes. But the employment effects tend to be more asymmetric for
        institutions that protect the employment of “insiders” (often prime-age
        men) at the expense of “outsiders” (often youths and women). Such
        asymmetric employment effects have been associated with monopolistic
        product markets, too-strict employment protection legislation and
        centralised collective bargaining.15
      Table 1.3. Employment/population ratios in 2006 for the working-age population
         and selected age and gender groups. OECD and selected Balkan countries
                                   Countries ranked from high to low ratios
  Working age 15-64             Youth 15-24                   Prime age 25-54        Elderly 55-64
  Both genders                  Both genders                  Women                  Both genders
  Switzerland        78         Netherlands        64         Denmark           82   Sweden           70
  Denmark            77         Australia          64         Sweden            82   Switzerland      66
  Sweden             74         Denmark            64         Switzerland       78   Japan            65
  Canada             73         Switzerland        63         Canada            77   United States    62
  United Kingdom     73         Canada             59         Austria           77   Denmark          61
  Netherlands        72         United Kingdom     57         Netherlands       75   Korea            59
  Australia          72         United States      54         United Kingdom    75   United Kingdom   57
  United States      72         Austria            54         Czech Republic    75   Canada           56
  Austria            70         Mexico             45         France            73   Australia        56
  Japan              70         Sweden             44         Germany           73   Mexico           55
  Germany            67         Germany            44         United States     73   Germany          49
  Slovenia           67         Spain              43         Australia         71   Netherlands      47
  Spain              66         Japan              40         Slovakia          70   Czech Republic   45
  Czech Republic     65         Slovenia           35         Romania           69   Spain            44
  Korea              64         Turkey             31         Hungary           68   Romania          42
  France             62         Czech Republic     28         Japan             67   France           41
  Mexico             61         Korea              27         Poland            65   Bulgaria         40
  Romania            59         Slovakia           26         Spain             64   Austria          36
  Bulgaria           59         Italy              26         Korea             60   Croatia          34
  Italy              58         France             25         Italy             59   Hungary          34
  Slovakia           59         Romania            25         Serbia            55   Slovakia         33
  Hungary            57         Poland             24         Mexico            50   Serbia           33
  Croatia            56         Hungary            22         Turkey            27   Slovenia         33
  Poland             55         Serbia             20                                Italy            33
  Serbia             50                                                              Turkey           30
  Turkey             46                                                              Poland           28

Source: OECD, Eurostat and the Statistical Offices of Romania, Serbia and Slovenia.
    For youths, extended education is a crucial policy goal, but international experience
suggests that it can and should be compatible with high employment. It is indeed
possible for young people who are engaged in full-time education and training to
combine this with work (often part-time) or job search.16

15.          Bassanini and Duval (2006), p. 36ff; OECD (2006), p. 130 and Table 4.1. The
             equations were designed to explain varying employment rates over time, between
             countries and for different groups.
16.          It is not known how many individuals are working full-time while attending
             education or training in Serbia. But in the 2005 LFS, only 0.3% of the employed
             respondents combined education with part-time work.


                Table 1.4. Labour force status of the population in 2004 to 2007
                Labour force participants and employed persons as percent of the population
                            Unemployed persons as percent of the labour force
              Labour force/Population               Employed/Population                Unemployed/Labour force
           2004    2005      2006     2007      2004    2005    2006      2007       2004   2005     2006      2007
 Both genders
 15-19     16.3      19.1   20.1     15.3        6.6     9.1      8.1      7.2       59.3     52.0    59.8    53.1
 20-24     53.9      52.1   53.7     50.3       29.2    28.1     30.4     29.7       46.0     46.2    43.4    41.0
 25-29     77.5      76.3   75.1     75.9       56.1    49.9     52.4     54.4       27.6     34.6    30.2    28.3
 30-34     88.9      88.5   85.6     86.4       71.9    68.3     66.0     69.9       19.2     22.8    22.8    19.1
 35-39     86.8      87.9   87.4     89.3       72.5    71.3     71.2     74.9       16.5     18.9    18.5    16.1
 40-44     88.6      88.1   87.3     88.4       75.5    72.7     72.5     75.5       14.8     17.5    17.0    14.6
 45-49     82.9      83.1   82.7     83.3       72.1    70.3     69.0     71.2       13.0     15.4    16.5    14.4
 50-54     72.5      70.8   68.1     70.4       62.8    61.3     57.6     60.9       13.4     13.4    15.4    13.5
 55-59     51.8      50.0   46.8     47.9       46.2    44.5     41.7     41.9       10.7     11.0    10.9    12.6
 60-64     30.1      24.6   20.6     22.3       28.2    22.5     19.6     21.4        6.2      8.3     4.8     3.7
 65-69     17.4      14.1   11.2     12.0       17.3    13.9     11.0     11.9        0.8      1.1     1.8     0.8
 70-74     16.6      12.4    7.7      9.5       16.5    12.3      7.7      9.3        1.0      0.7     -       2.0
 75+        9.3       8.1    5.1      6.4        9.3     8.1      5.1      6.4        -        -       -       -

 15+       55.5      53.5   51.0     51.0       45.2    42.3     40.4     41.8       18.5     20.8    20.9    18.1
 15-64     66.6      65.2   63.6     63.4       53.5    51.0     49.9     51.5       19.5     21.8    21.6    18.8

 15-19     18.9      22.5   24.5     19.9        8.3    12.1     10.8      9.6       56.2     46.2    56.0    52.0
 20-24     58.9      58.9   63.2     54.7       33.0    32.7     39.2     34.5       44.0     44.4    38.0    37.0
 25-29     85.9      83.8   82.9     84.4       67.0    61.3     60.4     63.1       22.0     26.9    27.2    25.3
 30-34     95.4      96.1   95.3     93.4       82.7    80.9     79.0     79.3       13.4     15.8    17.1    15.1
 35-39     93.4      94.2   94.3     95.6       82.1    82.5     79.8     84.6       12.1     12.5    15.3    11.5
 40-44     94.2      95.3   92.4     93.4       85.0    82.5     80.6     81.9        9.8     13.4    12.8    12.3
 45-49     90.6      91.1   90.0     92.2       82.2    81.1     76.6     81.8        9.2     11.0    14.9    11.3
 50-54     83.4      82.3   79.9     80.7       73.5    73.1     69.2     70.6       11.9     11.2    13.3    12.6
 55-59     70.0      69.0   65.2     65.7       61.5    60.8     58.8     56.5       12.1     11.9     9.9    14.0
 60-64     41.5      36.7   30.7     32.7       38.4    33.3     29.3     31.4        7.6      9.3     4.5     4.0
 65-69     23.0      18.4   14.6     16.6       22.9    18.0     14.3     16.6        0.7      2.0     2.4     -
 70-74     21.9      16.8    9.9     13.5       21.7    16.6      9.9     13.1        0.9      1.1     -       3.2
 75+       13.3      12.1    7.4     10.1       13.3    12.1      7.4     10.1        -        -       -       -

 15+       64.6      63.0   60.1     59.7       54.9    52.4     49.3     50.3       15.1     16.8    17.9    15.8
 15-64     75.2      74.3   72.7     71.9       63.2    61.2     59.2     60.0       16.0     17.6    18.6    16.5

 15-19     13.8      15.4   15.1     10.4        5.0     6.0      4.9      4.6       63.6     61.0    67.2    55.2
 20-24     49.3      45.3   43.6     45.3       25.6    23.2     21.0     24.1       48.1     48.7    51.8    46.7
 25-29     68.9      68.6   66.8     66.8       45.0    38.3     44.0     45.2       34.7     44.2    34.1    32.3
 30-34     82.1      80.3   76.0     80.0       60.4    54.6     53.3     61.2       26.3     32.0    29.9    23.5
 35-39     80.7      82.2   80.8     83.0       63.6    61.2     63.0     65.2       21.2     25.6    22.0    21.5
 40-44     82.8      80.7   82.9     83.3       65.6    62.6     65.4     69.1       20.7     22.5    21.1    17.1
 45-49     75.0      75.0   75.0     74.6       61.8    59.5     61.1     61.0       17.6     20.7    18.5    18.2
 50-54     62.3      59.9   56.4     60.8       52.8    50.1     46.0     52.0       15.3     16.3    18.4    14.6
 55-59     34.5      32.0   29.4     31.9       31.7    29.1     25.6     28.7        8.1      9.1    13.0    10.1
 60-64     20.1      13.3   12.1     12.6       19.3    12.5     11.4     12.2        3.8      5.8     5.4     3.0
 65-69     13.0      10.7    8.3      8.0       12.9    10.7      8.3      7.8        1.1      -       0.9     2.3
 70-74     12.2       8.6    6.0      6.3       12.0     8.6      6.0      6.3        1.2      -       -       -
 75+        6.7       5.4    3.5      3.7        6.7     5.4      3.5      3.7        -        -       -       -

 15+       47.0      44.6   42.5     42.8       36.3    32.9     32.0     33.8       22.9     26.2    24.7    21.0
 15-64     58.1      56.2   54.5     54.9       44.1    40.8     40.6     43.0       24.1     27.4    25.5    21.7

Source: Labour force surveys conducted by the Statistical Office of Serbia.

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                                                               CHAPTER 1. SERBIA’S OVERDUE TRANSITION – 31

           Among OECD countries, those with high youth employment rates tend
       to display relatively high participation in education and training as well.
       According to the 2006 Jobs Strategy reassessment, the key challenge facing
       most countries concerning youth labour market performance is that too
       many are neither employed nor studying.17 This also seems to hold in
       Serbia. Based on the Jobs Strategy, the best remedies to youth
       unemployment appear to be, first, to facilitate the transition from school to
       work by ensuring flexibility in wages, working time and other conditions of
       employment; and, second, to reform initial education and training (e.g.
       apprenticeships) so that all pupils acquire work-relevant skills before
       entering the labour market. In addition, youths are probably the principal
       “outsider” group that stands to gain much from the elimination of anti-
       competitive practices in product markets, where such exist.
           Similarly, OECD comparisons show that higher female employment
       need not be incompatible with the care of children or elderly relatives.18 But
       this will require more flexible working conditions so that family
       responsibilities can be accommodated with the demands of work. Policy
       measures to promote child-care facilities would also be useful. Regarding
       elderly workers, it is important to design the pension system so that it
       becomes attractive to extend working life rather than retire early.

The employment structure needs to change faster

           To assess the labour market’s performance, it is necessary to consider
       the quality of jobs as well as their numbers. For example, aggregate
       employment rates are often relatively high in rural districts; but this is not a
       sign of superior performance, considering the different job characteristics.19
       Such observations point, instead, to the role of farming as a coping strategy
       for otherwise jobless or under-employed persons, a situation that is not
       sustainable or desirable: the transformation of the economy requires a large

17.          OECD (2006), Chapter 4, p. 136.
18.          In most of the countries for which Table 1.3 (third column) shows relatively high
             female employment, fertility rates have recently been a little higher than in Serbia.
             By contrast, a number of countries combine below-average rates of female
             employment and fertility (cf. Italy, Spain, Korea and Japan).
19.          In 2005, the highest agricultural shares in employment (43-44%) were recorded in
             Jablanica, Mačva, Kolubara and Rasina districts, which all displayed above-
             average total employment as proportion of the adult population (age 15+). Areas
             with high industrial employment shares included several Vojvodina districts with
             high overall employment rates, as well as districts with low or very low total
             employment rates (North Bačka, Pčinja, Raška and Šumadija).


      shift in labour out of the agricultural sector to more high-productive jobs in
      industry and services. As shown below, much of the decline in overall
      employment has been concentrated in farming and other small-scale
      own-account work, often of a casual nature. This trend appears to reflect
      a growing reluctance on the part of most citizens to engage in low-
      productive work as a last resort, notwithstanding a continued severe
      shortage of higher-paid jobs.
          This section first considers the on-going shifts of employment between
      economic sectors and between ownership groups, and then illustrates some
      of the implications with the help of indicators of pay, job status, type of job
      contract and working-time. This analysis is based essentially on LFS data,
      which cover both dependent and independent employment, but are limited to
      the two surveys in October 2005 and October 2006. Chapter 2 will probe
      further into some of the questions raised here with the help of administrative
      employment data, which encompass the period 2001-2006 and permit more
      disaggregated analysis of economic sectors.
           One-fifth of the 2.6 million employed in October 2006 were in the
      primary sector, while nearly 30% were in industry and construction and 50%
      in services (Table 1.5). Although the agricultural employment share had
      declined by 3 percentage points in 12 months, or by almost 100 000 persons,
      it remained greater than in any OECD country except Turkey and higher
      than in any EU country except Romania.
          Manufacturing industry achieved significant net job creation in 2006,
      growing by about 4% on a yearly basis. But this increase was more than
      outweighed by job losses in construction and public services (except health and
      social care). Employment increased only marginally in commerce, the biggest
      service sector, while the trend was flat or negative in most other services.
          Insofar as annual relative-wage growth can be assumed to reflect
      successful business, and vice versa, the largest inter-sectoral shifts in
      employment between 2005 and 2006 went in the expected direction
      (Table 1.6). Job losses were thus recorded in construction, mining and
      education, where relative wages declined (although only the education
      sector experienced an absolute decline in real wages). Strong real-wage
      growth occurred in manufacturing and finance (banking and insurance),
      which increased their employment, but also in business-oriented services,
      where employment declined.

                                      SERBIA: A LABOUR MARKET IN TRANSITION – ISBN-9789264045798 © OECD 2008
                                                                          CHAPTER 1. SERBIA’S OVERDUE TRANSITION – 33

                          Table 1.5. Employment by economic sector and ownership
A. Thousands of persons
Economic sector                         Total employment            Of which: private ownership          State, social and other
                                                                                                               ownership forms
                                     Employed      Change              Employed in         Change       Employed in      Change
                                       in 2006   2005-2006                   2006        2005-2006            2006     2005-2006
Total                                  2,631         -103                  1,633               -7              998             -96

Primary                                  540           -97                    504              -92              36              -5

Industry                                 612            24                    352               58             260             -34
 Extraction                                31           -2                          4          -0.4              27            -1.5
 Manufacturing                            519           21                     345              58              173            -36
 Utilities                                 62            5                          3          0.7               59              4

Construction                             159            -7                    129                5              30             -12

Services                               1,320           -22                    647              22              672             -45
 Commerce, tourism                        491            5                     431              23               60            -18
 Transports, communications               151           -1                          64         0.6               87             -2
 Finance, business services               113          -0.1                         76           5               37             -5
 Public administration                    143          -16                      -               -6              143            -11
 Education                                129          -14                          9            5              120            -19
 Health and social care                   174           15                          12         -1.5             162             17
 Other services                           117          -10                          54          -4               63             -6

             B. Percent
             Economic sector                          Total employment                                Private ownership
                                                              by sector                     as percent of employment in
                                                                                                            each sector
                                                       2005               2006                        2005            2006
             Total                                      100               100                          60              62

             Primary                                    23.3               20.5                         93             93

             Industry                                   21.5               23.3                         50             58
              Extraction                                      1.2           1.2                         14             13
              Manufacturing                              18.2              19.7                         58             67
              Utilities                                       2.1           2.4                          3                 4

             Construction                                  6.1              6.1                         75             81

             Services                                   49.1               50.2                         47             49
             Commerce, tourism                           17.8              18.7                         84             88
             Transports, communications                       5.6           5.8                         42             42
             Finance, business services                       4.1           4.3                         63             67
             Public administration                            5.8           5.4                          4             -
             Education                                        5.2           4.9                          3                 7
             Health and social care                           5.8           6.6                          8                 7
             Other services                                   4.7           4.5                         46             46

Source: Labour force survey, 2005 and 2006.


        Table 1.6. Relative wages and employment by economic sector, 2005-2006
                                  Percent and thousands of employees
                        Sectors were ranked according to the employment change
                              Relative wage                Real-wage             Number of employees
                             (Average = 100)                 growth            Thousands     Percent
                                                           in percent              in        change
                            2005         2006              2005-2006             2006       2005-2006
     Utilities              125          117                    2                  62           11
     Health, social care    105          105                    9                 169           10
     Finance                156          162                   14                  42            4
     Manufacturing           86           90                   15                 473            4
     Commerce                 84           84                   8                 306            2
     Transport              111          108                    6                 131           1
     Tourism                 79           79                    9                  70            0
     Other local services    99           98                    8                  89           -4
     Business services       121          133                  20                  52           -5
     Construction           110          106                    4                 122           -6
     Extraction             122          120                    7                  31           -7
     Public service         128          126                    8                 143          -10
     Education               117          104                  -3                 126          -12
     Agriculture             67           71                   14                  96          -20
            Average/total    100          100                   9                 1915          -1

All figures refer to the survey weeks in October, so they are sensitive to seasonal changes, especially in
Source: Calculations based on LFS data submitted by the Statistical Office of Serbia.

       Private-sector growth and its impact on job conditions
           Private ownership is now predominant in the Serbian economy,
       representing 65% of total employment in October 2007. In October 2006,
       when the corresponding figure was 62%, the private sector included most of
       industry, construction, commerce, tourism and business services (Table 1.5,
       Panel B). But non-private ownership still accounted for one-third of
       manufacturing employment in 2006, over half of the jobs in transport and
       communications and the quasi-totality of employment in mining, utilities,
       education, healthcare and social care. Where non-private ownership persists,
       it is often linked with structural problems. Chapter 2 illustrates these
       problems in more detail with the help of data about output and wages in
       enterprises of different ownership categories. But first, the following
       paragraphs consider the implications that can be gleaned from LFS data
       about qualitative job characteristics such as job duration and working time.
           Public and socially-owned enterprises traditionally provide stable jobs,
       and in their current state of stagnation they exhibit very low labour turnover
       rates. By October 2006, fewer than 5% of all workers in the non-private
       ownership sphere had been recruited in the past 12 months, while over
       two-thirds had been with the same employer for over ten years (Table 1.7,
       Panel A).

                                          SERBIA: A LABOUR MARKET IN TRANSITION – ISBN-9789264045798 © OECD 2008
                                                                                           CHAPTER 1. SERBIA’S OVERDUE TRANSITION – 35

                       Table 1.7. Employed persons by tenure in the current main job

A. In selected economic sectors, by private vs. non-private ownership
Percent distribution
Job tenure,           All sectors                          Agriculture                      Manufacturing                                    Construction
years             Total Private        Non-          Total Private      Non-               Total Private       Non-                      Total Private        Non-
                                       privat                         private                                private                                        private
<1                   11        14        5              7        7        12                11         16       2                         16       17         11
1-5                  21        27       13             11       11         8                19         26       6                         32       37         13
5-10                 16        16       15             10        9        10                15         18      11                         18       18         15
10+                  52        43       67             73       73        70                54         41      81                         34       28         61
Total, percent      100        100       100          100       100       100               100       100      100                        100      100        100
 000s persons     2,631     1,633        998          539       503        29               519       345      173                        159      129            30
                          Commerce                   Hotels, restaurants           Transport, comm.                            Government (central and local)
                   Total    Private   Non-           Total Private      Non-       Total Private     Non-              Public Health, Edu- Utilities         Other Mining
                                      private                         private                      private              adm. social cation                    local
                                                                                                                               care                        services
<1                   16        17         4            25       29         7         11     15         7                  5        2       6        6             7    11
1-5                  36        37        19            30       36         9         20     35         9                 18       11      17       11            20    11
5-10                 21        22        16            18       18        18         16     15        16                 18       17      17       14            25    12
10+                  27        23        60            27       17        66         54     35        68                 58       70      61       68            48    66
Total, percent      100        100       100          100       100       100       100     100      100                 100      100     100      100         100     100
 000s persons       407        364        43           85        67        17       151      64       87                 143      162     120       37            39    13

Source: Labour force survey, 2006.

