Thursday, March 08, 2007


When an economist in Slovenia speaks about the problems in the field of the labor market, he/she often faces harsh attack on behalf of those who have never read a book on economics, nevertheless an elementary textbook on economics.

I still remember how student and trade union activists last year invited us to join them in protesting against economic reforms, from labor market to tax system and education. It shameful to see how student organization (SOS) receives a vast amount of budget money and is still kept on giving an explicit support to socialist structural policies which deny taxpayers from enjoying the output they create. In Slovenia, we have a very high employee social security contribution rate which equals 22,1 percent of the gross salary. Thus, one fifth of the average labor cost means a social security burden.

In the field of labor market, the role of trade unions is crucial. First, trade unions are nothing else but an interest group who protects its members at the expense of future employees. Thus, trade unions create a sort odevice which prevents the non-members of the unions from enjoying the potential benefits of the union memebership which they could gain if they were the members of the union. The reaction behavior of the unions is carefully designed and streams toward the implication of rigid rules of employment. The aim of the latter is to prevent new employees from getting a job fast, so that current employees would receive greater benefits and payments as the equilibria supply curve is shaped and the price of labor is thus higher than it would be in the competitive equilibrium conditions. Trade union also shape the horizon of the labor market with minimum wage claims. Higher minimum wage is nothing else but a paycheck insurance for existing employees, while higher minimum wage level creates a cost burden for employers who are thus prevented from faster hiring of low-cost workers. Minimum wage is a rigid experiment which cannot respond to the competitive labor market shifts which results in a rigid establishment of employment conditions. Due to these conditions, the employment probability for targeted worker groups is much lower. It's thus not surprising that strict minimum wage policy reflects higher unemployment among low-income population groups. That's why the aim of minimum wage is to protect current low-paid employees and detect potential future employees from competing and cooperating with existing employees. This kind of particular behavior is negative from several aspects. It implies a reduction of choice in the labor market because higher non-salary costs (tax report, payroll tax, social security contribution, meal subsidies, full fuel compensation, meal time subsidies...) and steeply progressive tax rates increase the price of productive labor force which often determines the growth of productivity and the use human capital in the productive process. As being faced with higher regular non-salary costs, employers shift towards looking for loopholes to reduce the cost burden. That's why many productive workplaces are moving toward the south-east where the labor cost burden is much smaller than in Slovenia. Therefore, hiring students is a practical example which explains why student employment is so spread in Slovenia. The worst of the worst is that those who lost the employment hardly find the job again due to rigid employment rules setup by the unions. The most frequent result of this spiral chase is applying for state unemployment subsidies and the creation of "moonlight" (underground) economy is very often the gateway for the unemployed.

Second, the implication of the rigid labor market rules negatively affects future university graduates. As employers would probably seek to minimize the labor costs, fresh graduates were then not able to find the employment regularily but through the framework of student hiring because they would too expensive to be employed in other case. Graduates are deprived from running a work age and consequently from investing in private pension funds. Third, student workers are a huge cost for the government because (a) they don't contribute to social security, and (b) don't fill in the tax return but the labor legislation allows them getting funded from unemployment and social subsidy funds. Fourth, student work and hiring students, by and large, forces students to postpone the graduation and this means a growing cost for the government who funds the education system. Hiring students stimulates them to prolong the status of the student and consequently, they graduate much later than the official length of the study is supposed to be.

Dr. Joze P. Damijan suggests the following solution for the labor market:
"...copy the Austrian system in which there is almost no non-salary costs [except for tax return and social security contribution] and then switch to the Danish system of flexibility within 3 to 4 years. For the beginning, we could lump-sum the non-salary costs in the hour figure regardless of the income level. Employer's labor cost would double formally, but not actually. All employees would be situated in an equal position and the costs of older employees were not grow exponentially anymore. In effect, contract transparency and the legal equality of employees would be increased. In addition, collective bargaining would become much more simplified. They would negotiate only about the extracting salary growth and not anymore about the formalities invented in socialism..."

In the situation in which trade unions determine the labor legislation and vis-a-vis the economic policy as well, the future opportunities in the labor market are harshly reduced. Will trade unions hold the responsibility for future brain-drain which seems to be inevitable as the trade unions are actually a "state within the state"?

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