Jan Rutkowski: In Poland, Without Radical Changes Labor Market Is Not Going to Improve

September 15, 2015

Mateusz Ratajczak Money.pl

Mateusz Ratajczak, Money.pl: Election is at our door. ‘Junk contracts’ will certainly be high on the agenda during election campaign. Both Ewa Kopacz and Beata Szydło have made promises to get the issue resolved, but as far as specific ideas are concerned, they seem to be buried deep inside the cupboards of both political parties. Meanwhile, World Bank proposal is lying on the table.   

Jan Rutkowski, World Bank Lead Economist: To be precise, the idea involves introduction of a single contract. With this concept, the breakdown into fixed-term and open-ended employment contracts would disappear. Second, employment contract would become more flexible – employee protection will increase in proportion to the length of employee work service in one company, it will not be the same throughout the entire employment period.

How is it possible that a minor change will turn to a revolution?

At the onset, hiring is cheaper and simpler. As employee gains experience, firing becomes more costly, and other benefits are expanding. Such a change would encourage employers to hire.

As I understand, people who work on employment contracts would have to give up some of their privileges.

Indeed, the idea is based on social solidarity principle. Currently in Poland we can observe what the economists refer to as a ‘dual labor market’. People with very similar qualifications work on totally different contracts. The more fortunate ones have been offered open-ended employment contracts, while all others – in many cases quite by chance, depending on what kind of employer they happened to encounter – have civil law contracts. That leads to serious inequalities, frustration and tensions. We need some equality here. Unfortunately, it’s a trade-off. Some people with entitlements must give them up so that those in a less fortunate situation can get better protection.

It seems to me that it will be extremely difficult to convince employees to accept this solution, not to mention the trade unions.

Trade union activists say that they represent not only those who work on employment contracts, but also those with other types of contracts. If this is the case, they should agree that we need a trade-off. It is not possible to change all junk contracts to employment contracts and, at the same time, keep the grey economy and unemployment in check. Achieving labor market equality requires some sacrifice.

One can easily imagine that trade unions will call this an idea from hell, forged by employers. After all, the employers will be able to fire people with greater ease, and employees themselves will not gain much.  

This is not the way I see it. Single contract would also mean a significant change for the employers. To begin will, civil law contracts will disappear from the market. They will only persist in those places where a civil law contract is truly appropriate. Employers will be forced to pay health care contributions on a larger basis. Firing an employee will not be all that easy and cost-free, either. An employee will be entitled to an appropriate financial compensation. It is a give-and-take deal.

In other words, labor costs are going to go up.

Such a change will definitely increase the cost of labor, I have no doubt about that. In fact, no matter what we do, this will be unavoidable. A group of employees is forced to accept civil law contracts because entrepreneurs want to contain some of their expenses. Such practices are frequently unjustified and, in the opinion of the World Bank, they should be discontinued.

The single contract concept has arrived in Poland from western countries struck by the crisis. Yet, it has not been fully implemented anywhere.  

It is true that the concept was developed quite recently in the countries with inflexible and dual labor market. Some employees had a ‘decent contract’ and protection, whereas a large group of people, especially the young, could at best hope for fixed-term jobs with much less protection and higher uncertainty of the future. A group of economists from Italy, Spain and France tried to develop a compromise solution. In those countries some entrepreneurs also sought to avoid contracts that were inflexible and costly, i.e. made them uncompetitive on the global market. In consequence, they started to resort to the models of employment with restricted employee rights.

Ultimately, it was the dramatic situation of young employees that finally inspired some action. We are looking for a solution with young employees in mind.

It is true that young people are in a particularly difficult position: they must enter the market and prove themselves useful. Such market entrants must be cheaper, at least at the start, because they have not proven themselves yet. We can compare this to a new product displayed on a shelf in a store. For some time its price will have to be lower so that the clients can get acquainted with the product and take to it. By analogy, the same should apply to young employees. An employer has a choice: either a civil law contract, or an employment contract. It is understandable that they will not offer a job with an open-ended contract to a new employee – it would be too risky. Once a single contract is in place, this barrier is removed. Severance pay and privileges increase in proportion to work tenure. An employer will immediately offer an open-ended contract to an employee, but if there is disappointment with employee competences or expectations, it will be easier to get the employee terminated.

It is rather hard to believe that facilitated firing is a recipe for job seeking assistance.

We hear from employers that this is their biggest concern. They are discouraged by the fear that they might have to turn up in court and try to prove that the employee must be terminated. Civil law contract is a less burdensome option because, in the case of a justified termination, there is no court litigation and trial, no reinstatement by court decision, no extra costs. An employer told us that nowadays hiring an employee with an open-ended contract is like adopting a child. Under such circumstances, there is low motivation to hire young people in particular.

On the other hand, it should be mentioned that entrepreneurs commonly share stories of drunk employees who are very difficult to terminate, or employees who are protected by the law on the grounds of pre-retirement age and basically look forward to the retirement. Their productivity is declining dramatically but they are still counted in as a headcount, and the costs are substantial.