B. By ownership groups in primary and non-primary sectors
Percent distribution
Job tenure,         Private                  State                     Social or other                                 All ownership groups*
years             Non-   Primary      Non-       Primary               Non-      Primary            Non-            Primary         Employees            Self-employed
                 primary              primary                         primary                      primary                                               without employees

<1                17           7         5           11                   4         9                12                  7              11                  10
1-5               34          11        14            4                  10        10                24                 11              24                  20
5-10              19           9        17            4                  12        16                17                 10              16                  15
10+               30          73        64           81                  74        65                47                 73              49                  54

Total, percent    100       100        100           100                 100      100              100                 100              100                 100
000s persons     1129       504        681            11                 281      26               2090                540              1915                338

* The primary sector accounts for 3% of the employees and 52% of the self-employed without
Source: Labour force survey, 2006. The column for the self-employed without employees refers
to age 15-64.


          Within the non-private sphere, labour turnover was particularly low
      in socially-owned firms, but it was not much higher under state
      ownership (Panel B). Under private ownership, by comparison (except
      farming), 17% of the workers had begun their present jobs during the
      past year – a proportion similar to that which characterises the whole
      labour market in many OECD countries. In Serbia, such a large
      difference in average tenure according to ownership was found in all
      non-agricultural economic sectors. 20
          Despite the private sector’s higher labour turnover, the use of fixed-term
      and other non-standard types of labour contract remains exceptional in most
      sectors. According to the LFS, the proportion of employees whose labour
      contracts were not of indefinite duration declined from 13% in 2005 to only
      11% in 2006, with substantially higher shares only in agriculture (42%)
      and construction (30%).21
           Weekly working time is relatively long by OECD standards for most
      groups in Serbia, a fact that may partly reflect the low hourly wages. For
      employees of both genders as well as for the self-employed and family
      helpers, it is more common to work over 50 hours per week than to work
      under 40 hours (Table 1.8, Panels A and B). In the LFS reference weeks of
      2005 and 2006, the reported “usual” working time and the actual one were
      both at least 40 hours for all employees except about 5% of the men and 6 to
      8% of the women. Engaging employees explicitly for part-time work
      appears to be an almost unknown practice in public and socially-owned
      worksites (Panel C). In OECD countries, by comparison, on average 7.5%
      of the men and 24% of the women worked under 30 hours per week in 2004
      (OECD labour force statistics), and it is widely recognised that working time
      must be flexible to facilitate the employment of students, women with
      children and other groups with special requirements (see Chapter 2).

20.       As seen in Table 1.7, Panel B, long job tenures are common under both state and
          social ownership, but in non-farm sectors this is particularly the case in socially-
          owned firms. The sector-specific estimates of job tenure refer to all employed
          persons; but tenure does not seem to differ greatly between employees and the
          self-employed, cf. the right-most part of Panel B.
          The average tenure given for all employed persons in Serbia – 11 years – is
          similar to the corresponding averages in Hungary and Portugal, but shorter than in
          most OECD countries (cf. OECD labour market database).
21.       Dependent employment in agriculture is found mainly in Vojvodina. It is highly
          variable and not well measured by the present LFS, which uses a one-week
          reference period in October each year.

                                      SERBIA: A LABOUR MARKET IN TRANSITION – ISBN-9789264045798 © OECD 2008
                                                                CHAPTER 1. SERBIA’S OVERDUE TRANSITION – 37

                                    Table 1.8. Weekly working time

                                              Percent distributions

     A. All employed adults (age 15+ ) by job status                     B. Employees of working age ( 15-64 ) by
     and usual working time. 2005                                        actual working time in the survey week
    Hours per      Average       Self-      Family Employees             Hours per
    week                     employed      helpers                       week                    2005       2006
     Men                                                                 Men
    <20                  2          5          6           1             <20                       1           1
    20-39                7         16         19           4             20-39                     4           4
    40-49               62         30         16          77             40-49                    70          73
    50-59               10         15         18           8             50-59                     9           9
    60+                 18         33         40          11             60+                      13          10
                                                                         Absent                    4           3
      Total           100        100         100         100               Total                 100         100
    Total 000s       1,635        429         67        1,139            Total 000s             1,134       1,082

     Women                                                               Women
    <20                  3         10          7           1             <20                       1           1
    20-39               13         27         31           7             20-39                     6           5
    40-49               69         33         24          84             40-49                    78          81
    50-59                7         12         13           5             50-59                     5           6
    60+                  8         17         25           3             60+                       4           3
                                                                         Absent                    5           4
      Total           100        100         100         100               Total                 100         100
    Total 000s       1,098        134        152         812             Total 000s               807        833

     C. Incidence of part-time jobs by ownership group
     Percent of employed persons
                         Private                           Non-private                          Total
                     2005      2006                        2005     2006                     2005       2006
     Men              9.0       8.2                         1.8      2.3                      6.0        6.1
     Women           15.5      12.6                         2.3      3.0                      9.7        8.6
Source: Calculations based on LFS data submitted by the Statistical Office of Serbia.

       Self-employment: from casual own-account work to small

           On the positive side, significant job growth is under way in
       non-agricultural micro-enterprises (self-employed persons with a few
       employees), although this growth is not yet sufficient to compensate for the
       large job losses elsewhere (Figure 1.3). The more “formal” enterprises that
       are registered as companies with under 50 employees have been stagnant in
       employment terms since 2004. As defined in the LFS – without regard to
       register status – non-farm self-employment represents about 10% of total
       employment or slightly less than the EU average.


            Self-employment in general – in agriculture and elsewhere – is
       characterised by great variations in working conditions. Households in the
       poorest decile earn much of their work-related incomes in-kind, and for all
       deciles together, about two-thirds of the agricultural incomes are earned in-
       kind (judging from the household budget survey quoted in Table 1.1). This
       reflects at the same time the social importance of small-scale farming and its
       very limited productivity. Few self-employed persons and family helpers
       report “normal” working time: over half of the interviewed men and 30 to
       40% of the women reported usual working times in excess of 50 hours per
       week, while over 20% of the men and almost 40% of the women worked less
       than the standard 40 hours (Table 1.8, Panels A and B). One in four self-
       employed persons is an employer, but the larger group with no employees
       includes almost all farmers and more than half of the non-farm self-employed
       (Table 1.9; see Panel C, which summarises for the whole adult population).
       Many have no permanent places of work: in 2006, over half of the non-farm
       self-employed without employees reported working at home, in street
       markets, from door to door, etc. (Table 1.10).

                          Table 1.9. Employed working age and older persons
                                     by job status and main sectors
                                                  Thousands of persons
                                    Total         Self-employed      Self-employed     Family workers     Employees
                                                  with employees   without employees

                                       Change            Change              Change            Change           Change
                             2006       2005-     2006    2005-      2006     2005-     2006    2005-    2006    2005-
                                        2006              2006                2006              2006             2006

    A. Age 15-64
     All sectors             2517           -57    115      5        338       -10      149     -26      1915    -26

     Primary sector          435            -53    12       -1       186       -4       139     -23       97     -25

     Non-primary sectors     2082           -4     103      6        151       -6        10      -3      1818     -1
     Of which:
    Industry                 609            26     17       -1        25        6        2       0        565     20
    Construction             159            -6      7       2         28        0        2       1        122     -8
    Commerce, tourism        489             4     57       2         51        -2       5       -3       376     7
    Government, education,
    health, social care      445            -16     5       2         3         0        0       0        437     -18
    Other services           381            -12    17       0         45       -10       1       0        318     -3

    B. Age 65+
     All sectors             114            -45     3       -1       73        -28       32     -14        6      -3
    Primary sector           106            -44     3       -1        69       -27       31     -13        3      -3
    Non-primary sectors       8              -1     -        -        5         -1       0.4    -0.3       3     -0.1

    C. Age 15+
    All sectors              2631       -103       118      4        411       -38      181     -39      1921    -29
    Primary sector           540            -97    15       -2       255       -32      170     -36       100     -28
    Non-primary sectors      2090           -6     103      6        156        -7       11      -3      1821     -2

Source: Calculations based on LFS data submitted by the Statistical Office of Serbia.

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                                                               CHAPTER 1. SERBIA’S OVERDUE TRANSITION – 39

            These observations suggest that farming and other own-account work
       is often sporadic and used as a source of extra income or as a last resort for
       poor households. However, the number of households that depend on such
       activities is falling rapidly, probably reflecting a combination of several
       developments including more regular pension payments, higher and more
       regular wages for those with jobs, and money transfers from family
       members living elsewhere (in Serbia or abroad). Judging from the LFS
       in 2005 and 2006, persons aged 65 or more reduced their employment by
       as much as 45 000 persons (28%) in one year. This rapid decline mainly
       concerned elderly peasants, who alone account for a large part of the
       downward trend in total employment (Table 1.9, Panel B). At the same
       time, self-employment in non-primary sectors displayed a welcome shift
       towards the group that is creating jobs for employees, thus away from the
       more “casual” group without employees, and also away from unpaid
       family work. The number of self-employed persons acting as employers
       increased noticeably in construction, commerce, tourism, education and
       health and social care.

   Table 1.10. Self-employed persons aged 15-64 without employees by place of work
                                          Percent distribution in 2006

     Place of work                             Total                     Men          Women

     Farm                                        53                       53             51
     Enterprise, shop                            17                       16             20
     At home                                      7                       6              9
     Field work, "from door to door"             9                        9              7
     Vehicle                                      5                       6              1
     Street, market places                        4                       4              5
     Other                                        6                       5              7
        Total, percent                          100                      100            100
        Thousands                               338                      265            73

Source: LFS data submitted by the Statistical Office of Serbia.

Concluding remarks

           A continued forceful restructuring of Serbia’s economy and labour
       market in line with market signals is urgently needed, even if it leads to
       additional job losses in the short term. There is no lack of signs that a more
       positive development has begun, notably in the manufacturing sector and in
       small businesses. But it will probably take some time before their job
       creation can dominate over the negative trends elsewhere in the labour
       market, as the restructuring must continue in line with market signals. For


      public policy to be consistent, it will be crucial to resist the inevitable
      pressures from special-interest groups seeking the protection of jobs that are
      not economically viable.
          Many of the data used above are available in comparable form only for
      the past few years. This gives reason for caution in drawing detailed
      conclusions. In broad terms, however, key results reported about the speed
      and direction of change in the employment structure appear robust and they
      are consistent with what can be gleaned from administrative data.
          Labour market policies need to pay more attention to the situation of
      expanding businesses. In Serbia as in many countries, there has been a
      tendency for the public administration to have more formal and informal
      contacts with big enterprises than with smaller ones. The government has
      recently taken new steps to develop its policy dialogue with business and
      worker associations, as observed in the next chapter. In the present situation,
      it appears especially important to ensure that a fruitful dialogue can
      encompass expanding and declining parts of the labour market, and so
      increase the chances of achieving a consensus about both economic and
      social objectives. According to OECD experience, a successful social
      compromise must reconcile workers’ demands for income security with a
      high degree of flexibility in business decisions.

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                                         CHAPTER 2. THE INSTITUTIONAL FRAMEWORK FOR EMPLOYMENT – 41

                                              CHAPTER 2



           The Labour Law, reformed in 2001 and 2005, conforms to
       international practice on all essential points. It generally offers a degree of
       flexibility that should permit employers and workers to adjust to changing
       economic conditions without breaking the law. Until now, however, the
       application of this and other laws has been uneven across the labour
       market, with, on the one hand, an informal sector where few rules are
       enforced, and, on the other, a formal sector that includes a number of
       severely under-performing enterprises, which have been allowed to stay in
       business for a long time without fulfilling their obligations. The situation
       has improved recently, but both informality and unresolved problems of
       ownership and enterprise management continue to reduce the scope for
       implementing legislation as it was intended. Moreover, given a persistent
       labour surplus, policy efforts to enforce labour standards are not always
       supported by market pressures on employers to make jobs more attractive.
           This chapter first reviews Serbia’s institutions for industrial relations
       and wage-setting. It then turns to labour taxation, informal work, the labour
       inspectorate and the anomalies found in a number of malfunctioning
       enterprises, after which it considers the provisions for working-time and
       employment protection. Concluding remarks are made in a final section.

The industrial relations system is under pressure

           Industrial relations are marked – as in many countries – by a de facto
       division between a traditionally unionised sphere dominated by large
       public and privatised employers, where collective bargaining is
       widespread, and a growing number of small private firms where trade
       unions are weak or absent. The Labour Law stipulates that collective
       agreements have precedence where they exist, but the employer can


      otherwise issue the corresponding regulations in a “labour rulebook” or
      via individual contracts.1 The Labour Law’s minimum requirements apply
      in any case.
          Employers and workers are free to set up associations, but if these want
      to participate in collective bargaining, they must be representative according
      to specific criteria (Article 223ff). To be representative at enterprise level, a
      trade union must organise at least 15% of the workers. At the level of a
      sector or territory, a trade union is representative if it organises 10% of the
      workers, while an employer association must represent 10% of relevant
      employers and 15% of their employment. There are numerous trade unions
      at enterprise and intermediate levels. At national level, there is currently
      one representative employer association, the Union of Employers in Serbia.
      The trade union movement has historically been split along political lines,
      but all main associations are now independent of the state and the parties.
      Some lower-level unions belong to no federation, but most of them adhere
      to one of the two that have been recognised: the Confederation of
      Autonomous Trade Unions of Serbia (SSSS) and Nezavisnost
      (“Independence”) Trade Union Confederation. A third federation, the
      Association of Free and Independent Trade Unions (ASNS), is not
      recognised at national level.2
          Collective agreements are valid for three years (Article 263) and the
      Law presumes that a national agreement will precede lower-level ones
      (Article 4).3 But in recent years, the private sector’s national-level
      bargaining has suffered considerable delays. During 2007, none of the
      nationally recognised federations had signed any general collective
      agreement by mid-November, and there were also relatively few sector-
      level agreements. When a sector agreement exists, the government can

1.        The Labour Law’s Articles 1-3 and 8 permit the employer alone to issue a “labour
          rulebook” when there is no representative trade union, when neither party initiates
          collective bargaining, and when such bargaining has begun but does not lead to
          agreement within 60 days.
2.        SSSS, formerly the only allowed trade union federation, claims 850 000 members
          (www.sindikat.org.yu/e_licna_karta.htm accessed 21 July 2007), but other estimates
          are less than half as high (e.g. Upchurch, 2006). The Nezavisnost (“Independence”)
          Trade Union Confederation was established in 1991 in opposition to the previous
          regime; it probably has 150 000 to 180 000 members. The Association of Free and
          Independent Trade Unions (ASNS), with perhaps 40 000 members, broke away
          from Nezavisnost and supports the Democratic Party.
3.        Collective agreements from 2001 or earlier, including a general collective
          agreement, became null and void as a result of the 2005 labour law (Art. 284).

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                                         CHAPTER 2. THE INSTITUTIONAL FRAMEWORK FOR EMPLOYMENT – 43

       extend it to cover all workers in the sector – a provision that is commonly
       used only in some sectors where the state is itself a predominant employer
       (education, culture and social protection).
           The legal minimum wage was 11 094 dinars per month after tax in the
       second half of 2007, corresponding to about 40% of the average wage.
       Although this proportion is close to the average for OECD countries, lower
       wages are found to a significant extent in Serbia (see below). But where
       collective agreements apply, they stipulate higher effective minima for most
       job categories.
           According to the 2005 Labour Law (Art. 106ff), collective agreements
       should lay down rules for setting a “basic” wage for each job category,
       possible performance-related elements and other wage increases. Wage
       increases for seniority as well as for overtime, work on holidays and night
       and shift work are specified in the law at certain proportions of the basic
       wage.4 A reform of public-sector wages is under preparation, designed to
       create a new framework for evaluating jobs and competences and to
       encourage professional development. The private sector is expected to
       develop its own procedures. Wage bargaining in state and socially-owned
       enterprises has until now resembled that of the public administration, but
       Ministry officials interviewed in the course of preparing this report
       considered that it should become aligned with the private sector.
           Observed relative-wage trends in the period 2001-2006 have largely
       matched the different employment performance of various groups of
       enterprises. Judging from data about registered enterprises with over
       50 employees, the strongest real-wage growth was thus recorded in
       non-retail trade and various other private and public services, which showed
       smaller-than-average declines in employment.5 The opposite results – slow
       real-wage growth and very large job losses over the five-year period – were
       notable in most industry sectors and in the primary sector. These different
       outcomes might be taken as a sign that the wage-setting system had the
       flexibility to respond in the face of changing economic conditions and
       labour demands by sector. However, the observed actual wage outcomes

4.           While partly based on tradition, these rules about wages from 2005 are more
             detailed than those of the 2001 labour Law. For seniority, Article 108 stipulates a
             0.4% wage premium per year of service.
5.           See Table 2.4 below. In the manufacturing sector, enterprises with under
             50 employees showed net job creation between 2005 and 2006 while bigger firms
             continued to decline through 2006. Cf. Table 1.5 above, based on LFS data
             covering all forms of business, which indicates a significant recovery for the
             manufacturing sector after 2005.


      were not always attributable to the formal wage-setting because
      low-performing enterprises often failed to pay agreed wages, as discussed
      further below (cf. Tables 2.3 and 2.4).
          Over the past decade, Serbia’s labour market has been conflict-prone,
      with many strikes directed at political decisions makers, notably concerning
      plans for privatisation and restructuring. In individual labour conflicts,
      workers and employers have too often resorted to time-consuming court
      procedures rather than seeking peaceful solutions (Đukić, 2006; Jasarević,
      2003). Provisions for peaceful arbitration in such conflicts were included in
      the 2001 Labour law (Article 121), but did not have the desired effects. A
      new Agency for Peaceful Resolution of Labour Disputes was therefore set
      up after legislation in 2004. It can mediate in disputes about workers’ right
      to organise and to strike and about the conclusion and application of
      collective agreements, while offering to arbitrate in individual conflicts
      about dismissals and the minimum wage.6 It is probably too early to assess
      the agency’s achievements, but it reportedly settled 2 815 individual and 25
      collective disputes between its foundation and the autumn 2007.
          All told, the industrial-relations system is under severe pressure. Trade
      unions have not been very effective as counterparts to employers who
      operate under competitive conditions, especially small private firms. In
      larger firms, where unions have more power, the worst obstacles to a
      meaningful social dialogue are probably on the employer side, where
      unresolved problems of ownership and corporate governance still prevent
      many managers from acting effectively as employers (see below).
          As these problems are now being addressed, it is essential to foster a
      better climate for social dialogue. This is promoted by a tripartite
      Social-Economic Council set up in 2001, now following legislation from
      2005, and by similar councils in most of the country’s 25 districts. The
      national-level council decides about the level of the minimum wage. But
      most of its functions can only be advisory, as industrial relations are largely
      decentralised and each actor is responsible for its own adjustment.
          The urgency of economic restructuring makes it crucial that the social
      dialogue can engage both expanding and declining segments of the labour
      market. It falls upon the Social-Economic Council and the principal

6.        Mediation is usually voluntary. It is mandatory if a conflict threatens essential
          society functions, but the parties are still not obliged to reach an agreement. In
          individual conflicts about dismissals and the minimum wage, no party can be
          forced to accept arbitration – but if they do so, they must accept the verdict (Law
          on Amicable Resolution of Labour Disputes).

