Interview with Jan Rutkowski, Lead Economist for Social Policy and Labor Markets, World Bank Poland

July 10, 2015

Wojciech Matusiak Gazeta Wyborcza

Wojciech Matusiak: According to the latest World Bank study on ‘Balancing flexibility with fairness in the labor market,' fixed-term contracts - including so-called ‘junk contracts’ - have had detrimental effects on the labor market, but they have also helped boost employment in Poland.  

Jan Rutkowski: In the case of Poland the issue is not the fact that non-typical contracts (civil contracts included) are there, but that they are being abused. Flexible contracts are used, one way or another, in all countries: take ‘mini-jobs’ in Germany or ‘zero-hours’ in the UK, for example; similar contracts can also be encountered in Italy. There must always be some space for flexibility, since regular contracts are not fit for each and every type of work. This is especially true in the new economy, with increasingly liquid labor markets.

What do you mean by saying that civil contracts are abused in Poland? 

They are abused in the sense that they are applied in cases when such a solution is not justified by the special nature of a job. There are jobs that call for civil contracts, but such cases represent a relatively low percentage of all civil contracts issues in Poland. More frequently, such contracts are used for typical, ‘nine-to-five’ jobs. Civil contracts are not linked to the character of the job; instead, they are a consequence of stronger bargaining position for the employer. Flexible contracts are also used in hiring IT specialists, for example. IT people prefer this kind of contract because it allows them to do jobs for several companies at the same time. More typically, however, an employer decides to offer a civil contract instead of permanent employment because they find it cheaper and more advisable. As a result, a dual labor market begins to emerge. It has negative implications on both the economic and social arenas.

What are those implications?

The workforce is being divided into the better-off and the worse-off, which triggers social tension. Sometimes employees are simply forced to accept such contracts. They are treated unfairly, their position is less favorable compared to salaried employees who do a similar - or even identical - type of work. Another adverse consequence is the impact on human capital and productivity. There is a large population of people in a very precarious employment situation, which must be detrimental for their work drive. Yet, at least they have some employment – and this is the other side of the coin. Let us consider an alternative: if flexible contracts were eliminated, some people would be offered permanent jobs, but others would simply lose employment or they would work informally. Civil contracts have added some flexibility to Poland’s labor market.

In my personal view, it was thanks to flexible contracts that we were able to weather the crisis. In contrast to other countries, Poland not only managed to avoid decline in employment during that period, but actually saw improvement in that regard. Anyway, due to globalization and technology development the number of traditional, stable jobs is bound to shrink.

In other words, to quote Henryka Bochniarz of the Gazeta Wyborcza daily, we should all forget about permanent, salaried jobs?

I take this as shorthand for a trend, but it is an overstatement. I would phrase it differently. Salaried jobs will be different from what we have been used to. A salaried job will no longer be equivalent to security of employment. Having one job during one's entire lifetime is a thing of the past. Nowadays in the USA a 50-year-old employee has worked at 12 different places, on average. We will have to change jobs with increasing regularity.   

Hardly anyone has pointed out that junk contracts are a barrier to fertility. Recently, I was told by a female colleague: ‘I would like to have a baby, but I do not a have a permanent job and that stops me from getting pregnant.’

It is a double-edged sword. Employers think along the following lines: a young woman may get pregnant, so perhaps it is better not to hire her at all or to hire a man instead. One cannot be sure how long the woman will be absent from work due to various leaves, etc... A civil contract is an alternative, since it does not build a lasting relationship between the employer and the employee. From their standpoint, employers act rationally: they shift the uncertainty related to permanent employment on the employee, taking advantage of their stronger bargaining position on the labor market. On the other hand, thanks to this solution, a young woman can find a job more easily. There is always a trade-off.

But the gains are short-lived. If we have low fertility in Poland, in a few years there will be no consumers to buy products or services offered by those companies.

You are right. Individual reasons of employers are not always supported by social reasons. It is illegitimate, however, to blame only labor market developments for the decline in fertility in Poland. There are many different factors at play, including changes in culture and values (having a career vs. having a child).

Another female colleague of mine was working on a civil contract, doing regular, salaried kind of work. When she got pregnant, she had to quit. If her husband had not had a good job, they would not have made it financially. When she wanted to come back it turned out that her job had been taken.