Entrepreneurs frequently complain about high cost of labor and use it as an excuse for the presence of civil law contracts in their companies. However, it cannot be ignored that some entrepreneurs have turned this approach into a business model. This makes them cheaper and gives them a head start in applying for large investment contracts through tenders.

It is a real issue, I agree. Some entrepreneurs resort to cheaper contracts because this is the weapon used by their competition (instead of a better offer). The only solution in that respect is to increase the competences and effectiveness of the State Labor Inspection. Naturally, this would entail additional costs for the budget, but it would really help employees. In the extreme scenario it is planned that the job performance contract (Polish: umowa o dzieło)  will be completely eradicated. This is a Spanish idea; in Italy it is assumed that a single contract will be the dominant model of employment, with other models developed for non-standard jobs and with limited use.

Several weeks ago we demonstrated in money.pl that Polish State Labor Inspection is an underperformer compared to equivalent institutions in other countries. Maximum fines are not administered, warnings are most prevalent. Employers are not bothered in view of such an inspection.

Performance of State Labor Inspection is an extremely complex issue. Inspectors claim that in a lot of cases their hands are tied, simply put. They are unable to operate effectively. Performance of State Labor Inspection should definitely be analyzed; so far, this has been a weak point. Inspection does not do the job required to keep the labor market free from pathology. If we want to fight with pathology, the work of State Labor Inspection must be streamlined, starting with  greater empowerment and improved effectiveness.

If not a single contract, what else? Charging contributions on all types of contracts?

Even if we carry it through with administrative means, the consequences will be dramatic. Unemployment is bound to go up, and informal economy is bound to expand. When labor  becomes substantially more expensive, employers begin to avoid legal hiring. It will impact the young and the women.

What if employers were offered some reliefs for hiring people on employment contracts? It might be tied with the CIT rate, for example.

Reliefs are a risky business. I am not a proponent of reliefs because they create a lot of space for abuse. On top of that, this solution is much more expensive and not always effective.

The issue of so-called junk contracts, i.e. civil law contracts used in a pathological way, has been on the rise and it has been diagnosed quite well. The issue resurfaces with every election campaign, but nothing ever changes.

Any labor market reform is both politically challenging and costly. Strong political will and determination are needed. Importantly, all stakeholders should engage in a dialog, otherwise such a reform cannot be implemented. In other words, employers must talk to the trade unions, and the government must act as a mediator in a sense, representing public interest. All the stakeholders must understand that without radical changes there can be no success, no improved labor market. Trade unions should put on their banner the interest of marginalized employees, not only their members. And employers should understand that they cannot and should not abuse their position with employees. These are difficult changes.

Things went well abroad.

In Italy things went well because the situation had been dramatic. In Spain labor market reforms were not implemented due to very strong resistance of trade unions. Employees have their concerns, and so do employers. Trade unions argue that a single contract adds to employee uncertainty, whereas employers are concerned that they will lose flexibility in HR decisions.

Paradoxically, employees can hope that when the situation gets so bad it becomes impossible to endure, there will be no choice and compromise will turn out to be the only option.

You have a point in a sense, this is what happened in other countries.  Radical reforms are only implemented once we hit the wall. The crisis makes the change. There is huge frustration among young people in Poland. Let us remember, however, that the cure should not be worse than the disease. There are some extremely radical ideas, such as complete eradication of civil law contract, but this is a blind alley. Without adding flexibility to basic contracts there is nothing we can do.

One in three working Poles has a civil law contract and majority of young people work on such contracts; this has been a fact for over 15 years now. It is quite common that security guards and cleaning personnel work based on job performance contracts. You mentioned that we must hit the wall. Where is that wall?

It is hard to predict what will trigger the change. So far, this cause has not brought people out on the streets. I must say that some media and journalists give civil law contracts a really bad name, hence the term - ‘junk contracts’. Of course, abusive practices are there, but there is also a sizeable segment of the market where such model of employment is justified. I do not mean to warrant abuse, but we should not forget that the coin has two sides. Civil law contracts cannot be curtailed without offering employers more flexibility in employment in some other way. In many cases labor protection sustains the employees who are unproductive, incapable of doing the work anymore, and when there is no economic reason for continued employment.

By the by, somewhere in the background another revolution has been going on. The way we work today is not the same as 25 years ago, people frequently work in several places, taking on short-term jobs.

That’s exactly right. This is a global trend in a way, confirmed by many researchers. Labor market has been dynamic, with many changes on technology and demand side, and employers must respond swiftly. Employees should adapt as well. At present we change jobs twelve times in a lifetime, on average. Twenty or thirty years ago two workplaces in a lifetime were a standard. Regulations must be aligned with labor market developments, which is why we advocate greater flexibility in hiring and firing practices. A company must be able to adapt to changes, otherwise it will not be competitive. It may not be a popular approach, but the fact is that when companies lose their market position, the entire society is adversely affected.