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                                         CHAPTER 2. THE INSTITUTIONAL FRAMEWORK FOR EMPLOYMENT – 45

       associations as coordinators to promote such changes of the
       industrial-relations system that the dialogue can encompass new types of
       business, for example via a better representation of small private firms and
       their employees.

Labour taxes, compliance and unreported work

           Serbia’s labour taxation is moderate by European standards. But the
       cost of social insurance makes the total tax burden regressive, which
       encourages informality in low-wage groups. Recognising this, the
       authorities have introduced a series of changes that reduce the relative tax
       burden on low wages, with application from 2007, of which the most
       important are:
             •    The standard tax rate on wages was reduced from 14 to 12%, and
                  taxable wages are subject to a new basic deduction of 5 000 dinars
                  per month. (Most non-wage incomes are taxed at a 20% rate.)
             •    Lower trigger points for an additional income tax, now charged at a
                  rate of 10% on incomes in excess of three average wages after
                  family deductions, rising to 15% from five average wages. (The
                  trigger points were previously four and ten average wages,
             •    New exemptions from wage tax and social contributions for young
                  workers (see Chapter 3). These can last up to three years
                  after recruitment.
             •    Mandatory social insurance contributions must be calculated on at
                  least 35% of the average gross wage (previously 40%).
           Social insurance contributions total 35.8% of earnings.7 Employers and
       employees share these contributions equally while the self-employed pay
       the full rate. There is no basic deduction from the income on which they are
       calculated, but no contributions are charged on the part of the income above

7.           The contribution rates are 22% for old-age and disability pensions, 12.3% for
             sickness and maternity and 1.5% for unemployment insurance. The total falls
             slightly below a European average, being lower than in France, Germany, Italy
             and most transition countries. But it is higher than in several of those countries
             that, like Serbia, finance a significant part of the corresponding expenditures via
             the treasury (e.g. the United Kingdom and Nordic countries;
             www.ssa.gov/policy/docs/progdesc/ssptw/2006-2007/europe/guide.html).             In
             Serbia, contributions cover all the spending on sickness, maternity and
             unemployment insurance but less than half of the pension spending.


      five average wages. Thus, although the taxation of low incomes was
      reduced in 2007, it remains substantial and strongly dominated by the cost
      of social insurance.
           Corporate profits are taxed at only 10%, one of the lowest rates in
      Europe. While this can encourage investments, the size of the difference
      compared with the total tax on wages can encourage under-reporting of the
      latter. A somewhat higher tax rate on corporate income can be justified as a
      means to incite employers to declare their full wage costs and deduct them
      from taxable profits (OECD, 2004, Chapter 5).
          According to OECD experience, efficient collection of taxes and social
      contributions is usually the most important instrument for enforcing formal
      employment regulations (OECD, 2004, Chapter 5). Labour or social
      insurance inspectorates play significant roles in detecting undeclared work
      in many middle-income countries with large informal economies, and, also,
      in some advanced countries such as Belgium, France and Spain. Elsewhere,
      however, as in most English-speaking OECD countries and the Nordic
      region, the corresponding function is performed mainly by tax authorities.
          The goal should be to coordinate fiscal auditing of business costs,
      revenues, value added and profits. The tax agency can then use various
      methods for tracking expenses e.g. to verify subcontractors’ accounts. Such
      coordination is also crucial for a correct assessment and allocation of the
      combined tax liability of an enterprise, its employees and its owners. For a
      business as a whole, it is usually tax-efficient to declare wage costs because
      any undeclared wages would increase taxable profits.8

      Unreported work – and under-reported wages in reported jobs
           To assess the implications of unreported work in labour market terms, it
      is pertinent to distinguish between i) deliberately unreported jobs and
      ii) under-reporting of wages in reported jobs. The former type can be
      considered as a subset of informal employment, and its incidence can be
      partially assessed with the help of the LFS. However, an unknown
      additional number of informal jobs are likely to go undetected in the LFS as
      well as in administrative registers. Moreover, informal employment can be
      considered to include activities that need not be declared, e.g. production for
      own consumption. It will not be attempted here to assess the full extent of
      informal employment.

8.        Once distributed to the owners, profits are taxed at a higher overall rate than
          wages in most countries. Exceptions exist, e.g. when social security contributions
          are payable on wages but not on business earnings.

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                                             CHAPTER 2. THE INSTITUTIONAL FRAMEWORK FOR EMPLOYMENT – 47

              A partial estimate of deliberately unreported work can be obtained by
         comparing employment data from the LFS – a household survey – with the
         statistics collected from registered enterprises and self-employed persons.9
         In the autumn 2006, this gave a discrepancy of 160 000 persons or 7% of
         the LFS-based employment total (excluding peasants; Table 2.1). Similarly,
         LFS-employment exceeded the number of employed contributors to public
         pension funds by about 230 000 or 9 to 10%.10 A majority of the non-
         contributors seem to be employees working full-time.11
             Table 2.1. Employed persons and contributors to pension funds
                                        Thousands of persons in 2006
      Data source                                  Employees      Self-    Peasants*     Total   Total except
                                                               employed*                           peasants

      1. LFS: Employed in age 15-64                  1,915        264        338         2,517      2,179
      2. Administrative employment data**            1,780        239         na           na       2,019
      3. Employed contributors to pension funds      1,621        333        333         2,286      1,954

      Observed discrepancies
        (with possible interpretations)
      1 - 3: Employed but not contributing           294          -69          5          231        226
      1 - 2: Employed in informal jobs (?)           135           25         na           na        160
      2 - 3: Working pensioners (?)                  160          -94         na           na        66
      na = Not available.
      * Including family workers.
      ** Refers to registered enterprises, institutions and organisations in September 2006. Bulletin
      ZP 21, Statistical Office of Serbia.
      # Not counting unemployment benefit recipients, for whom the National Employment
      Service pays contributions. Data from pension funds were submitted by the Ministry of
      Labour and Social Policy.
             There is some evidence that such deliberately unreported employment is
         declining. Similar estimates by the Statistical Office of Serbia, using a
         method recommended by OECD (2002) for national accounts, covered only

9.            The concept “unreported production” also includes a significant element not
              considered here that went unrecorded through no fault of the businesses concerned
              (around 4% of GDP in 2005 according to Ratkovic, 2008). For example,
              production in registered enterprises is not always recorded due to shortcomings of
              the official system for collecting and manipulating such data.
10.           The distribution of the discrepancy in Table 2.1 suggests that some employees
              contribute to the fund of the self-employed.
11.           Cf. Table 1.8. Only 1% of all employees counted in the LFS worked less than
              20 hours per week in 2006, while about 5% worked 20-39 hours. The self-employed
              and family workers, whose working times are more variable, accounted for only
              25 000 of the discrepancy between LFS and administrative employment data.


      construction and certain service sectors but took account of working time.12
      In these sectors alone, the number of deliberately unreported full-time
      equivalent jobs was found to decline from about 230 000 in 2003 to 200 000
      in 2004 and 163 000 in 2005. This corresponded to, respectively, 6.3%, 6%
      and 5% of GDP in the mentioned years (Ratkovic, 2008).
           The under-reporting of incomes in registered or formal jobs can also
      cause great shortfalls of public revenue.13 It is not known how many
      workers are affected. But according to Ratkovic (2008), who compared
      information from a survey of entrepreneurship with small firms’ financial
      statements, the unreported wage amounts declined from 6.8% of GDP in
      2003 to 4.7% in 2004 and 4.55% in 2005. This decline suggests that small
      businesses improved their financial accounting.
           If a worker’s full wage cannot be detected, the existence of certain fixed
      wage components defined by law or collective agreements may serve as an
      imperfect basis for taxation. It has been noted in several transition countries
      that the use of unreported wage supplements can lead to a concentration of
      reported wages at the level of the minimum wage (Tonin, 2007; OECD,
      2003b concerning the Baltic countries; OECD, 2004, Chapter 5). A rise in
      the minimum wage can then boost public revenues. To some extent, the
      same may hold for decisions about the lowest wage recognised in social
      insurance – recently reduced in Serbia, see above – and for basic wages and
      other standardised wage elements. In general, however, the use of such
      wage regulations for taxation can cause rigidities and it is unlikely to lead to
      a fair distribution of the tax burden.
           To reduce informal employment and permit a more orderly application
      of labour fiscal law, it will be crucial to consolidate recent improvements of
      business registration and financial accounting and to make sure that further
      rapid progress is made in these areas. While his task requires the
      cooperation of several public agencies, notably tax authorities and the
      business register, the role of the labour inspectorate has special interest in
      the context of this policy review.

12.       This study by the Statistical Office of Serbia (2007) was a result of the OECD’s
          regional project for the western Balkans. The figures cited from Ratkovic (2008)
          concern unreported jobs in construction, commerce, hotels and restaurants,
          transports and communications and finance. They do not include illegal business,
          assessed at around 1% of GDP.
13.       Serbian employers tend to report similar wage amounts to both pension funds and
          to the Statistical Office, so any under-reporting would affect these two data
          sources in equal measure.

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                                         CHAPTER 2. THE INSTITUTIONAL FRAMEWORK FOR EMPLOYMENT – 49

The labour inspectorate should be strengthened
           The labour inspectorate, organised as a division of the Ministry of Labour
       and Social Policy, has the right to inspect registered enterprises, and if it
       detects a violation of the Labour Law – such as work without a labour
       contract – it can order its elimination within a short period (Box 2.1).
       However, the inspectors’ effective powers are too narrowly constrained in
       two respects. First, although the Law stipulates fines, these can be imposed
       only by courts. To apply fines on the scale that appears necessary in order to
       discourage offences, inspectors would need to pursue an unrealistically large
       number of individual court procedures. Second, unregistered businesses can
       legally refuse access by the inspectors to their premises. In such cases,
       inspectors are also unlikely to receive assistance from the police, which in
       general has been reluctant to act when there is no suspicion about more
       “serious” offences than breaking the Labour Law.
           In sum, the authorities should consider possible changes in the law that
       would give labour inspectors a right to inspect all worksites regardless of
       register status, and permit them to impose penalties with a simplified
       procedure. It will also be important to develop the inspectorate’s cooperation
       with tax authorities, social insurance administrations, the police and courts.

                            Box 2.1. The labour inspectorate
    The labour inspectorate was set up during 2005 and 2006 as part of what is now the Ministry
of Labour and Social Policy. Headed by a director general, it has altogether 330 employees of
whom 321 are labour inspectors, with offices in each of the 25 administrative districts and
Belgrade, including some units in the Ministry’s headquarters. Over half of the inspectors are
lawyers, most of the others being engineers.
     The inspectorate enforces labour law, collective agreements and recognised standards for
health and safety at work. It also promotes technical measures to improve safety. Strategic
objectives – defined in accordance with the EU accession plan and the Poverty Reduction Strategy
– are to minimise work-related risks, to fight against informal work and violations of industrial-
relations rules, and to promote smoke-free worksites.
     A priority task at present is to check that employees have labour contracts. In 2005, about
60 000 worksite inspections targeted industrial relations and employment conditions and led to the
detection of 29 000 workers without contracts, whom about 21 500 received contracts after the
inspections. The corresponding numbers in the first ten months of 2006 were a little lower, with
47 000 inspections that detected 13 600 workers without contracts, for whom contracts were
subsequently established in 9 500 cases. In addition, some 24 000 health and safety inspections
were completed in 2005 and 20 000 in the first ten months of 2006.
     When workers are found to lack labour contracts, the employer is given a date before which
these workers must be declared or dismissed. Within 15 days from this deadline, the employer
must notify the inspectorate about the steps taken, after which a follow-up inspection is carried
out. According to Ministry officials interviewed by the OECD team, this procedure has the
intended effect for many of the workers concerned, but it is nevertheless unlikely to discourage
future offences because there is no credible threat of sanctions.


     The Labour Law (Article 273-274) stipulates penalties of 600 000 to 1 000 000 dinars
(EUR 12 500 at the current exchange rate) for enterprises that commit various offences, notably
lack of labour contract, lack of social insurance, unpaid wages and wages below the legal
minimum, while responsible managers are fined at rates of 30 000 to 50 000 dinars. The
corresponding penalties for entrepreneurs (self-employed persons with employees) are 300 000 to
500 000 dinars. But to impose these penalties, inspectors must bring each case to an administrative
court, a procedure that is seldom deemed efficient enough to merit the effort. Only 2% of the cases
reported in 2005 were dealt with in this manner.14
     As a further limitation, worksites not belonging to registered companies or entrepreneurs
cannot be legally inspected, except to some extent with a view to enforcing health and safety
standards. The problem concerns many small businesses and some larger ones, especially
construction sites. Officials of the Ministry of Labour and Social Policy consider that inspections
of unregistered employers in general receive too little support from the courts and police, which
do not regard violations of the Labour Law as criminal offences. As a possible solution, it has
been suggested that some offences against the Labour Law should be covered by criminal law; but
no such reform appears to be under preparation.
    The inspectorate has limited ICT capacity. Electronic links have been established with the
Business Registers Agency, and an in-house database is being developed for analytical and planning
purposes. But the inspectorate cannot connect directly with the files of enterprises or tax authorities.

The problem of unreformed enterprises

           Over the past decade, a shrinking but still-significant group of formal
       enterprises that have not been restructured or privatised has shown many
       signs of malfunctioning. They have frequently imposed unpaid leaves on
       their workers or defaulted on wage payments, while postponing or
       neglecting to take the necessary steps to adjust. Such practices are hardly
       compatible with the current Labour Law or other regulations, notably
       bankruptcy law, but they have often been tolerated in the face of threats of
       large-scale lay-offs and liquidation. The Labour Law’s Chapter IX provides
       for compensation of workers for unpaid wages via a public Solidarity
       Fund – but this applies only if a bankruptcy procedure has been initiated. As
       seen below, non-payment of wages is most widespread in socially-owned
       enterprises that operate in competitive product markets.
           The privatisation policy pursued since 2001 has been partially
       successful. Between 2001 and 2005, the employment share of private
       ownership increased from 15 to 54% in all registered companies, while
       social ownership declined from 45 to 13%. The incidence of mixed and
       state ownership changed less. Privatisations slowed after 2003, when

14.         The inspectorate can itself impose sanctions against some less-serious offences,
            e.g. working without a work-book.

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                                         CHAPTER 2. THE INSTITUTIONAL FRAMEWORK FOR EMPLOYMENT – 51

       many of the remaining non-private firms were deemed to be so
       unprofitable that they needed restructuring before they could be sold, or
       otherwise should be liquidated.
           To facilitate restructuring in selected state and socially-owned firms,
       a “Social Programme” set up in 2002 can pay various subsidies
       including generous severance pay, self-employment support and other
       active measures. About 130 000 beneficiaries were reported in
       2002-2005, when the estimated annual spending was about 0.5% of
       GDP, with severance benefits as the biggest item, typically paid as a
       lump sum (World Bank, 2006).15

       Phasing out social ownership

           The government’s current plans envisage the abolition of social ownership
       by 2009, along with most subsidies to enterprises.16 However, to the extent that
       socially-owned firms are merely transferred to state or mixed ownership – as
       often happened in the past, at least temporarily – political decision makers
       would still be responsible for many of the necessary management changes.
           According to companies’ annual reports for 2005, socially-owned
       enterprises had 144 000 employees and their value added per worker was
       only 40% of the private-sector average (Table 2.2).

15.          According to a tracer survey of participants in selected enterprises, reported by the
             World Bank (2006, p. 76), the average severance benefit corresponded to nine
             average monthly wages. This was a high amount compared with their own recent
             wages, which had often been very low if paid at all, but in most cases it could not
             be combined with unemployment benefits. Almost all were registered as
             unemployed, but a majority showed little interest in job-search assistance and only
             5% participated in any active programme. By late 2005, less than one-third of a
             group of persons laid-off in 2002-2003 had found work or started a business.
16.          The 2001 Privatisation Law gave enterprises four years to implement
             privatisation, after which the Privatisation Agency would take over the remaining
             firms. This was not fully accomplished. In July 2007, the Minister of Economy
             and Regional Development, Mr. Mlađan Dinkić, announced a new plan to pursue
             privatisation with the deadline postponed till the end of 2008. According to this
             plan, bankruptcy procedures should be started whenever three attempts to sell a
             company have been unsuccessful.