The position of women on the labor market is more difficult, compared to men. Women who decide to pursue a career and have children must be prepared for some difficult choices. A child gets in the way on the work front, and work often gets in the way of having a child. In my opinion, civil contracts open more opportunities for women who want to make it on the labor market. An alternative to civil contract is not necessarily a permanent job. More likely, it might be unemployment.  

I guess in the West it must be easier to reconcile being a mother and a having a career.

There are no miracle solutions in that regard, I am afraid. In Germany, where labor market participation among women is very high, many women have part-time jobs.

Fair enough, but these are permanent jobs, not civil contracts.

Generally speaking, flexible models of employment, part-time work included, are conducive to high labor market participation.

In the Netherlands or in Switzerland there is a lot of flexibility within the model of permanent, salaried jobs: instead of working on flexible contracts, people work part-time according to a 60% or 15% working time allocation schedule.  

It is true. In Poland part-time salaried jobs are very unpopular. We do not exactly know why this is the case. But civil contracts are often equivalent to working part-time. In Poland, part-time work has simply evolved towards a different model.  

How do we compare to other countries?

It is well known that in Poland fixed-term contracts are more common than in other European Union (EU) countries. One in every four employees is hired on a fixed-term basis. But these contracts include more than just civil contracts. The Polish Central Statistical Office does not distinguish between fixed-term contracts and civil contracts, although  - in the eyes of employers and employees - these are two separate categories.

In that case, how many junk contracts do we have in Poland?

Approximately, 1.4 million. Employers resort to non-typical contracts when the labor market is inflexible - for instance, in Spain, Portugal or Italy. Such contracts are scarce in Denmark or the UK, where the labor market is flexible.

If junk contracts were eliminated, how much would unemployment increase?

Such a simulation is a very challenging exercise but one can say, approximately, that when the cost of labor goes up by 10%, employment goes down by 3-4%. There is no doubt that in the extreme scenario, if civil contracts were to be abolished altogether, we would experience a decrease in employment and an increase in unemployment.

Our labor market success in recent years must largely be attributed to the dissemination of flexible contracts - civil contracts included. However, this effect was achieved at the expense of an increase in labor market inequalities. Once again, it was a trade-off. I believe, however, that balancing greater flexibility with fairness in employment is indeed possible, and this is the way to go.

What is the World Bank's recipe? A single contract?

In a nutshell, employees with permanent, salaried jobs should forsake some of their privileges to help those who are in a more precarious situation.

The World Bank recommends a so-called single employment contract. In principle, a single contract eliminates the division of employees into more privileged and less privileged statuses. This concept has been developed by economists; it is now gaining popularity in Europe and various countries are considering the introduction of a single contract.

What would it look like? An open-ended employment contract would become the dominant model; fixed-term employment contracts would be eliminated; and civil contracts would be marginalized. At the same time, a single contract must become much more flexible compared to the status quo. An employer cannot be afraid to hire an employee; termination should be a viable option when an employee does not do a good job or when market conditions change.

At present it is very difficult to terminate an employee, which is why employers avoid open-ended contracts.

We have recently interviewed employers. One employer compared hiring a salaried employee on a permanent basis to adopting a child. For example, it is extremely difficult to prove it in the court of law that the employee was not qualified, unproductive, or useless for the company. Under such circumstances, courts, as a rule, adjudicate in favor of the employee and order to have them rehired. It is no wonder, then, that employers are cautious and reluctant to offer permanent, salaried positions. We propose that employee protection should be determined in monetary terms, and compensation in the case of termination should grow in proportion to the length of service. Each termination with compensation would be legitimate, the only exception being discrimination, e.g. due to disability.

Lately, such regulations have been introduced in Italy. In Italy there is a single, open-ended contract; workplace security increases with the length of service, and it is expressed mostly in financial terms.

The World Bank tries to find solutions balancing employer flexibility with employee security. We want to make sure that employers are not afraid to offer permanent, salaried positions and create new jobs; to make it easier for people to find jobs. Adding more flexibility to employment contracts is a price salaried employees ought to pay in order to allow labor market outsiders in. Someone has to forsake some of their privileges to help those who are worse-off.

To make that happen, we need employers, trade unions, and political decision-makers to agree. According to the World Bank, both the OPZZ (All-Poland Alliance of Trade Unions) and ‘Solidarity’ have expressed their tentative interest. On the employers’ side, ‘Lewiatan’ is involved. The concept is also being reviewed by the Ministry of Labor.