Marina Wes: It Is a Bad Idea to Abolish Junk Contracts

November 18, 2014

Marina Wes wyborcza.biz

Interviewed by Leszek Baj 2014-11-12

Civil law contracts are abused, and their prevalence results mainly from lower labor costs rather than from a non-typical nature of work assignment as such. This leads to labor market duality, i.e. a situation where alike jobs are divided into better and worse ones. 

Leszek Baj: You used to work in Turkey. Now you are the Manager of World Bank Office in Warsaw. What are your first impressions from Poland?

Marina Wes: I relocated to Poland in August. My family and I came here by car. The first things that struck me was the number of people who were selling some produce by the side of the road: fruit, mushrooms. My first impression was that the people were poor. But I soon realized that they were simply very industrious.

Another observation I have is about bureaucracy, in a broad meaning of the word – it still remains an issue, despite some progress in curtailing the red tape. I was surprised how much trouble it took me to get Internet connection in the house. In Turkey it was easier.

Bureaucracy and protracted procedures – e.g. in getting construction permits – have been long known as Poland’s weakness for many years. One can clearly see that looking at Doing Business ranking, for instance.

In the latest edition of the report Poland was ranked at a very good, 32nd position in a group of 189 economies, but indeed it was ranked 137th in the category of getting construction permits. This shows that there still is a lot to be done if you want to maintain fast economic growth in the longer term.

What else is there to be done?

Let’s take labor market activity of Polish people, for example. Itis very low. Reforms are needed to make labor market more flexible and to boost employment and labor market activity.

Some people say that our labor market is quite flexible because of civil law contracts, inter alia, which are sometimes referred to as ‘junk contracts’.

I’d rather we didn’t refer to civil law contracts as ‘junk contracts’. Economists use the term of an ‘atypical contract’. Such contracts are used in many countries and they are b   applicable to work assignments of unusual or irregular nature, for example assignments limited in time or focused on a specific task, such that can be done outside of the workplace and at different hours.

Having said that, I admit you have a point here: in the Polish context, civil law contracts frequently have little in common with these assumptions. According to the research done recently in the World Bank, civil law contracts are abused, and their prevalence results mainly from lower labor costs rather than from atypical nature of work assignment as such. This leads to labor market duality, i.e. a situation where alike jobs are divided into better and worse ones, which has unfavorable economic and social implications.

In that case, what is the alternative?

To be able to answer that question one should first consider the counterfactual - what would have happened if such contracts were not used in Poland.  Would the people who are hired under civil law contracts be hired based on the Labor Code, or would they become unemployed? Or, perhaps, the grey economy would expand.

If such contracts were to be abolished, it might turn out that negative consequences outweigh the positives. In many regions in Poland, especially those with relatively low labor productivity and  in the absence of regionally differentiated  minimum wage, civil law contracts make it possible to legally hire people  who might otherwise be jobless. The way to go is not to abolish civil law contracts, but to reduce the gap in costs generated for the employer by civil law contracts vs. Labor Code contracts.

In that context, is it a step in the right direction to impose social security contribution payments on civil law contracts?

It is the right step, albeit insufficient. When civil law contracts are charged with social security contribution, the gap in costs between civil law contracts and regular employment contracts may be diminished. This will help fight the abuse, at least to an extent. We also need measures to simplify the Labor Code and make it more flexible, so that employment contracts are more attractive to employers.

In the Netherlands, where you come from, or in Germany there is very low unemployment. What can you tell us about flexibility of those labor markets?

Labor market in the Netherlands is flexible in the sense of part time work, which makes it easier to combine work with family life and maintain a  good work-life balance.

In Germany, which struggled with the issue of high unemployment for quite a long time, they have recently introduced so-called mini jobs, which enhance flexibility of employment.

In the UK there are ‘zero-hours’ contracts which also give significant degree of flexibility to the employer. Whether we like it or not, greater flexibility of the labor market is unavoidable due to globalization and accompanying competition.