      Table 2.2. Number of employees and value added (VA) per employee in registered enterprises by ownership
                                    as reported in company statements for 2005
                     Sector,                    Private                      State                      Social                    Mixed                        Total
                     firm size               Employees,        VA per    Employees,       VA per    Employees,      VA per    Employees,        VA per    Employees,      VA per
                     (no. of employees)       thousands     employee,     thousands    employee,     thousands   employee,     thousands     employee,     thousands   employee,
                                                             thousand                   thousand                  thousand                    thousand                  thousand
                                                                dinars                     dinars                    dinars                      dinars                    dinars
                     Manufacturing                277           661               5        556            70         200               90        342           442         522
                     0-9                           24           560           -            -             -           -             -             -              25         550
                     10-49                         45           653           -            540             3         239                4        282            52         602
                     25-249                        68           646           -            626            19         164               28        290           117         480
                     250+                         139           688               4        541            48         212               57        371           247         521

                     Commerce                     150           751           -            -              12         164               20        283           184         676
                     0-9                           54           620           -            -             -           -             -             -              57         610
                     10-49                         43           871           -            -             -           -                  3        312            49         798
                     25-249                        27           899           -            -               6          68                7        234            40         665
                     250+                          25           664           -            -               3         320               10        296            39         629

                     Other non-agriculture        157           692           167          916            49         379               53      1,029           428         791
                     0-9                           32           677           -            -             -           -             -             -              35         737
                     10-49                         40           721             4          702             5         328                5        397            55         652
                     25-249                        34           714            20          593            18         315               14        427            87         556
                     250+                          50           664           143          967            25         439               33      1,379           251         910
                      Of which: Mining                 3         669              37      1,153             6         142              -          -              47         987
                      Utilities                    -             -                40      1,270             4       1,028              -          -              46       1,226
                      Transports                       33        897              56        652             8         380               22      1,698           119         895

                     Agriculture                   23           535               9        685            13         387                8        421            64         478
                     0-9                            2           424           -            -             -           -             -             -               4         375
                     10-49                          3           760           -            -             -           -             -             -              10         439
                     25-249                         8           546           -            -               7         375                4        487            24         460
                     250+                           9           474               8        693             5         403                3        417            25         527

                     Total                        607           686           183          909           144         275           170           551         1,118         648
                     0-9                          114           619           -            -             -           -             -             -             121         626
                     10-49                        132           748             5          684            12         287             12          321           165         666
                     25-249                       138           707            22          592            50         237             53          334           268         530
                     250+                         224           671           156          962            80         297           103           692           563         702

- (Dash): indicates insignificant employment (up to about 2 000 persons).
Source: Calculations based on data submitted by the Statistical Office of Serbia. The figures cover registered companies but not public
administration or the employees of entrepreneurs (self-employed persons).
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                                           CHAPTER 2. THE INSTITUTIONAL FRAMEWORK FOR EMPLOYMENT – 53

            Social ownership was associated with poor economic performance in
       most sectors and in enterprises of all size categories. Private firms generally
       showed better results.17 Firms under “mixed” ownership – often unreformed
       – also performed worse than average, at least in manufacturing and
       commerce. (However, the highest value added per worker was reported by
       big state and mixed-owned firms in mining, utilities and transports – a result
       that probably reflects special market conditions.)
            Socially-owned firms also stand out by paying the lowest and most
       irregular wages. In February 2007, over 25% of their employees received no
       wage (Table 2.3). The corresponding proportion was then 10% on average
       for all ownership groups, rising to 15 to 20% in manufacturing, construction
       and commerce.
                             Table 2.3. Incidence of unpaid wages
                                Employees concerned in February 2007
                                                       Workers with      Percent of all
                                                      unpaid wages         employees
                         Social                            32,924                  26
                         Mixed                             35,791                  14
                         Private                           14,906                  11
                         Family                             1,913                  34
                         State                              9,124                   2
                              Total                        94,658                  10

                         Agriculture, forestry              7,554                  19
                         Fishing                              360                  56
                         Extraction                           713                   3
                         Manufacturing                     49,752                  16
                         Utilities                            573                   1
                         Construction                       9,902                  20
                         Commerce                           8,565                  15
                         Hotels, restaurants                2,339                  16
                         Transport, comm.                   5,045                   6
                         Finance                              410                   2
                         Business services                  2,642                  10
                         Public administration                997                   2
                         Education                          1,130                   1
                         Health, social care                3,988                   3
                         Other services                       688                   2
                                Total                      94,658                  10

The figures refer to registered companies.
Source: Data submitted by the Statistical Office of Serbia.

17.          In general, the observation that private firms perform better also holds at more
             disaggregated levels, not shown in Table 2.2. But some notable exceptions in 2005
             concerned private (often privatised) firms in the textile and apparel sector, which
             reported very low value added per worker.


           Disaggregated average wage statistics – taking account of zero and
      non-zero wages – indicate large differences by ownership and sector.
      During 2006, serious problems were evident in “light” manufacturing
      sectors such as textiles, apparel, wood and furniture production as well as in
      commerce (Table 2.4). In light industry except for food and publishing, the
      firms counted as socially-owned (some of which had recently been
      privatised)18 paid on average 5 600 dinars per month, which was only 18%
      of the overall average gross wage – much less than either the minimum
      wage or the 40% of the average wage that was then the income limit for
      social insurance. (The minimum wage was then about 37% of the average
      wage in after-tax terms.) Socially-owned retail trade firms also paid on
      average less than the social-insurance limit, as did mixed-owned firms in the
      textile, apparel and wood industries.
           Available statistics do not reveal for how many workers the wages were
      incompatible with the law or collective agreements. But this was undoubtedly
      the case for more than the 10% of the total workforce in registered companies
      who received zero wages in February 2007. By each of the measures
      considered here, the situation was most preoccupying in socially-owned firms
      in light industry and commerce, and to a lesser extent in mixed-owned firms.
      Even regardless of ownership, Serbian firms in these consumer-oriented
      sectors have largely failed to benefit from the recovering household incomes
      of the period 2001-2006. (Cf. Table 2.4. The rightmost column shows an
      accumulated employment decline of 44% for these sectors, while the middle
      column shows a real-wage rise of only 41% compared with an average of
      71% in manufacturing and 93% in the whole labour market.)
          Such results demonstrate the urgency of completing the planned
      privatisations. But in addition, they indicate that further policy efforts will
      be needed to encourage better management after privatisation. Judging from
      the experience of other transition countries, it may be most essential to
      ensure that businesses face hard-budget limits in the form of well-enforced
      bankruptcy legislation, taxation and labour rights.

18.       These wage statistics are based on data collected from employers in March and
          September 2006. The enterprise-level information was not fully updated with
          respect to recent changes of ownership. By contrast, the above-quoted value-
          added statistics reflect actual ownership in 2005.

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                                                                        CHAPTER 2. THE INSTITUTIONAL FRAMEWORK FOR EMPLOYMENT – 55

                                Table 2.4. Relative wages by sector and ownership*
      Sector                                     Relative wages in 2006                      Real-wage                    Memorandum items:
                                        100 = Overall average (31,745 dn/month)                 growth     Employees in Sept.'06 (000s)          Employment change
                                         Total Social Private Mixed State                     2001-2006       Firms    Of which:           All     2001-2006 (%)
                                                                                                          covered by     socially   registered    Covered    All regis-
                                                                                                           wage data      owned          firms       firms tered firms
      Whole economy                       100       64        100        89        117             93      1,172          163       1,472            -24          -16

      Primary sector                       81       79         61        80         89             78           49          14           59          -36          -31
      Agriculture, fishing                  73           70    61             79        74          72          41           11           50          -38          -31
      Forestry etc.                        120      119        60        110        120            109            8           3            9          -24          -24

      Extraction                          124       82         92        82        143             58           28            6          29          -21          -22
      Fossil fuels                         143       -         -          -         143             45          19             -          19          -13          -15
      Metal ores and other                  84           82    92             82    -               86            9           6           10          -15          -12

      Manufacturing                        82       49         97        84        134             71         339          68          421           -40          -32
      Food, beverages, tobacco             108           61   127        113        65              75          71            9           84          -28         -21
      Publishing, printing                  98           91    67        107       118             105          10            2           18          -37         -15
      Other light industry                  44           18    63         53        45              41          68          20            91          -54         -44
      Textiles                              29           19    53             31    -               21          15            6           18          -60          -55
      Apparel                               27           11    44             31    -               41          18            7           24          -62          -54
      Leather, footwear                     47           30    52             51    -               70          10            2           12          -40          -33
      Wood products excl. furniture         38           21    49             37        36          41           6            -           11          -56          -35
      Pulp, paper                           64           28    109            45    -                5           6            -            9          -47          -34
      Furniture; manufacturing n.e.c.       56           13     67            75        81          42          12            3           16          -47          -37

      Industrial inputs etc.               105       69       116        108       153              79          86          19          101           -36         -30
      Coke, petrol processing              151      120        111       106        155             53            4            -           4          -25          -22
      Chemicals                            124      101        88        145        113             69          23            5           27          -36          -31
      Rubber, plastics                      89           54    102            98    -               90          16            4           20          -22          -12
      Other non-metal mineral prod.         82           46    125            83    -               25          21            6           24          -43          -37
      Basic metal processing               113           80    133            85    -              143          20            4           22          -42          -40

      Engineering industry                  70       53        80         68       148              81         104          19          127           -33          -26
      Metal prod. excl. machinery           67           40    71             71    153             61          23            4           31          -47          -36
      Machinery, equipment n.e.c.           73           58    102            65    -              115          27            8           31          -27          -21
      Office machines, computers           148       -         137       176        -              141            2            -           5           55           48
      Electrical machinery n.e.c.           74           55    78             76    -               56          12            2           14          -30          -25
      Radio, TV, phones                     56           35    44             62    -              126            3            -           4          -60          -47
      Medical, precision instruments        54           53    74             51    -               40            4            -           6          -51          -36
      Motor vehicles, trailers              66           59    62             67    -               71          25            2           27          -29         -27
      Other transport equipment             66           57    65             68        79          83            9           2            9          -31         -31
      Utilities                           133      103         85        107       138             87           42            5          44          -12          -10
      Electricity, gas, hot water          148      137        -         107        151             67          25            2           26          -23          -20
      Water                                112           87    85        106        118            116          17            3           18             9           9
      Construction                         89       74         79        81        149             93           64          15           86          -22          -12
      Commerce                             92       39        108        79        140            121           86          14          198          -25           -8
      Motor vehicle sale, service          111           55    147            97    139             88          13            3           24          -38          -12
      Wholesale trade                      112           45    119       103        153            138          32            3          114             2          23
      Retail trade excl. vehicles           70           31    80             60    134            119          41            8           60          -42          -30

      Hotels, restaurants                  68       77         71        56         71             76           20            8          25          -43          -35
      Transport                           115       87        112        87        129             78           91          12          110          -21          -13
      Land transport                        93           92    53             79    108             59          47            9           56          -23          -13
      Air transport                        203      180        -          -         205             61            2            -           2          -60          -56
      Support, travel agencies             145           69    165       108        192            135          15            3           23          -27          -16
      Post, telecommunications             130       -         208            39    128             79          26             -          28            -5           0
      Other services                       117      124       150        159       109             100         451            4         501            -1           2
      Banking                              229      188        268       215        246            161          24            2           24          -31          -35
      Insurance, other finance             190      171        138       203        -               97            4           2            6            -5          11
      R&D                                  145      145        182       149        142             32            9           2           10          -19          -19
      Business services                    108           88    95        101        157             92          31            8           57            -3          29
      Public administration                128      130        -         139        127             92          69             -          69             8           8
      Education                            104           83    140        -         104            108         120            2          125             6           5
      Healthcare, social work              103           52    90         -         104             93         154            2          158            -5          -3
      Other                                 110      201           80     135           94         102          40            4           52            -2           4

* The wage statistics used here count many private firms as non-private due to incomplete updating. For
estimates of the ownership structure, see Tables 2.7 and 2.11.
The wage data are collected twice-yearly (March and September) from registered enterprises, institutions and
organisations with over 50 employees and from a sample of smaller firms. Small firms are thus under-
represented, causing a bias that can affect estimates of average wages.
Note. The table shows wages before tax. The legal minimum wage was 35-40% of the average after tax in
2006, while the minimum wage for social insurance was 40%.


Employers often disregard the Labour Law – but seldom use the
flexibility it allows

      Working time
          The standard working week is 40 hours. Enterprises can shorten it to
      36 hours, an option that has been little used until now. By the same token,
      the Law’s provisions for part-time work are liberal and neutral – all rights
      and duties being proportional to working time, unless other conditions are
      agreed upon (Article 40) – but LFS data suggest that this legal flexibility is
      not much used. Part-time work remained unusual for private-sector
      employees and almost non-existent in the public sector in 2006, as seen
      above in Chapter 1 (Table 1.8, Panel C).
          Paid overtime is limited to 8 hours per week. But the law seeks to
      limit the need for overtime by offering generous possibilities for
      employers to reschedule work over a six-month period, with up
      to 60 hours worked in any one week (Article 50 ff). Judging from
      Table 1.8 (Panels A and B), both limits are frequently exceeded.19
      Actual working times of over 50 hours were reported by 9% of female
      employees and 19% of male employees, of whom over half even
      exceeded the 60-hour limit that applies to rescheduled work. Moreover,
      reported usual working times (Panel A) differed only a little from actual
      ones in the survey week (Panel B), suggesting that the rescheduling
      option was seldom used. These results point to the need for increased
      inspectoral supervision.

      Employment protection legislation (EPL)
          As noted in Chapter 1, the OECD Jobs Strategy Reassessment
      (OECD, 2006) identified EPL as one of a set of institutional factors behind
      international differences in labour-market performance. Econometric studies
      found that strict protection against dismissal of workers has been associated
      with below-average employment rates and slow job creation. As a result, it
      protects “insiders” at the expense of “outsiders” such as youths.
         Given the unfinished state of the transition in Serbia, and the imperative
      need to speed it up, it would be justified to make EPL more flexible than in

19.       It is unclear how secondary jobs affect these LFS data. According to the
          2005 LFS, just under 6% of all employed persons (including self-employed and
          family workers) had secondary jobs. This could explain some of the cases when
          actual working time exceeded the legal limits, but far from all of them.

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                                             CHAPTER 2. THE INSTITUTIONAL FRAMEWORK FOR EMPLOYMENT – 57

            most EU countries. However, based on the OECD’s method for “scoring”
            the strictness of EPL, the relevant regulations in Serbia’s 2005 Labour Law
            (Articles 37, 153-160 and 175-191) appear on average about as stringent as
            they are in typical Continental European countries. They are thus more
            stringent than in most transition economies and much more so than in
            English-speaking countries, Switzerland, Denmark and Japan (Table 2.5).

          Table 2.5. The strictness of the employment protection legislation (EPL)
                             Scores 0-6 from lowest to highest strictness.
                        Country ranking by average score and for each EPL type
      Total:                   1. Termination of indefinite contracts
 Weighted average                      1a) Procedural           1b) Difficulty of        1c) Notice periods
      score                            inconvenience       dismissal (criteria; trial    and severance pay
                                                            periods; penalties and
United States     0.7          United States       0.0     United States      0.5       United States    0.0
United Kingdom    1.1          Switzerland         0.5     United Kingdom     1.3       New Zealand      0.4
Canada            1.1          Belgium             1.0     Denmark            1.5       Italy            0.6
New Zealand       1.3          Canada              1.0     Switzerland        1.5       Ireland          0.8
Ireland           1.3          Denmark             1.0     Belgium            1.8       Austria          0.9
Australia         1.5          Mexico              1.0     Australia          2.0       Korea            0.9
Switzerland       1.6          United Kingdom      1.0     Canada             2.0       Canada           1.0
Hungary           1.7          Australia           1.5     Ireland            2.0       Norway           1.0
Japan             1.8          Hungary             1.5     Poland             2.3       Australia        1.0
Denmark           1.8          Italy               1.5     Turkey             2.3       Finland          1.0
Czech Republic    1.9          Greece              2.0     Hungary            2.5       United Kingdom   1.1
Korea             2.0          Ireland             2.0     New Zealand        2.7       Serbia           1.2
Slovak Republic   2.0          Japan               2.0     Finland            2.8       Germany          1.3
Finland           2.1          New Zealand         2.0     Slovakia           2.8       Poland           1.4
Poland            2.1          Norway              2.0     France             3.0       Switzerland      1.5
Austria           2.2          Spain               2.0     Serbia             3.0       Sweden           1.6
Netherlands       2.3          Turkey              2.0     Greece             3.0       Hungary          1.8
Serbia            2.4          Austria             2.5     Korea              3.0       Japan            1.8
Italy             2.4          Serbia              2.5     Germany            3.3       France           1.9
Germany           2.5          France              2.5     Italy              3.3       Netherlands      1.9
Belgium           2.5          Finland             2.8     Netherlands        3.3       Denmark          1.9
Norway            2.6          Poland              3.0     Spain              3.3       Mexico           2.1
Sweden            2.6          Sweden              3.0     Japan              3.5       Greece           2.2
France            2.9          Korea               3.3     Mexico             3.7       Belgium          2.4
Greece            2.9          Czech Rep.          3.5     Austria            3.8       Spain            2.6
Spain             3.1          Germany             3.5     Czech Rep.         3.8       Czech Rep.       2.7
Mexico            3.2          Portugal            3.5     Norway             3.8       Slovakia         2.7
Portugal          3.5          Netherlands         4.0     Portugal           4.0       Turkey           3.4
Turkey            3.5          Slovakia            5.0     Sweden             4.0       Portugal         5.0


  Table 2.5. The strictness of the employment protection legislation (EPL) (cont)
2. Temporary jobs                                                            3. Additional constraints
 2a) Fixed-term contracts              2b) Temporary-work                    on collective dismissals
      (valid reasons,                       agencies
     cumulation rules,
   maximum duration)
Canada                 0.0          Australia             0.5                New Zealand              0.4
Poland                 0.0          Canada                0.5                Japan                    1.5
United States          0.0          Czech Republic        0.5                Korea                    1.9
Slovak Republic        0.3          Denmark               0.5                Czech Republic           2.1
United Kingdom         0.3          Finland               0.5                France                   2.1
Czech Republic         0.5          Serbia                0.5                Ireland                  2.4
Japan                  0.5          Hungary               0.5                Turkey                   2.4
Ireland                0.8          Ireland               0.5                Slovak Republic          2.5
Korea                  0.8          Slovak Republic       0.5                Finland                  2.6
Netherlands            0.8          United Kingdom        0.5                Australia                2.9
Australia              1.3          United States         0.5                Canada                   2.9
Switzerland            1.3          New Zealand           1.0                Hungary                  2.9
Belgium                1.5          Switzerland           1.0                Serbia                   2.9
New Zealand            1.5          Austria               1.3                Norway                   2.9
Austria                1.8          Sweden                1.5                United Kingdom           2.9
Germany                1.8          Netherlands           1.6                United States            2.9
Hungary                1.8          Germany               1.8                Netherlands              3.0
Portugal               1.8          Italy                 1.8                Spain                    3.1
Sweden                 1.8          Greece                2.0                Austria                  3.3
Denmark                2.3          Japan                 2.0                Greece                   3.3
Italy                  2.5          Norway                2.5                Portugal                 3.6
Mexico                 2.5          Poland                2.5                Germany                  3.8
Spain                  3.0          Korea                 2.6                Mexico                   3.8
Finland                3.3          France                3.3                Denmark                  3.9
Norway                 3.3          Belgium               3.8                Switzerland              3.9
France                 4.0          Portugal              3.8                Belgium                  4.1
Serbia                 4.3          Spain                 4.0                Poland                   4.1
Turkey                 4.3          Mexico                5.5                Sweden                   4.5
Greece                 4.5          Turkey                5.5                Italy                    4.9

Source: OECD Employment Outlook 2004, Chapter 2, Annex 2.A; Serbia’s 2005 Labour Law.

              In practice, some of the detailed EPL provisions may be less strict than
          they appear. For example, the use of fixed-term contracts is subject to a
          one-year limit – stringent by OECD standards – and some sectors use
          seasonal and “casual” employment to a considerable extent.20 In practice,

20.             The use of different types of temporary contract also seems to depend on
                qualifications. According to the LFS in 2005, persons with secondary or higher
                education were over-represented among those with fixed-term contracts, but
                under-represented among seasonal and casual workers.

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                                         CHAPTER 2. THE INSTITUTIONAL FRAMEWORK FOR EMPLOYMENT – 59

       temporary contracts of one kind or the other are common in sectors where
       they are justified by particular conditions, while elsewhere their spread has
       been largely prevented. According to the LFS in 2006, some two-thirds of
       the employees in agriculture and almost one-third of those in construction
       had temporary jobs. But the overall average was 11%, which was lower
       than the OECD average of 14%.21

            In some part, the limited use of temporary contracts reflects the legal
       restrictions governing their use. But it also suggests that employers regard
       the standard indefinite-duration contract as flexible enough. Employers are
       usually free to terminate employment if they follow the rules and pay
       severance benefits.22 The approved causes of dismissal include both
       individual factors, such as poor performance, and economic and technical
       redundancies. Procedures can be somewhat complex, as is the case in most
       of the EU – not least concerning collective redundancies, for which Serbia’s
       rules have been aligned with the corresponding EU directive.23 These
       procedures involve a duty to cooperate with the employment service and
       trade unions. To some extent, the practical implications are therefore likely
       to vary with the strength of the unions, the positions they take and the
       general climate of industrial relations.

           Taken together, these EPL rules have proved compatible with a good
       deal of labour turnover. About 450 000 job separations are reported per
       year, or about 25 per 100 employees (Table 2.6). But about half of this
       turnover is concentrated in the small group of workers with temporary
       contracts. Moreover, only around 50 000 separations per year are reported
       as dismissals, i.e. employer-initiated terminations of indefinite contracts – a
       very low figure, considering the large restructuring needs.

21.          The reported incidence of temporary job contracts is often high in countries with rigid
             rules about indefinite contracts (e.g. Spain, Portugal and Sweden) and low where
             indefinite contracts are more flexible (English-speaking countries and Denmark).
22.          The severance pay stipulated in the Labour Law is normally one-third of a
             monthly wage for each of the first ten years of service, plus one-fourth of a
             monthly wage for each subsequent year of service. Cf. above concerning the more
             generous severance benefits paid as part of the Social Programme for restructuring
             of state and socially-owned firms.
23.          When the number of redundant workers exceeds certain limits (ranging from 10
             to 30 depending on the size of the firm), the employer must prepare a
             redundancy programme in co-operation with the trade union and the National
             Employment Service.


                                 Table 2.6. Reported job separations
                                         Percent distribution by reason
 Reason                                                      2004           2005           2006           2007
                                                                                   January-June   January-June

 Dismissals                                                    11             11             11              9
 (employer-initiated, including bankruptcy etc.)
 Quits                                                         27             25             26             27
 (voluntary or consensual, including retirement)
 End of temporary jobs                                         50             49             53             52
 Other reasons in law or collective agreement                  12             15             10             12
        Total, percent                                        100            100            100            100

 Separations per year:
  - total in thousands                                        348            373            453            459
  - separation rate per 100 employees                          19             20             25             26
Source: National Employment Service.

Concluding remarks
             This chapter has found many of Serbia’s legal employment regulations
        relatively well adapted to foreseeable needs, and they essentially correspond
        to international standards. On some points, especially EPL, Serbia’s rules
        are too rigid for a transition economy, a fact that may partly reflect a
        somewhat premature adoption of certain standards promoted by EU
        countries with more advanced economies. As shown in the reassessed
        OECD Jobs Strategy Reassessment (OECD, 2006), relatively rigid EPL
        rules has for a long time had a negative impact on job creation in western
        Continental Europe. Transition countries like Serbia, which need to sustain
        high economic growth and rapid restructuring in order to catch up, should
        aim at a significantly higher degree of labour market flexibility than is
        currently found in most of western Europe.
            In any case, some of the most serious shortcomings of Serbia’s labour
        market institutions belong to the implementation stage. Further reforms
        should therefore pay special attention to the respective roles of the
        principal enforcement bodies, including tax and social insurance
        administration as well as the labour inspectorate and the industrial
        relations system. Their tasks are particularly challenging in the present
        difficult labour market situation, where most workers have a weak
        bargaining position due to the large labour surplus, and where corporate
        governance is still poor in some enterprises.
            The labour inspectorate should be strengthened with additional
        resources and decision powers, for example concerning the use of fines and
        the right to inspect unregistered businesses. The inspectorate’s co-operation
        with other enforcement bodies such as tax authorities, police and courts
        should also be developed.

                                                   SERBIA: A LABOUR MARKET IN TRANSITION – ISBN-9789264045798 © OECD 2008

                                              CHAPTER 3

                     AND ITS PROGRAMMES


           The National Employment Service (NES), a public agency under the
       Ministry of Economy and Regional Development,1 administers
       unemployment insurance along with job-brokering and counselling services
       and other active labour market programmes (ALMPs), mostly regulated in
       the 2003 Law on Employment and Unemployment Insurance. With 26 main
       offices2 and at least 130 small outlets, the NES has about 2 100 staff
       members, of whom 1 100 are counsellors and related groups in contact with
       clients. The average number of registered unemployed persons per
       counsellor can then be roughly assessed at about 500, or more than twice as
       high as in most western European countries. However, if the total staff
       resources could be related to the number of unemployment benefit recipients
       alone, the ratio would decline to about 50, which is similar to the
       corresponding ratios for the best-equipped employment service agencies in
       OECD countries (e.g. those in the United Kingdom, Germany and
       Nordic countries).3
          The NES’ total expenditures in 2006 were just under 1% of GDP, of
       which four-fifths concerned unemployment benefits, which until now have
       been paid with significant delays. Most of the remaining funds were used for

1.           Responsibility for the NES was transferred from the Ministry of Labour and
             Social Policy to the Ministry of Economy and Regional Development in the
             summer of 2007.
2.           In addition, the NES operates five offices in Kosovo.
3.           Such estimates have been made in a series of thematic reviews of the public
             employment service, mostly during the 1990s. For a summary table, see Grubb
             (2007), Table 3.


      running the office network, while other “active” programmes accounted for
      barely 0.07 percentage points. Available estimates for 2007 suggest about
      the same total spending relative to GDP, but with a rise in the “active”
      programme share to about 0.1%. Employer and employee contributions
      (at a total rate of 1.5% of earnings; see Chapter 2) cover about half of the
      total expenditures, the remainder being financed via the state budget.
          Like its counterparts in other former Yugoslav republics, the NES
      inherited an unemployment insurance programme and an office
      organisation that had been developed in the socialist period. This legacy
      included a set of administrative registers that had been designed not
      merely to monitor job seekers and vacancies, but to keep comprehensive
      records on employers and their employees, recruitments, job terminations
      and changes in social insurance enrolment. The above-mentioned Law
      from 2003 (Article 100) still obliges the NES to keep such registers. The
      system has become somewhat bureaucratic and the information it provides
      is not as useful for client services as it could be, a problem that is now
      recognised and has motivated a number of recent initiatives. Nonetheless,
      a key shortcoming discussed below is that unemployment registers include
      numerous individuals who are not seeking jobs.
          Similarly, the NES’ monitoring of employers’ vacancies and
      recruitments has traditionally served to support social-insurance
      enrolment. As a result, it lists many vacancies for which the employers
      have already selected candidates, while giving too few details about the
      jobs for which employers wanted help in finding suitable applicants. The
      vacancies reported as filled – almost 700 000 on an annual basis in 2007 –
      probably represents the bulk of actual recruitments in the formal sector
      during the year; registered job seekers took up a little less than half of
      these jobs (Figures 3.8 and 3.9).
          The Change Strategy of the National Employment Service 2006-2008
      (NES, 2005) places much emphasis on client-oriented services, but it also
      calls for better labour market data and analytical labour market indicators,
      which should follow international and scientific standards.4 Many analytical
      indicators are best produced in sample surveys such as the LFS. But OECD
      experience shows that the quality of public employment-service registers is

4.        The Change Strategy of the National Employment Service 2006-2008, adopted by
          the NES in the fall 2005, had been initiated under a programme for institutional
          capacity-building supported by Sweden. It developed the implications for the NES
          of Serbia’s National Employment Strategy 2005-2010 and its National
          Employment Action Plan for 2006-2008, both drawing on the European
          Employment Strategy.

                                    SERBIA: A LABOUR MARKET IN TRANSITION – ISBN-9789264045798 © OECD 2008

       increasingly important as well, both for helping clients and for monitoring
       the performance of employment-service agencies and their various
       programmes.5 As far as possible, these registers should be treated as
       operational instruments and not as legal obligations. The NES should
       therefore be given a wide remit to develop its registers and information
       systems and to adjust them to changing needs, while discontinuing any
       practices it no longer finds worthwhile.
            Serbia’s National Employment Strategy 2005-2010 (MLSP, 2005) singles
       out the promotion of active job search as the most important and probably most
       efficient active labour market policy (ALMP) (ibid., pp. 30-33). As developed
       in the Strategy, this crucial function requires a capacity to organise targeted
       activities at limited cost as a direct complement to basic job counselling, e.g.
       skill assessment, CV drafting, interview techniques, individual action plans, job
       clubs and special activities with vulnerable groups. Concerning other ALMPs –
        which generally are more expensive – the Strategy takes note of the mixed
       results documented in the international evaluation literature, which give reason
       for caution with proposals for large-scale job-subsidy and training schemes.
       Recognising this, the Strategy favours a moderate expansion of carefully
       targeted programmes.6 As an example of recent Serbian experience, it
       mentions the pilot project “Beautiful Serbia”, supported by Spain and the
       UNDP, which was found to give modest but promising results by combining
       public works with training for construction jobs.
           However, the subsequently adopted National Employment Action
       Plan for 2006-2008 (MLSP, 2006) favours “broadening the scope and
       types” of ALMPs, with more subsidies towards self-employment, job
       creation and training. To support this stronger emphasis on
       ALMP spending compared with the Strategy, the Action Plan cites the
       EU’s 70% target for the employment rate, which in Serbia’s case has been
       deemed to require an annual increase in this rate by 1.5 percentage points.

5.           Cf. OECD (2005b), Chapter 4, concerning the evaluation of labour market
             programmes; Chapter 5 concerning the use of employment-service registers for
             managing performance.
6.           Commenting on the principal types of ALMP, the Strategy (p. 31) notes: i) public
             works should target the most vulnerable groups and help them gain work
             experience and training; ii) recruitment subsidies have modest net employment
             effects due to their inevitable side effects; iii) only a limited proportion of the
             unemployed have entrepreneurial skills, but self-employment support may
             nevertheless be the only realistic solution in some cases when large enterprises are
             restructured; and iv) training schemes should be small-scale and organised in
             co-operation between employers, the unemployed and specialised institutions.


      Additional programme spending would target, for example, the long-term
      unemployed, unemployed youths and vulnerable groups such as the
      disabled, Roma and refugees. Until now, however, Serbia’s budgetary
      situation has prevented any large increase in public spending on ALMPs,
      which therefore continue to play a very marginal role compared with the
      scale of unemployment.
          Before discussing the principal programme types, the following pages
      consider the NES client registers and what can be gleaned from them about
      different categories of job seekers.

Who are the registered unemployed?

          For the whole transition period, Serbia’s unemployment registers have
      been dominated by what appears to be a large pool of long-term clients at
      the margins of the job market. The median duration of current
      unemployment spells is about three years. This concerns a very high
      proportion of first-job seekers along with persons who have lost their jobs.
      But numerous individuals in both groups do not seem to seek jobs actively,
      perhaps because they have given up looking for work or are busy in
      informal jobs or education.

          Following a period of increase after 2000, the number of registered
      job seekers stabilised at approximately one million during 2005 and 2006.
      It declined during 2007 to about 850 000 at the end of the year, partly due
      to administrative changes considered below (Figure 3.1). Over 90% of the
      registered job seekers are classified as unemployed, implying that they
      must report regularly to a NES office and show proof of active job search
      (Article 91 of the Law on Employment and Unemployment Insurance).
      Most of the unemployed need not come to the office more than once every
      three months. Those who receive unemployment benefits – only about
      70 000 persons (see below) – must report about their job search every
      month. The remaining about 65 000 job seekers, who are not considered as
      unemployed, are not obliged to keep contact with the NES and most of
      them are not ready for work.7

7.        In December 2007, 62 500 of the 65 700 non-unemployed job seekers were
          “temporarily incapable or unavailable”; under 2 000 were recorded as employed
          while 1 500 were waiting for decisions. Available statistics do not always make
          the distinction between unemployed and other job seekers, despite its operational
          importance for the NES. It is given in stock terms (Figures 3.1 and 3.2), but not in
          flow statistics (Figure 3.8).

                                    SERBIA: A LABOUR MARKET IN TRANSITION – ISBN-9789264045798 © OECD 2008

                            Figure 3.1. Registered job seekers: stock data





                                          Not unemployed

        200,000                           Unemployed with work experience

                                          Unemployed first-job seekers

        Source: NES registers.

                     Figure 3.2. The unemployed by duration of unemployment









                        5 years or more
       100,000          2-5 years
                        1-2 years
            -           Up to 1 year

        Source: NES registers.


           Registered unemployment has fallen steadily from the beginning of 2007
       until November, when it was under 800 000. The decline initially concerned
       those with less than one year of unemployment, so the relative incidence of
       longer-term unemployment increased further (Figure 3.2). In December 2007,
       as many as 77% of the unemployed had been on the register for over one year,
       while 57% had been so for over two years and 28% for over five years.
            On first sight, these unemployment statistics from the NES correspond
       well with those of the LFS, which indicated somewhat lower unemployment
       (falling from about 700 000 in 2006 to 600 000 in 2007), but an even higher
       incidence of unemployment spells longer than two years (66% in 2007).
       However, it is possible that many of the registered unemployed are not LFS-
       unemployed and vice versa. An estimate for 2002 suggested that only one-third
       of the registered unemployed were LFS-unemployed, while over one-third
       were inactive and almost as many were employed, mostly in informal jobs.8
            Compared with employed workers, the unemployed by any definition
       include much higher proportions of young people and women (Figures 3.3
       to 3.5). But youths are not as strongly over-represented in registered
       unemployment as they are in LFS-unemployment, indicating that many
       jobless youths who are looking for work do not find it worthwhile to register
       at the NES. By contrast, elderly persons and women (except youths) are more
       likely to register as unemployed than to be LFS-unemployed, suggesting that
       many are not very active as job seekers. This over-representation of elderly
       and female clients on the register has increased during 2007.
            Figure 3.3. Women as percent of the employed and the unemployed

                    LFS-employed,      LFS-          Registered        Registered
                      Oct. 2006     unemployed,     unemployed,       unemployed,
                                     Oct. 2006       Nov. 2006         Aug. 2007

     Source: NES.

8.         World Bank (2003, Vol. II, p. 69) compared data from the Survey of Living
           Standards with LFS data for 2002. However, the LFS definitions used then were
           different from those applied since 2004.

                                        SERBIA: A LABOUR MARKET IN TRANSITION – ISBN-9789264045798 © OECD 2008

                  Figure 3.4. Employed and unemployed men: age distributions

           50%                                                                          41-50
           40%                                                                          31-40
           30%                                                                          26-30
           20%                                                                          15-25
                    LFS-employed, LFS-unemployed,                  Registered    Registered
                      Oct. 2006      Oct. 2006                    unemployed,   unemployed,
                                                                   Nov. 2006     Aug. 2007

               Figure 3.5. Employed and unemployed women: age distributions

           70%                                                                           51+
           60%                                                                           41-50
           50%                                                                           31-40
           40%                                                                           26-30
           30%                                                                           15-25
                   LFS-employed,    LFS-                    Registered     Registered
                     Oct. 2006   unemployed,               unemployed,    unemployed,
                                  Oct. 2006                 Nov. 2006      Aug. 2007

      Source: Statistical Office of Serbia; NES.


          Insofar as young job seekers have finished their schooling, they tend to
      have higher average educational qualifications than older workers
      (Figure 3.6). But the difference is moderate, e.g. the proportions with
      secondary or higher qualifications range from 22% to 33% for men in the
      shown age classes and from 24% to 45% for women.9 Moreover, persons
      with only primary education are over-represented on the register
      regardless of age – both compared with the employed workforce and
      compared with the LFS-unemployed (Figure 3.7). Comparing the
      registered unemployed with the LFS-unemployed, most of this difference
      in education remains even if one controls for the age distribution
      (rightmost columns for men and women, respectively).10 In conclusion,
      numerous young LFS-unemployed persons are not registered at the NES,
      and their propensity to be registered is particularly low in the group with
      secondary or higher education.

              Figure 3.6. Registered unemployed persons in August 2007:
                 distribution by gender, age and education attainment

            80%                                     Higher
            60%                                     Secondary
            50%                                     Primary

      Source: NES.

9.        Following Serbian practice, the term “secondary” refers to the upper-secondary
          level (age 15-19).
10.       Due to data availability, this comparison is made only for October 2005.

                                    SERBIA: A LABOUR MARKET IN TRANSITION – ISBN-9789264045798 © OECD 2008

                 Figure 3.7. Employed and unemployed persons in October 2005:
                        distributions by gender and education attainment

          70%                                                                     Higher
          60%                                                                     Secondary
          50%                                                                     Primary or less

      LFS-U=LFS-unemployed; RU=registered unemployed.
      The “age-adjusted” bars reflect actual education by age class, while assuming the same age
      distribution as in LFS-unemployment.
      Source: NES; Statistical Office of Serbia.

             The relatively low number of unemployment benefit recipients – less
         than 10% of the registered unemployed – is explained by the eligibility rules
         (see Box 3.1). These are not particularly restrictive by international
         standards, apart from the absence of any flat-rate benefit to first-job seekers,
         as found in several European countries. However, amongst the registered
         unemployed in Serbia, a large majority are either first-job seekers, long-term
         unemployed persons whose benefit rights have been exhausted, or persons
         with only informal work experience.11
             It falls upon the NES to assist all these groups and promote their entry
         into jobs in the formal economy. Until now, however, their registration has
         served mainly as a justification for access to other social programmes.
         Especially health-care, but also pension and disability insurance, have until
         now been provided more or less automatically to the registered unemployed,
         making it difficult for the NES to refuse registration of persons who need
         social insurance, even if they do not intend to seek jobs. That such apparent
         misuse of unemployment registers has been tolerated for a long time, if not
         encouraged, can thus be explained by policy concerns with the population’s

11.             Following previous rules, some older beneficiaries who became unemployed
                before 2003 can continue drawing benefits until they become eligible for pensions.


       social protection, combined with the limited impact on unemployment
       benefit spending. However, this practice has distorted unemployment
       registers and placed an administrative burden on the NES that is irrelevant to
       its main functions.
           All told, unemployment data must be used with caution – but there is no
       doubt that Serbia suffers from massive under-employment. This is also
       evident from the low employment-population ratio (see Chapter 1). The
       register system should be redesigned to identify those individuals who are
       motivated to seek jobs.

                           Box. 3.1. Unemployment insurance
    The NES administers unemployment insurance according to the 2003 Law on Employment
and Unemployment Insurance. It is financed by a 1.5% contribution, shared equally by employers
and employees. Insured self-employed persons pay the whole contribution.
Eligible persons: those who contributed for at least 12 months, or for 18 months with
interruptions. Workers who quit jobs voluntarily are excluded, as are those dismissed for justified
reasons related to their behaviour.
Duration of benefits:
      •    three months for persons with up to five years of insurance.
      •    six months after over five to 15 years of insurance.
      •    nine months after over 15 to 20 years of insurance.
      •    one year after over 20 years of insurance. This is the maximum benefit duration
           up to age 51.
      •    two years a) after over 20 years of insurance, applicable from age 61 (men) and
           56 (women); b) after insurance periods of 38 years (men) or 33 years (women)
           from age 51; and c) after 25 years of insurance from age 55.
Benefit calculation: Benefits depend on the beneficiary’s average wage in the last six months.
This amount is replaced at a rate of 60% for the first three months of unemployment, thereafter
50%. However, the benefit cannot be higher than the average wage or lower than the minimum
wage. The benefits are tax-free and the NES pays employer contributions to social insurance. In
effect, the benefits are quite generous by OECD standards in most situations, but especially for
those who previously earned the minimum wage. If wages were not paid on time, benefits depend
on the wage amounts for which contributions were paid.
Special groups: Unemployed persons who start self-employment can collect their benefit entitlement
as a lump sum. Some persons in training receive unemployment benefits augmented by 10%.
Payment arrears affect unemployment insurance, like other social insurance. In the autumn
of 2007, benefits were paid with a delay of four months.
During 2006, around 75 000 beneficiaries received on average just over 10 000 dinars per month
(EUR 130 or 47% of the average net wage) after deduction of social insurance contributions.12

12.        In addition, the NES paid monthly benefits to 23 000 persons in Kosovo.

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                                           CHAPTER 3. THE NATIONAL EMPLOYMENT SERVICE AND ITS PROGRAMMES – 71

New principles for registration from 2007
              The observed trend break at the beginning of 2007 was brought about by a
          new Law on Healthcare that extends medical insurance to additional groups,
          notably students. These should now have less reason than previously to seek
          registration as unemployed unless they actually want to work. According to
          interviewed NES officials, the reform was phased-in during 2007, with the
          NES taking gradually a more restrictive approach towards accepting new
          clients as unemployed. The agency has also begun an effort to “clean” the
          existing registers of persons not actively seeking work.
              As a result, registered unemployment has declined for both first-job
          seekers and those with work experience. There have been fewer new
          registrations and more deletions from the register. Positive trends in
          vacancies and hirings have facilitated the change, but most of the rise in
          deletions appears unrelated to hirings (Figures 3.8 and 3.9).
                             Figure 3.8. Registered job seekers: monthly flow data

                A. Newly registered job seekers                                          B. Removed from job seeker registers
 40,000                                                                         40,000

 35,000                                                                         35,000

 30,000                                                                         30,000

 25,000                                                                         25,000

 20,000                                                                         20,000
                                                                 2005                                                                                 2005
                                                                 2006                                                                                 2006
 15,000                                                                         15,000
                                                                 2007                                                                                 2007

 10,000                                                                         10,000
            I     II   III   IV    V   VI    VII VIII IX    X    XI     XII                 I       II        III     IV   V   VI   VII VIII IX   X   XI     XII

                                            C. Recruited from job seeker registers




                                  15,000                                                             2006

                                             I   II   III   IV   V      VI    VII VIII IX       X        XI     XII

                                   Source: NES.


                           Figure 3.9. Registered vacancies: monthly flow data

             A. Newly registered vacancies                                            B. Filled vacancies
 75,000                                                             75,000

 70,000                                                             70,000

 65,000                                                             65,000

 60,000                                                             60,000

 55,000                                                             55,000

 50,000                                                             50,000
                                                          2005                                                            2005
 45,000                                                             45,000
                                                          2006                                                            2006
 40,000                                                   2007      40,000                                                2007

 35,000                                                             35,000
            I   II   III   IV   V   VI VII VIII IX    X   XI XII             I   II   III   IV   V   VI VII VIII IX   X   XI XII

Source: NES.

              A greater element of self-selection by motivated clients is welcome and
          merits being promoted, for example by publicity to inform the general
          public about the NES, its services and its new principles for registration.
          Individuals’ desire to be registered at the NES should normally depend on
          their entitlement to unemployment benefit, their motivation to seek jobs and
          their assessment of the usefulness of available services. Under such
          conditions, registered unemployment might well stabilise at a level
          somewhat lower than LFS-unemployment, as it has done in many countries.

A difficult challenge for job counsellors

               To support client-oriented services, the register should thus focus on
          active job seekers and it should record details of importance for dealing with
          them. Much of this information is best collected in direct connection with
          job counselling, so its quality will largely reflect the frequency and sincerity
          of the client contacts.
              In OECD countries – where most of the unemployed receive cash
          benefits – job-search assistance has been found most cost-effective when the
          client-friendly service role is combined with effective controls on job-search
          behaviour, including a credible though moderate threat of benefit sanctions
          against non-compliance with the rules (OECD, 2005b, Chapter 4). The legal
          requirement to seek jobs actively is crucial, but it is also important to act

                                                     SERBIA: A LABOUR MARKET IN TRANSITION – ISBN-9789264045798 © OECD 2008

       against other abuses such as drawing benefits while working.13 Both
       controls and client-friendly services – “sticks” and “carrots” – tend to be
       ineffective if the client contacts are not sufficiently regular and candid,
       especially when the employment service cannot steer clients to enough
       vacant jobs and/or vacant slots in ALMPs.
           According to a recent questionnaire, about half of the OECD countries
       require the unemployed to report every two weeks or monthly about their
       job search (OECD, 2007, Table 5.2). Such reports by individuals can take
       different forms, ranging from telephone contacts or email to interviews with
       counsellors. In over half of the OECD countries, job seekers must also
       attend intensive interviews at least quarterly, lasting typically around
       30 minutes. Elsewhere, the length of intervals between meetings can vary
       more, often depending on client profiles and individual action plans.

Profiling and selection of priority groups
           As mentioned above, there are still over 500 registered unemployed per
       NES counsellor, of whom about 50 are benefit recipients. It is impossible
       with such heavy caseloads to conduct intensive interviews at sufficiently
       regular intervals with all those not receiving benefits, so it is essential to
       prioritise. As proposed in the above-cited Change Strategy (NES, 2005), the
       NES has begun to use a form of profiling as part of a first interview with
       new clients, to be held within 90 days from registration. According to
       Ministry officials, some 350 000 clients have been profiled during 2007
       until mid-November, a figure that is somewhat higher than the number of
       newly registered persons. Four client categories are distinguished according
       to an assessment of employability and risks of long-term unemployment:
             •    Easily employable: requiring only basic mediation services
                  (about 10%).14

             •    Employable: requiring basic support in active job search,
                  e.g. assessment of skills and capabilities, CV writing, interview
                  techniques, job clubs or job-search training (about 15%).

13.          Drawing unemployment benefits while working, if detected, is likely to be treated
             as insurance fraud in most OECD countries. But this is not always the case
             elsewhere, especially when unemployment benefits are modest. China’s
             unemployment insurance, for example, appears to tolerate that beneficiaries work
             informally – but not formally – in order to gain a supplementary income (OECD,
             2002a, Chapter 16).
14.          The percentages given in brackets refer to preliminary assessments of the
             outcomes of profiling in 2007.


          •   Employable: requiring more substantial ALMPs such as training,
              job subsidies or public works (about 45%).

          •   Hardly employable: not possible to integrate in the labour market in
              the short run (about 30%).

          For clients assigned to the first two categories, the Change Strategy
      envisages the establishment of “individual employment plans” at the first
      meeting. But for the other two categories – comprising 75% of the persons
      concerned – the employment plans can be postponed if further meetings
      are scheduled. The third category alone, for which more expensive ALMPs
      are deemed necessary, appears substantially greater than the current
      capacity of the Serbian economy to either fund or deliver such
          From an OECD perspective, it is surprising that the above-cited strategy
      papers do not suggest more special treatment of benefit recipients. In most
      countries, recipients of unemployment benefits and other social benefits are
      the main targets for activation policies, if not the only targets. In a budgetary
      context, targeted spending on activation measures can be justified by the
      need to control benefit spending. This linkage also makes it legitimate and
      feasible to put pressure on benefit recipients to co-operate with the
      employment service, as many countries do by spelling out mutual
      obligations in individual action plans.
          Following the international trend, Serbia obliges unemployment benefit
      recipients to agree with the NES about mutual obligations (Law on
      Employment and Unemployment Insurance, Article 14). But it appears
      questionable if agreements about mutual obligations can be considered as
      binding for unemployed workers whose benefits are paid with several months’
      delay. In the future, however – when the NES can hopefully fulfil its part of
      the mutual-obligations bargain – such agreements should strengthen the
      recipients’ commitment to job search, and the NES can then respond by
      giving them priority in access to slots in ALMPs.
          However, the Law’s general provisions about active labour market
      programmes (Article 31ff; cf. below) only suggest a broad targeting of
      all the unemployed or large sub-categories such as the long-term
      unemployed, first-job seekers, youths and older workers. Any
      unemployed person is obliged to accept training if the NES proposes this
      (Article 37). Benefit recipients are probably given priority in terms of
      participation in ALMPs, especially the more expensive ones, but this
      priority could be made more explicit and linked systematically with
      individual employment plans.

                                    SERBIA: A LABOUR MARKET IN TRANSITION – ISBN-9789264045798 © OECD 2008

            It will also be important to develop a consistent service approach to
       registered persons without benefits – insofar as they want to seek jobs. Those
       who appear motivated should receive personal attention, but they should not be
       classified as unemployed without evidence that they are available for and
       seeking a job. A full assessment of a client’s labour market situation appears
       necessary if he or she is considered for access to targeted programmes. For
       those who do not find work within a few months, the above-described
       procedures for new clients – profiling and individual employment plans – need
       to be followed-up in counselling interviews at regular intervals. However, a
       higher proportion of clients could be registered only as job seekers and asked to
       provide the NES with personal information for job matching, without having to
       make further obligations. For those who do not keep regular contact with an
       office, the NES can do little more than remove them from the register, and they
       would still be eligible for general services such as vacancy information.

Active labour market programmes (ALMPs)

           The budget for ALMPs in 2006 amounted to a modest 1.3 billion dinars
       or 0.07% of GDP, rising to an estimated 2.3 billion dinars or 0.10% of GDP
       in 2007. Training, self-employment and job subsidy programmes had
       altogether some 40 000 participants during 2006 (Tables 3.1 and 3.2). As
       mentioned above, this budget allocation does not cover NES staff and other
       costs of running NES offices, which represent an additional 0.1% of GDP
       and include most costs of the above-mentioned intensified counselling
       measures. Spending per participant is moderate for many training courses
       and public works, probably reflecting their relatively short duration
       (2-3 months for training courses), but it is much higher on average for
       job subsidies.
           In addition to the programmes mentioned in Tables 3.1 and 3.2, some
       active measures have been financed under a Social Programme for laid-
       off workers in certain enterprises, as mentioned in Chapter 2. Moreover,
       a new hiring subsidy has been introduced in the form of exemptions from
       wage tax and employers’ social insurance contributions. These can last
       for two years after hiring registered unemployed persons aged under 30,
       or for three years if they are recruited as trainees.15 The employer is
       obliged to retain the worker for another three years after the
       subsidy period.

15.          Trainee jobs can usually last up to a year. They are intended for first-job seekers
             and others who lack the work experience required for particular jobs, as specified
             in law or enterprises’ organisation plans (Labour Law, Article 47).


          Judging from OECD experience of targeted exemptions from social
      insurance contributions, they may soon carry a higher budgetary cost
      than all the other ALMPs. As with most other hiring subsidies, tax
      exemptions are liable to have only a small net effect on employment due
      to significant “deadweight” effects (subsidies to recruitments that would
      have happened anyway). But they may be worthwhile if they reduce
      informality. To increase the chances of success in this respect, the
      exemptions should be linked with systematic checks of employer
      compliance with other tax obligations and labour law.

       Table 3.1. Active labour market programmes: estimated spending in 2006

                                                                       Million           Euros per
                                                                       dinars           participant*
        Training                                                          400                   377
           Vocational training                                             264                    520
           Courses for complementary skills                                114                    219
           Other                                                            22                    681

        Support of self-employment                                        258                   931
           NES Training for entrepreneurs                                    4                     36
           Activities under other bodies                                     4                     ..
           Subsidy to self-employment                                      250                1,512

        Employment subsidies                                              511                 1,261
           Subsidies to new jobs                                           202                  1,109
           Regional programmes                                             225                  1,088
           Jobs for the disabled                                            48                  2,902
           Measures for groups at risk                                      36                       ..

        Public works                                                      100                   403

        Contribution to job creation by other                              26                        ..
              Total                                                    1,295                    650
     * Using current exchange rates and the participant numbers in Table 3.2.
     Source: National Employment Action Plan for 2006-2008.

                                           SERBIA: A LABOUR MARKET IN TRANSITION – ISBN-9789264045798 © OECD 2008
                                               Table 3.2. Participants in active labour market programmes
                                                                 2006                         2005
                                                                (budget          Total               Key target groups as percent of the participants
                                                               estimate)                         Age <25 Age >50 Women           Low-        LTU      First-job
                                                                                                                                skilled*   (>2yrs) seekers
                 Activities in the employment service              ..           100,555              30%     11%        54%        19%       19%        50%
                 Group information                                 ..            34,946              28%     15%        52%        27%       12%        55%
                 Individual assessments and plans                  ..            20,730              30%     10%        59%        18%       15%        50%
                 Job fairs                                       36,000          27,851              25%     11%        48%        20%       29%        38%
                 Job-search courses                              39,750          17,028              42%      3%        63%         1%       22%        61%

                 Training                                        12,834          11,325              31%      3%        58%        1%        20%        60%
                 Further education                                 ..                50              56%      0%        28%        92%       34%        60%
                 Vocational training                              6,135           6,357              35%      1%        59%        0%        16%        72%
                 Courses for complementary skills                 6,309           4,414              27%      4%        60%        0%        27%        45%
                   Foreign languages                               ..                   919          25%      2%        68%         0%        23%       48%
                   IT                                              ..                 1,456          24%      6%        69%         0%        34%       37%
                   Specialised IT                                  ..                 1,225          27%      4%        45%         0%        24%       48%
                   Other                                           ..                   867          35%      4%        55%         2%        25%       54%
                 Training at work                                   390               504            24%      5%        38%        13%       12%        32%

                 Support of self-employment**                      ..            26,165              14%     19%        41%        18%       32%        16%
                 Business centres (IT, legal support)              ..             8,332              12%     14%        42%        19%       21%        11%
                 Training in setting up a business
                 ---by the State Agency for SMEs                  1,350              1,112           17%     15%        46%        12%       29%        14%
                 ---by the NES                                     ..                6,742           14%     19%        41%        15%       31%        16%
                 Lump sum for self-employment***                   ..                  305            0%     44%        37%        8%         0%         0%
                 Subsidy to self-employment                       2,000              9,674           15%     23%        41%        19%       44%        21%

                 Employment promotion                             4,900              1,167           31%      7%        39%        27%       35%        50%
                 Subsidies to new jobs                            2,200                133           30%     11%        39%        13%       38%        57%
                 Regional programmes                              2,500                937           31%      6%        39%        29%       34%        47%
                 New jobs for the disabled                          200                 97           41%      9%        34%        25%       36%        65%

                 Public works                                     3,000                 -              -           -          -          -       -            -

                  Total                                            ..           139,212              27%     12%        52%        17%       22%        44%
                 Memorandum: The corresponding groups as percent of all registered
                 unemployed persons (Dec. 2005)                                                      19%     19%        54%        37%       52%        53%

* No secondary education; ** In addition to the mentioned programmes, the Serbian Development Fund gave microcredits to about 3 500 unemployed
persons in 2005; *** Unemployment benefits paid as a lump sum. LTU: Long-term unemployed.
Source: NES.

          Compared with 2006, the above-mentioned National Employment Action
      Plan for 2006-2008 envisaged a rapid expansion so that ALMP spending
      would be almost twice as high in 2007 and nearly three times as high in 2008.
      This increase would be similarly strong for each of the main programme
      types. But although the government first endorsed this plan, it was not fully
      implemented in 2007. The state budget for 2007 was not approved until June,
      and the authorities may have under-estimated the difficulties that must be
      overcome at the implementation stage. Nevertheless, a government
      memorandum from July 2007 announced that ALMPs – including all
      categories cited in Table 3.2 – were estimated to concern 636 700 participants
      and cost 12.5 billion dinars over the three years 2008-2010 (Government of
      the Republic of Serbia, 2007, p. 69).16 But according to the Ministry of
      Economy and Regional Development (2007), the numbers of
      ALMP participants in 2007 are likely to be just a little higher than in 2006.
          In terms of their general orientation (if not their volume), reported
      activities in 2005 and 2006 correspond with the principles of the National
      Employment Strategy 2005-2010, which as mentioned give top priority to
      the employment service itself and related activities such as group
      information, individual assessments and plans, job fairs and job-search
      courses. But even for these important activities, the participant numbers
      shown in Table 3.2 are low compared with the stock and flows of registered
      unemployed persons. At least one of the above-mentioned items, individual
      assessments and plans, should involve all newly registered unemployed
      persons – 300 000 to 400 000 persons per year – unless they find work
      within a few months. The participant figure given for 2005 was probably not
      even sufficient for the inflow of new unemployment benefit recipients.
          Against this background, job-search counselling in various forms should
      remain the top priority in the near future. According to international
      experience, not only are these activities generally cost-effective in their own
      right, they are crucial for the efficiency of more expensive ALMPs that
      should be targeted according to careful assessments of individual needs,
      which in practice depend on counsellors’ client contacts. Policy decisions
      about the scale of ALMPs should take account of the organisation’s capacity
      to make such assessments.
          It is also relevant to consider to what extent various sub-groups among the
      unemployed participate in the existing programmes. In 2005, every
      programme type except self-employment support showed an

16.       Concerning the financial management of the NES, this memorandum stresses the
          goal of higher formal employment so that more of the spending can be financed
          via contribution revenues (Government of the Republic of Serbia, p. 78).

                                    SERBIA: A LABOUR MARKET IN TRANSITION – ISBN-9789264045798 © OECD 2008

       over-representation of youths and first-job seekers (Table 3.2, six rightmost
       columns). Elderly persons and the long-term unemployed are correspondingly
       under-represented. Unemployed women are more likely to participate in
       training than in subsidised jobs or self-employment schemes. On the whole,
       simple demographic distinctions play a moderate role (except that, as in most
       countries, few elderly persons participate in training).
            More disturbing, however, is that almost no vocational training course
       receives pupils who lack secondary education. Such persons are found only in
       a small further-education scheme, which targets the low-skilled, and an
       on-the-job training programme. Considering that 37% of the registered
       unemployed are low-skilled, it will be important to develop more
       further-education and training options that can help low-skilled adults to
       overcome their educational handicap. Courses of this nature have played a
       role for a considerable time in, for example, Germany, Ireland, the
       Netherlands and the Nordic region. But while some countries have targeted
       such options on the unemployed, they can also be considered as a complement
       to initial education that should be provided by the regular education system.

Concluding remarks

           A key challenge considered in this chapter concerns the need to
       prioritise within an exceedingly large pool of registered unemployed clients,
       which includes many who are not actively seeking work. Appropriate
       principles for keeping NES client registers must be consistently applied.
       This should help bring registered unemployment down to a level that
       corresponds to the actual number of unemployed persons who are motivated
       to seek jobs via the NES. But even then, the number of unemployed clients
       will remain high compared with available resources.
           Serbia’s plans to modernise its employment service take account of
       recent international experience, for example concerning the links between
       job counselling and other programmes. The country’s situation differs
       compared with almost all OECD member countries insofar as relatively few
       clients receive unemployment benefits, and any such benefits are paid out
       with a delay of four months. The NES therefore has less scope for putting
       pressure on clients who do not want to seek jobs. But this makes it all the
       more justified to concentrate on those who are motivated to co-operate.
           Recipients of unemployment benefits must be a priority group,
       considering the need to control benefit spending. In the future, the
       proportion of newly registered persons who are eligible for benefits should
       increase if and when the level of formal employment recovers. Should this
       prove difficult to accommodate in budgetary terms, the authorities may


      consider a possible shortening of the maximum duration of the benefits,
      which is longer than in most comparable economies.
          An expansion of the training programmes could be justified, provided
      that they are carefully designed to address specific needs that can be
      identified as a result of the employment service’s interactions with local
      employers and job seekers. Existing programmes for self-employment and
      job subsidies are relatively expensive unless they have short duration. Such
      programmes cannot solve a large-scale unemployment problem, a goal that
      is best promoted by persevering in the policies to establish good institutional
      conditions for creation of jobs that are productive enough to be financed on
      market conditions.

                                    SERBIA: A LABOUR MARKET IN TRANSITION – ISBN-9789264045798 © OECD 2008



                                             by Vladimir Gligorov1


            With the dissolution of Socialist Yugoslavia, social ownership and
       self-management of enterprises came to an end as well, leaving only some
       anomalous remnants. Research about this type of “market socialism”
       declined at the same time. Some studies of the transition in Yugoslav
       successor states have considered their institutional path-dependency,
       especially when it comes to privatisation and labour market performance.
       This path-dependency has weakened with the passage of time, if it ever
       existed. But it can still be expected to play some role in countries like
       Serbia, where the transition has been delayed.
           To clarify the implications, this Annex first gives a stylised account of
       the former Yugoslav “market socialism”. It describes the micro and
       macro-economics of social ownership and self-management and compares
       the successor states’ experience of transforming this system. Serbia’s
       development is then briefly reviewed and the remaining economic impact of
       the discussed path-dependency is assessed. Some policy suggestions
       conclude the Annex.

Model and muddle

           The former Yugoslav system of market socialism has been extensively
       analysed from different theoretical, institutional and empirical points of

1.           Senior economist at the Vienna Institute for International Economic Studies


      view. The theoretical debate was mostly about the consistency with which
      self-management was applied and how it affected efficiency. The interest in
      efficiency was partly comparative, i.e., whether a self-managed firm is more
      or less efficient than a profit-making one. Analysts of the institutional setup,
      and especially its development, were mainly interested in how it dealt with
      the fundamental problems of the socialist federal state. Empirical research
      was aimed at checking the model’s expected consequences against actual
      outcomes in terms of resource allocation, income distribution and
      economic growth.
           Two main questions emerged from this voluminous literature on the
      Yugoslav experiment. First, how suitable was the model of a self-managed
      economy, used in theoretical debates, for understanding Yugoslavia’s
      economy? Second, how important was the formal institutional framework
      for the actual functioning of this economy? Both could be hard to assess in
      consistent empirical terms against a reality that presented itself as an ever-
      changing muddle of regionally diverse developments. But the two questions
      may still be important to answer if it is hypothesised that the system has
      partly persisted, institutionally or behaviourally, long after the collapse of
      the Yugoslav state and the progress of transition. In other words, the two
      questions boil down to one: how did the model relate to the muddle?
           Before going into that question, it is worth noting that relatively few
      studies have combined micro and macro-economic approaches. The work of
      the late professor Aleksander Bajt stands out in that respect.2 Most other
      researchers showed little interest in the macroeconomic foundations of the
      self-management system, tending, instead, to draw conclusions about
      macroeconomic performance from the Yugoslav economy’s microeconomic
      foundations. Some, like the late Branko Horvat, believed that the
      inconsistency of the macroeconomic and indeed the political system
      interfered with the performance of the micro-economy, and so was
      responsible for the unsatisfying outcomes (Horvat, 1982). However, both the
      institutional setup and economic policies were important. A complete model
      of Yugoslav market socialism would have to combine its macroeconomic
      institutions and policies with the constraints and incentives that resulted
      from microeconomic arrangements. Such a model of the political economy
      might be more useful in explaining the facts of Yugoslav economic
      development. It could also provide some insights into the paths of transition
      that the different successor states took.
          What then was the model of the Yugoslav muddle? The model evolved
      from the early 1950s to its “classic” setup of the late 1970s, after which it was

2.        The crowning achievement is Bajt (1988).

                                    SERBIA: A LABOUR MARKET IN TRANSITION – ISBN-9789264045798 © OECD 2008

       modified in a piecemeal manner in the 1980s and finally reformed almost out
       of existence in 1989 and 1990. What was left was subsequently transformed in
       different ways in each successor state. Throughout its history, the model relied
       on the assumption that five main principles could be followed:
             1.       Productive resources should be owned socially and managed
             2.       Markets were to allocate goods, labour and most services.
             3.       Capital goods and investments should be financed through the
                      banking system rather than state budgets, while banks were under
                      the control of enterprises and the six republics (federal states).3
             4.       The fiscal system was to be decentralised, republics having the
                      dominant taxing and spending powers.
             5.       Foreign trade and financial flows were to be increasingly
                      liberalised as the economy developed, substituting tariffs and
                      capital-account restrictions for the state monopoly on foreign trade.
           For corporate governance and the management of enterprises, these key
       principles were institutionalised in different ways in different periods. But
       again, two institutional assumptions were invariably present despite
       ever-changing practical arrangements:
                  • Market self-management: enterprises were to be autonomous,
                     their transactions voluntary and their employees empowered to
                     decide about employment and investments.
                  • Social ownership: enterprises’ assets, and all other assets that
                     were socially owned, were not tradable.
            Throughout the existence of the system, it proved difficult to find a
       consistent codification of these assumptions. As an apparent result, the final
       version – formulated in the Law on Associated Labour in 1976 – was
       excessively detailed and full of unnecessary regulation. Laws adopted in
       1997 about banking and the financial system tried unsuccessfully to
       combine the principles of commercial banking with social ownership and
       self-management. At the same time, an increasing de facto concentration of
       political and economic power at the level of the six republics must be taken
       into account.

3.           The Federation consisted of six republics: Bosnia and Herzegovina, Croatia,
             Macedonia, Montenegro, Serbia and Slovenia. Serbia’s two autonomous regions,
             Vojvodina and Kosovo, had almost the status of republics until 1989.


          The system as it existed was not identical or even very similar to those
      that could be found in theoretical models of worker-managed or “Illyrian”
      firms, which often guided the understanding of the Yugoslav economy.4
      Moreover, as the formal institutions laid down in different laws were not
      always consistent, explanations of the economic performance could not be
      simply deduced from the legally defined system. The actual model that
      could best capture the performance of Yugoslav market socialism would
      also have had to reflect its macroeconomic characteristics and its response to
      various shocks, some of which were exogenous to the institutional setup.
          One shock with far-reaching consequences was the rise in international
      labour mobility. In the mid-1960s, Yugoslavia allowed outward migration
      and a sizeable number of people left – mainly for Germany and some other
      western European countries – with profound consequences for domestic
      labour markets and macroeconomic developments. Studies are lacking on
      the impact on employment, wages and income, but more is known about the
      consequences for the balance of payments and the exchange rate, and thus
      for monetary policy. One result was that the Yugoslav economy relied
      increasingly on the Deutschmark as its preferred currency from the
      mid-1960s and on.
          Another important shock was connected with industrialisation, which
      brought changes in productivity and urbanisation and had all the usual
      consequences of rapid development. This was accompanied by growing
      trade and financial relations with the rest of the world, forcing domestic
      producers to deal with foreign competition. Yugoslavia was far from being a
      closed socialist economy, even though the level of protectionism was rather
      high throughout the period.
          Also, as with most socialist countries, the fact that Yugoslavia was
      politically and socially unstable had significant consequences for policy
      making. Ever-present centrifugal forces had to be accommodated in fiscal,
      economic and social policies. The socialist federation had some success in
      attenuating tensions between regions and ethnic groups – especially in the
      period from the early 1950s to the late 1970s, when it managed to sustain
      both peace and strong economic growth. But the historic tensions did not

4.        The Illyrians, an ancient tribe, lived in the western Balkans before the arrival of
          the Slavs in the 6th century. In economic literature, the “Illyrian firm” refers to
          theoretical models of worker-managed firms, where workers decide locally about
          both output and prices. Ward (1958), who developed such a model, pointed out
          that it was not identical to the actual situation in Yugoslavia. An important
          difference was that outside pressures, especially by local governments, seemed to
          have considerable influence on Yugoslav firms’ decisions (p. 585).

                                    SERBIA: A LABOUR MARKET IN TRANSITION – ISBN-9789264045798 © OECD 2008

       disappear, and they were accompanied by important regional differences in
       economic development. A federal fund transferred money from developed to
       less-developed republics, which helped the latter to quell some social
       tensions. But these subsidies were unpopular elsewhere, adding to the
       increasing difficulty of sustaining political cohesion at federal level.
           Finally, interest in Yugoslavia’s actual economic performance increased
       in the early 1980s, when a balance-of-payments crisis occurred and turned
       into a systemic crisis, prompting eventually the attempt at systemic reform
       that failed because the country disintegrated. However, even this
       disintegration was then often explained as a consequence of the failure of
       the economic system, though other explanations were clearly
       more fundamental.
           Taking account of all these factors, the fact remains that the Yugoslav
       system developed significant macroeconomic disequilibria. Relatively high
       unemployment was endemic from the mid-1960s and on. Unemployment
       may have been moderate in Slovenia and Croatia, the most developed
       republics, but there is no doubt that the bulk of the country was marked by
       labour surplus.
            Inflation also tended to be relatively high in the 1960s and 1970s. It
       accelerated in the 1980s when the balance-of-payments crisis erupted and
       reached hyperinflationary rates just before a major reform effort in
       December 1989. The sources of inflationary pressures were not well
       understood and much of the discussion of possible causes was focused on
       self-managed enterprises’ behaviour rather than on the stance of
       macroeconomic policies. The two factors were arguably inter-connected; but
       it was the macro-economic stance that most directly caused an
       inflationary bias.
            Perhaps the most important shocks were the development of the balance
       of payments. Following the liberalisation of foreign trade and financial
       relations in the 1960s, and with a steady growth of remittances from
       emigrants, the trade deficit widened as imports grew much faster than
       exports. In the mid-1970s, Yugoslavia also started borrowing in commercial
       markets. The inflow of foreign currency led to growing currency
       substitution, with the result that monetary authorities preferred to peg the
       exchange rate to the Deutschmark. This, in turn, facilitated imports of goods
       and services.
           The balance-of-payments crisis of 1981-1982 was triggered by a sharp
       increase in world interest rates, which had similar effects in several
       emerging market economies, e.g. Poland and various Latin American
       countries. Thereafter, the Yugoslav economy went through a decade of
       stagflation, growing at less than one percent per year on average for the


      1980s. It was also in that period that unemployment increased significantly
      in the less-developed regions, while major fiscal imbalances had to be
      financed via ever-rising inflation.
           Yugoslavia was not heavily indebted when the balance-of-payments
      crisis began: its foreign-debt-to-GDP ratio was hardly higher than 20%. The
      problem was not solvency but liquidity – and in that respect, social
      ownership proved to be the real constraint on the country’s ability to service
      its foreign obligations. Indeed, the main issue of debate throughout the
      decade after the balance-of-payments crisis was how to make socially-
      owned assets marketable. This eventually turned into a debate on
      privatisation, to be carried out later in the successor states.

Rights and risks in enterprises

           Given the history of Yugoslav market socialism, what are the
      characteristics that can be said to have endured even after the disintegration
      of the country and the transformation of its economy and institutions? There
      are basically two ways in which path-dependency could work: through
      specific rights and obligations, or through institutional inertia.
          In socialist Yugoslavia, a specific structure of rights and obligations
      could be traced to certain attitudes towards ownership and rights to
      employment, which were inherent in the concept of social ownership. The
      definition was negative: a socially-owned asset was neither private nor
      state-owned. Society delegated the right to manage firms to their
      employees, so that a firm became nothing but the association of its
      employees. No explicit distinction was made between employers and
      employees, except that firms employed managers who were responsible
      not only to the self-management bodies but also to the law. The right to
      self-manage also implied a right to the proceeds. Firms did not distinguish
      between wages and profits, but treated them together. Each self-managed
      firm would distribute corporate income – sales minus purchases and
      taxes – between wages and investments. Given that the wage sum
      depended on corporate income, while employment did not, it was assumed
      that all workers as a “team” would have a common interest in making the
      best possible use of the capital and to make new investments to enhance
      their future wages.
          This system provided a mix of rights to ownership, employment and
      management, combined with some positive incentives. But workers had no
      clear obligations as owners because there was no clear responsibility for
      risks. The hiring of additional employees, like investments, was to be
      guided by workers’ interest in a growing income. But there was no clear
      provision for firing of employees or for risk-taking in investment

                                    SERBIA: A LABOUR MARKET IN TRANSITION – ISBN-9789264045798 © OECD 2008

       decisions. A loss-making firm could do little to restructure its costs; all it
       could do was to stop investing, and perhaps to stop increasing the wages.
       And if a firm could not service its debt, its bank had few options but to
       refinance it.
            All told, the system was strong on workers’ rights and weak on the
       allocation of risk. This could be expected to lead to low productivity and
       misallocation of investments, a problem that was addressed in various
       ways in different periods. In the late 1970s, each firm was obliged by law
       to maintain its value, at the very least; but this merely highlighted the
       question of how to determine the value of a firm when its assets were not
       valued on the market. There were also some provisions about the
       circumstances in which a firm could fire employees, and legislation was
       eventually passed in the late 1980s about some kinds of bankruptcies. But
       given the underlying structure of rights and incentives, all these attempts
       to institutionalise risks and obligations proved ineffective.
            In principle, labour and capital mobility and the entry of new firms could
       mitigate such institutional deficiencies. Studies of labour mobility were
       scarce, but a bit more was known about the performance of new firms. Some
       research was devoted to the mobility of managers, who as mentioned were
       hired by the firms so that a market for management jobs could be expected to
       develop. Indeed, some regional differences in enterprise performance were
       attributed to the labour markets for managers. By implication, the rigidities of
       social ownership and self-management were not absolute: competition for
       goods, services and labour did have some impact in the direction of better
       resource allocations.
           In the voluminous literature on self-management, theoretical models
       identified several problems with labour and capital markets. The functioning
       of the labour market would reflect a tendency for labour-managed firms to
       maximise average wages (value added per worker) and not to equate
       marginal costs with marginal revenues: the so-called Ward effect (Ward,
       1958). The firm would then behave as a monopoly rather than increasing
       production and employment as much as a competitive, profit-maximising
       firm would have done. Aggregate employment would then be lower than in
       a competitive market economy with profit-maximising firms. In addition,
       wages might not tend to equalise across firms, considering the limited labour
       mobility in monopolistic firms.
            However, empirical evidence about these predicted effects was not
       altogether convincing. Wages were found to display systematic differences
       across firms, but it was not clear if this was an effect of the goal functions of
       self-managed firms. Studies did tend to show, however, that capital-
       intensive firms paid higher wages than did labour-intensive firms at the


      same skill levels, suggesting that workers could capture some profits at
      enterprise level.
          Another well-known problem was that any right to capture proceeds
      from private investments would favour these over socially-owned
      investments in the long run: the so-called Furubotn-Pejovich effect.5 Both
      entrepreneurs and households were expected to prefer private ownership of
      their capital if this was allowed. So if an employee could choose between
      higher wages and higher socially-owned investments in his or her firm, he or
      she would prefer higher wages, which could then be invested in private
      assets or consumed. If private ownership were not allowed, social ownership
      would merely favour consumption over investment. But if both ownership
      forms were allowed to compete, the prediction was that private firms would
      drive out socially-owned firms.
           These two effects have been used as arguments against social ownership
      and self-management, indeed from both state-socialist and liberal points of
      view. Much of the debate in Yugoslavia was exactly about whether one or
      the other shortcoming could be deduced from deficiencies inherent in the
      self-managed economy. If the labour market was inefficient due to the
      Ward effect, it could be argued that privatisation would have helped – but so
      would some conceivable state interventions.6 Similarly, if investments were
      too low due to the Furubotn-Pejovich effect, privatisation could be an
      answer – but so could a return to state-led investments, which might have
      required a nationalisation of socially-owned assets.
          The third alternative was developed by Aleksander Bajt to defend social
      ownership in the late 1980s.7 His idea was that self-managed socially-owned
      firms would be pushed towards improved efficiency if they had to compete
      in a completely free and open market economy with a government that was
      constrained, perhaps by law, to pursue prudent macroeconomic policies,

5.        According to Furubotn and Pejovitch (1972, p. 1155), Yugoslav workers’ rights to
          a company’s capital and profits differed from those of a stockholder on two
          counts. First, Yugoslav workers had some possibilities to influence the managers,
          but it was uncertain to what extent they could do this in practice. Second and most
          important, a worker’s share of the capital could not be sold and the right to a share
          in profits applied only as long as the worker remained in the firm. To attract
          capital in competition with private investments, a socially-owned firm would
          therefore have to give much higher annual returns than the private investments.
6.        The state could offer job subsidies, or merely exercise political pressure on
          self-management bodies to hire more workers.
7.        Primarily in Bajt (1988).

                                      SERBIA: A LABOUR MARKET IN TRANSITION – ISBN-9789264045798 © OECD 2008

       i.e. to maintain balanced current and fiscal accounts. There were obvious
       problems with this proposal, but the point was that the Yugoslav economy’s
       underperformance might have been due primarily to bad economic policies.
       According to Bajt, the experience of the short reform period in the 1960s
       (see above) proved that a combination of market liberalisation and
       responsible fiscal and monetary policies could substantially improve the
       efficiency of both capital and labour allocations. The performance of such
       an economy would still be lower than what could be achieved in a privately-
       owned economy, but many argued that it would have preferable
       social characteristics.
           In sum, the Yugoslav heritage could give rise to three alternative

             1.       To nationalise risk without interfering with the rights of
             2.       To liberalise internal and foreign trade, privatise enterprises and
                      quickly establish a market economy in line with the international
                      main stream.
             3.       To restore macroeconomic balances and quickly increase market
                      competition, while changing rights and risks only gradually when
                      it becomes socially and politically acceptable.
           Successor states’ experience provides material for comparing the
       three types of path-dependency. As seen in the following section, this
       contributes to the understanding of the deficiencies of the previous system
       and the strength of path-dependencies.

Comparing transitions

            Yugoslavia disintegrated and new states chose quite different transition
       strategies. Putting aside the still-conflictual developments in Bosnia and
       Herzegovina, the transitions of Slovenia, Croatia, Serbia and Macedonia can
       be usefully compared.
            Slovenia is where the break with the previous system was most gradual.
       The country came out of socialism with a much more developed economy
       than other socialist countries, being comparable to South European
       EU members. There was a social consensus that the inherited system was
       not grossly inefficient. In fact, it was believed that most enterprises were
       sound and managerial skills well allocated. It was also deemed important to
       avoid conflicts and social disintegration. As a result, Slovenia’s transition
       strategy embraced a rather strong path-dependence. It had the following
       key elements:


          1.     Insider privatisation to turn self-managed firms over to their
                 employees, i.e. rights and risks became symmetrically allocated.
          2.     Liberalisation of foreign trade in order to maintain the
                 competitiveness of the Slovenian economy.
          3.     Monetary policies aimed at the stability of the real-exchange rate
                 and thus at achieving a balanced current account.
          4.     Balanced fiscal policy.

           The outcome was generally positive. Slovenia’s transitional recession
      came to an end after barely one year as it successfully reoriented its exports
      from the collapsed Yugoslav market to the EU, while avoiding any great
      volatility in real or nominal values. Unemployment increased from just over
      1% to nearly 10%, but it came down and has now been around 6 and 7% for
      quite some time. The developments on the labour market can be explained
      by the increased efficiency of enterprises and have no obvious relation to
      either Ward or the Furubotn-Pejovich effects. Recently, there has been a
      debate about a lack of incentives for innovation in Slovenian firms, which
      may be a consequence of both the unreformed institutions and the economic
      policy stance. But it is hard to say whether, and to what extent, this can be
      attributed to the persistence of a structure of rights and risks inherited from
      social ownership and self-management.
          The experience of self-management was less positively assessed in
      Croatia, which chose to nationalise all socially-owned assets before
      privatising them in various ways. It also chose to rely on an economic policy
      mix that led to significant instability and macroeconomic imbalances. Its
      privatisations led to massive resource misallocations that resulted in
      widespread deindustrialisation and bad performance in the banking system
      until the latter was completely sold to foreign banks.
           Croatia thus did away with its legacy of self-management, but it initially
      retained much of the economic policies that had been characteristic of
      Yugoslavia. In contrast to Slovenia, it is difficult to detect any path
      dependence in terms of attitudes about rights or the distribution of risks. In
      fact, its transitional employment decline and the resulting rise in
      unemployment were quite similar to what happened in, for example, Poland
      and Slovakia.

          Macedonia is an example of a third type of transition. It privatised its
      socially-owned assets, but mostly to managers. It was decided that the rights
      to socially-owned assets were basically to be assigned to the managers who
      were expected to start behaving like risk-conscious entrepreneurs. As in
      Croatia, the economic policy mix was similar to the previous Yugoslav one.

                                    SERBIA: A LABOUR MARKET IN TRANSITION – ISBN-9789264045798 © OECD 2008

       It thus created a rather closed and monopolised product market, while
       combining a fixed exchange rate with a lax fiscal policy. This led to
       successive attempts at fiscal consolidation and a restrictive monetary policy,
       which, together with the unreformed product market, contributed to the
       country’s disappointing economic performance and a record high
       unemployment rate.

           It is striking that Slovenia, which displayed the strongest path
       dependence with respect to social ownership and self-management, did
       better than the successor states that opted for a more clear rupture with this
       heritage. Two main factors seem to account for this difference. The first
       was the belief in Slovenia that employees already held de facto ownership
       rights, which made it legitimate to entrust them with these rights de jure as
       well along with the risks that enterprises faced. Elsewhere, ownership
       rights were often seen as belonging to the state or to the managers, if not
       to individuals who were close to the government in one way or the other.
       Second, Slovenia relied from the beginning of its transition on open
       market competition and hard-budget limits to discipline enterprises,
       principally through the need for them to ensure a growth in exports. This
       approach proved effective even with imperfect corporate-governance
       arrangements. In the other states, one or the other type of protectionism
       was applied but did not prevent a surge in imports.

Serbia’s transition

            In Serbia’s case, discontinuity with the self-management system was for
       a period observed mainly as an increase in the role of the state, somewhat
       similar to the soviet system. The Serbian constitution adopted in 1990 –
       before the breakup of the federation – declared all types of ownership equal.
       But the state nationalised public utilities and a number of large companies,
       while a subsequent law on privatisation allowed a voluntary transition from
       social to private ownership. Moreover, Serbia took over an already-existing
       law that had legalised the setting-up of private firms from the end of 1980s.
       Indeed, once private ownership became legal, numerous private companies
       were registered immediately. The private sector was soon dominant in terms
       of the number of firms, but the state and social sectors remained much more
       important in employment terms.
           Voluntary privatisations were not very popular. Selling companies to
       outsiders was resisted by insiders (employees and managers), who saw it as
       a threat to their employment, while insider privatisation was regarded as a
       formula for taking over risks without any strong expectation about returns. It
       is hard to say if this scepticism reflected a real lack of interest in ownership
       or if it resulted from deteriorating economic conditions and growing state


      interventions. Also, some insider privatisations produced mixed ownership,
      whereby – in typical cases – a private firm owned by managers would create
      a joint company together with a socially-owned firm, and then channel
      assets from the socially-owned to the private firm. Such methods could also
      involve state-owned companies. As a result, privatisation was widely seen as
      a way to steal and cheat employees out of their previous ownership rights.
           Throughout the 1990s, the state did not allow socially or state-owned
      firms to fire workers. The state thus took over the obligation to pay their
      wages directly or indirectly, which it could not always do on time. As the
      economic situation deteriorated, the health and social benefits associated
      with employment could seldom be supplied without individual participation
      in money or in-kind. Thus, employees’ rights became increasingly nominal
      while their risks became increasingly real, though unrelated to investment
      decisions. Many were listed as formal employees while making their living
      in the informal economy.
           In sum, the period between 1990 and 2000 saw a transformation from
      predominantly social ownership to a mixture of state, social and private
      sectors, both formal and informal. Although many firms remained under
      social ownership, this could not be described as a persistence of the rights
      and risks that had previously been associated with this ownership form,
      considering that few legal or state institutions were functioning by the time
      of the regime change in 2000, when the economy had been devastated by
      several wars and international isolation. To the extent that traces of the
      previous system could still be found, this was mostly due to institutional
      inertia and obstacles faced in reforming them. In any case, the legacy of
      socially-owned and self-managed enterprises cannot explain the many
      economic disasters of the 1990s: the decline of GDP, deindustrialisation,
      destruction of the banking system, rising unemployment and the growth of
      the informal economy. Nor did it require the above-mentioned increase in
      state ownership or the accommodative economic policies.

Policies and institutions

           Comparing the experiences of the different successor states, it becomes
      clear in retrospect that the legacy of political and economic mismanagement
      was more important, and more problematic, than that of social ownership
      and self-management. The performance of the socially-owned and self-
      managed Yugoslav economy had always depended rather less on its
      institutions than it did on policies, among which those relating to external
      trade and finance played a critical role.
          Throughout its history, socialist Yugoslavia relied significantly on
      foreign financial support. Much of its economic history can be understood

                                    SERBIA: A LABOUR MARKET IN TRANSITION – ISBN-9789264045798 © OECD 2008

       only if its changing foreign economic relations are taken into account. For
       example, the crucial reforms of the mid-1960s were driven largely by the
       need to take up foreign loans – from sovereign lenders or international
       financial institutions – as a substitute for foreign aid, which had been
       substantial until then. This was found to require a liberalisation of foreign
       trade, and, later, a commercialisation of banks and financial markets.
            Similarly, the need to meet foreign obligations required firms to become
       efficient. When this put pressure on the labour market, a relief was found in
       emigration, which led, in turn, to adjustments in the banking system so that
       it could handle growing amounts of remittances. This involved the
       commercialisation of banks, which eventually were given access to the
       international market for private credits. With the growing role of the
       Deutschmark and the reliance on the IMF, fixed exchange rates became a
       preferred policy, leading to a trend of nominal convergence due to
       Germany’s lower inflation. Yugoslavia’s inflation may have served to
       attenuate the fiscal deficit, though the size of the latter is hard to assess due
       to a lack of reliable data.
           Some labour market developments can thus be explained by
       macroeconomic trends. Labour markets also displayed important regional
       differences, with low unemployment rates in Slovenia and Croatia and
       higher rates elsewhere. In other words, Yugoslavia was not an optimal
       currency area. The reliance on the Deutschmark tended to distort wages in
       the less-developed republics, with negative consequences for their
       competitiveness. It appears likely with hindsight (despite a lack of relevant
       data) that wages were in line with productivity in Slovenia, and, probably, in
       Croatia. But wages were often inflated in the rest of the country including
       Serbia, with negative effects on the competitiveness of the Serbian
       economy. Indeed, Serbia and Macedonia tended to show significant trade
       deficits, while Slovenia and Croatia had more balanced trade balances.
           To the extent that Serbia’s higher unemployment was due to an excessive
       price level, it can thus be explained by a misaligned exchange rate. Labour
       market rigidities may also have reduced Serbia’s competitiveness, but the
       nature and importance of these rigidities have yet to be determined.

Transition and labour markets

           In the labour market as in the economy in general, comparisons between
       for example Slovenia and Croatia suggest that the performances do not
       depend primarily on the structure or inertia of labour market institutions;
       they depend rather more on initial conditions and on macroeconomic
       policies. Before commenting on this hypothesis, a general comment on the
       behaviour of labour markets in transition may be in order.


           If the experience of Central European transition economies is anything
      to go by, most of the growth in GDP and industrial production is due to
      rising productivity. After initial declines in output and employment, the
      former recovers quickly and decisively while the latter stagnates for a longer
      time. This suggests an improved utilisation of those labour resources that
      remain employed, while too few new jobs are created.
            Croatia’s experience corresponds to this Central European pattern of
      productivity-driven growth. But in Slovenia, employment declined only a
      little and unemployment has remained low for a transition economy. This is
      remarkable not least because Slovenia has a relatively small agricultural
      sector and cannot hide unemployment there. Moreover, the labour market is
      probably more rigid in Slovenia than in Croatia.
           So what caused the underperformance of transition economies’ labour
      markets? Serbia is still at the stage when an employment decline can be
      expected. The transition invariably leads to job losses not only during the
      transitional recession, but also during an initial period of recovery, when
      privatisation and foreign investments lead to higher production mainly by
      enhancing productivity. Many of the job losses now observed in Serbia are
      due to closures of unprofitable firms and to rising productivity in
      restructured ones.
          As a sign of labour market rigidity, it has been pointed out that real
      wages tend to grow while employment declines. The labour market
      disequilibrium may reflect excessive wage increases, which insiders might
      be able to extract as a result of institutional rigidities that bar outsiders
      from competing with them for existing jobs. However, the recent wage
      growth in Serbia started from a very depressed level, and it was strongest
      in service sectors whose employment trends, while mostly negative,
      showed smaller negative values than the average for all sectors.8
          It is also not clear whether the assumption about labour market rigidity
      goes together with the large increases in labour productivity. In any case,
      while wage growth may occasionally match or even exceed labour-
      productivity growth, it is likely as a rule that real wages do not grow as
      fast as productivity does. The long-term growth trend should be a little
      lower for real wages than for labour productivity in order to encourage
      investments and job creation. This will be important not least in Serbia,

8.        By comparison, wage growth in Serbia since 2001 has been relatively moderate in
          most of the industry sectors that experienced steep employment declines
          (cf. Chapter 2, Table 2.4).

                                    SERBIA: A LABOUR MARKET IN TRANSITION – ISBN-9789264045798 © OECD 2008

       where much of the employment decline can be attributed to a worrying
       scarcity of new start-up firms.
           Another possible problem is that public-sector wages may grow faster
       than productivity, but here the evidence is mixed. Macedonia, like some
       countries outside the former Yugoslavia, introduced a cap on public-sector
       wage growth; but this had limited effect on employment there. Elsewhere,
       public-sector wages have proved to be a problem. But perhaps the main
       reason for this has been the slow democratisation. Political instability and
       insufficient transparency make it difficult to control public-sector wage
       growth. In Croatia, for instance, fiscal consolidation has been possible only
       in the last few years. Poor governance can also contribute to low labour
       turnover in the public sector. Serbia’s lack of political stability has clearly
       had effects on the speed of the public sector’s transformation, and probably
       on its relative wages as well.
           In conclusion, the experience of transition economies in Central Europe
       and the Balkans suggests the following as key causes of low employment:
             1.       Rising productivity in existing enterprises, especially for tradable
                      goods and services.
             2.       Slow growth of the new private sector.
             3.       Decreased employment in the public sector, combined with low
                      labour turnover and the ability of insiders to restrict outsiders’
                      access to employment.
             4.       Upward pressure on the real exchange rate due to growing
                      inflows of foreign investments and remittances, often leading to
                      currency substitution and uncompetitive prices and wages.
             5.       Mismatch between labour supply and demand resulting from
                      population ageing and the skill structure of the labour force.
           In addition to these factors, rigidities in product and labour markets are
       likely to contribute. However, with the possible exception of some sectors,
       the role of labour-market rigidities is probably moderate as long as high
       unemployment prevails.

Social justice and labour markets

           Serbia’s new constitution, adopted in October 2006, includes a general
       declaration committing the state to social justice. This is followed by several
       provisions of relevance to the labour market that indicate a dependency on
       previous constitutions.


          The new constitution does away with social ownership by not
      mentioning it in a list of possible ownership types. But another article states
      that existing socially-owned firms will be transformed into other of types of
      ownership in accordance with the law. (Such laws already existed.) It is also
      stipulated that all ownership forms will be equally treated. It is not fully
      clear that the latter applies to social ownership, although this appears
      important in view of the number of people still employed in such firms.
          Other provisions grant citizens a right to work, with equal rights to all
      jobs, and envisage job subsidies to support these rights. The constitution
      stresses the importance of social dialogue and collective bargaining about
      wages, and it provides framework rules about social insurance and
      healthcare. In all these areas, the constitution thus stipulates ambitious goals,
      while – like similar laws in many countries – it leaves numerous questions
      open concerning the practical implications.
          Against the background of the actual situation in labour and product
      markets, such constitutional promises can be expected to have limited
      impact in the near future. The present labour surplus means that the right to
      employment is at best a distant goal. Collective bargaining occurs mainly in
      the public sector and some large firms, with limited impact on wages
      even there.
           What these constitutional provisions primarily seem to reflect is an
      understanding – to an extent inherited from the socialist past – that there is a
      demand for social justice, job security and social protection. This results in
      high claims to rights, especially the right to work and to be socially secure.
      But there is less understanding of how risks can be distributed in a market
      economy. Though Serbia’s labour market is quite flexible in reality, not
      least as a result of a labour surplus that reduces workers’ bargaining power,
      the legal language is strong on social solidarity and labour rights.

Policy options
           Because Serbia is still at the beginning of transition, significant
      restructuring has yet to happen and will cause further job losses. The private
      sector is getting stronger, but there are too few new private firms to
      compensate for the downsizing of older firms. The paramount goal must be
      to improve the conditions for creation of new and more productive jobs.
          The small share of new firms in total labour demand may have
      contributed to a tendency for real wages to outpace productivity after
      2000, especially in the public sector but also in private service sectors. In
      principle, a disconnect between wages and productivity in non-traded
      sectors (the “Balassa-Samuelsson effect”) suggests that an overvalued real
      exchange rate is causing inflationary pressures.

                                    SERBIA: A LABOUR MARKET IN TRANSITION – ISBN-9789264045798 © OECD 2008

           Such a policy stance makes it unnecessarily expensive to create new
       jobs. It implies an inefficient distribution of rights and risks, with, on the
       one hand, excessive wage growth for insiders (strong rights, few risks),
       and, on the other, insufficient job creation and higher unemployment for
       outsiders (high risks, few rights). The functioning of the labour market
       could be improved by a set of policy measures that target competitiveness,
       establish an appropriate relation between productivity and wages and an
       appropriate combination of risks and rights.
           As in most transition economies, unemployment rates are particularly
       high for youths (first-job seekers), the unskilled, women, and those who have
       been laid off. Members of these “outsider” groups are unlikely to demand as
       high wages as do “insiders” (often skilled middle-aged men), who frequently
       have jobs in the public sector or in firms that face relatively little competition,
       permitting them to demand higher wages without taking much account of
       product markets. As a result, a significant proportion of the employed
       workforce – apart from small-scale services and the informal economy – may
       be in a position to demand higher wages than would be realistic for
       “outsiders”, causing little risk for themselves but negative effects for the
       economy as a whole.
             In this situation, the policy options boil down to three:

             1.       Increase competitiveness. Avoid misalignment of the real
                      exchange rate, which is problematic in combination with the
                      present structure of labour demand.
             2.       Invest in human capital. It has proved difficult for Serbia to
                      compete in low-skill sectors.
             3.       Increase product-market competition. Many sectors are
                      monopolistic and competition policies are weak or non-existent,
                      permitting companies to pocket profits without taking risks.

            Some further labour market reforms could be envisaged with specific
       view on the distribution of rights and risks. Clearly, the new constitution
       goes in the direction of a stronger affirmation of rights to work, and some
       provisions can possibly be understood as a promise to limit the market’s
       influence on wage setting. This is understandable, given the social pressures
       and the underlying uncertainty facing an economy in rapid transition. In
       practice, however, unemployment works as an unintended source of labour
       market flexibility in a situation where employment and wages are not
       sufficiently responsive to market forces. A better solution, if it can be
       achieved, would be to adopt reforms that permit the necessary flexibility
       within the framework of regular employment.



          Employees should take labour market risks and employers should take
      product market risks. Workers need to be protected by rights when they are
      affected by changes in product markets, which they cannot control. But the
      two types of risk are related, and sometimes impossible to distinguish.
      Moreover, enterprise managers must have the right – indeed, the duty – to
      concentrate on their business, which is to compete in product markets, and
      to make whatever changes are necessary to achieve this goal. The legacy of
      socialist labour markets and of worker-managed product markets is not
      helpful in this respect.
          The institutional path-dependence is not strong in Serbia, but there is a
      persistent confusion about the proper distribution of risks and rights in a
      market economy. It is unfortunate that its macroeconomic policies have
      been most path-dependent, with inflation as a chief constraint on real wages
      and a fixed exchange rate to discipline monetary and fiscal policy. This
      combination continues to cause imbalance in the economy and in the
      labour market.

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         Executive Summary and Vol. II: Main Report, Washington D.C.


      World Bank (2004), Serbia Investment Climate Assessment, Washington
      World Bank (2005), Doing Business in 2006: Creating Jobs, Washington

      World Bank (2006), Doing Business in 2007: Serbia, Washington D.C.
      World Bank (2006), Serbia: Labour Market Assessment, Washington D.C.
      World Bank (2007), Doing Business in 2008: Serbia, Washington D.C.

                                 SERBIA: A LABOUR MARKET IN TRANSITION – ISBN-9789264045798 © OECD 2008
OECD PUBLICATIONS, 2, rue André-Pascal, 75775 PARIS CEDEX 16
                      PRINTED IN FRANCE
   (81 2008 08 1 P) ISBN-978-92-64-04579-8 – No. 56229 2008
OECD Reviews of Labour Market and Social Policies

To catch up with more advanced economies, Serbia urgently needs to improve the
functioning of its labour market. Despite many reforms, new business growth until now
has been far too slow to compensate for job losses elsewhere. Recent reforms of labour
law should be followed up by further efforts to improve the climate for business and
productive work. Labour regulations must be flexible, but they should also be enforced
more consistently. For all this to happen, it is essential that an effective social dialogue
can take place and that it encompasses expanding and declining segments of the
labour market.

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                                                    ISBN 978-92-64-04579-8

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