Balancing Flexibility and Security

crnogorski

Author: Jan-Peter Olters, World Bank Representative in Montenegro

Published in Monitor, No. 897/8 (December 28, 2007),

“Ravnoteža fleksibilnosti i sigurnosti,” pp. 36–37.

You take my life when you do take the means whereby I live.

—William Shakespeare (“The Merchant of Venice”)

Being able to provide for one’s family, feeling valued and productive, contributing to something bigger than oneself—all of these are reasons why work takes up such a central part of our lives. Fearing for one’s job is a cause for great stress, loosing it a traumatic event just shy of a personal tragedy. Economists, of course, frame this more austerely (but no less accurately) when stating that unemployment represents a waste of productive resources. Debates on labor-market policies, for this reason, tend to be very emotional and politically divisive, and they are most challenging for policymakers. The failed ideologies of the 20th century—having gained popularity and momentum during the period of grave economic crises during the 1920s and 1930s—have, to a large extent, been motivated by the attempt to offer simple solutions to the challenge of unemployment.

Up until today, changes to established labor practices cause fears, particularly among those currently employed and protected by existing labor laws. As difficult and divisive as these reforms might be, policymakers must not dodge the decision and adapt the labor market to prevailing realities. In Montenegro’s case, there are three main reasons that necessitate the introduction of additional elements of flexibility. First, euroization has removed any possibility to cushion economic shocks by letting the exchange rate adjust. The exchange-rate anchor implies that adjustments to changes in the overall economic situation will occur in the labor market. Thus, to avoid a situation in which potential economic downturns are accompanied by excessively high rates of unemployment, the labor market needs to remain sufficiently flexible to absorb fluctuations in the business cycle.

Second, Montenegro is preparing its eventual membership in the European Union, both politically and economically. Montenegrin firms have to become competitive and profitable to succeed in Europe’s common market (or elsewhere in the world). The opening of the economy has contributed considerably to the dynamic growth rates in recent years and the fact that Montenegro has become the fastest growing country in the region. In this globalized and interconnected world, firms—whether foreign or domestic—compare the conditions across countries and weigh the relative advantages and disadvantages of a given country as their production site. One of the key elements that can tip a decision in one direction or another is the degree to which the labor market functions properly and is sufficiently flexible to adjust to changing circumstances. Third, protections under the labor law are only as good as their relevance in practice. To protect the integrity of the law, any right specified therein needs to be enforceable. If the labor law and applicable labor standards do not reflect the reality in the workplace and workers cannot sue for their implementation, this leaves employees exposed to the selective application of the law and thus in a weaker and less secure position. This dichotomy between extensive protection under the law and the practical irrelevance of well-intended stipulations is reflected in the still large share of employment in the— unregulated and unprotected—informal economy. Economic dynamics are such that Montenegro’s labor market will almost inevitably become more flexible, either formally through changes in the law or as a result of market pressures affecting the reality describing the workplace. But flexibility is only one side of the coin. A good labor law carefully weighs the firms’ needs and those of the employees. Finding the right balance between the two objectives—flexibility and security—means that probably neither firms nor workers, at the end of the parliamentary approval process, will be fully pleased with the law.

A number of developments have taken place in other countries that, if adopted in Montenegro as well, should help to facilitate the gradual transition to a somewhat more flexible labor market. Many countries, particularly those in Northern Europe, have shifted their policies away from the single focus on legal frameworks and collective bargaining agreements, which protect existing jobs, to a broader approach, combining “light” employment protection legislation with conditional unemployment benefits and active labor-market measures that promote and facilitate life-long learning and provide workers with financial and non-financial support during the difficult periods of transition. This “flexicurity” concept has proven quite effective and has become a cornerstone in the European Commission’s approach to labor-market policies today. By contrast, Montenegrin labor and employment policies have remained focused on protecting existing employment, through the Labor Law and general collective agreements. Complementary policies, including investments in training, do not yet play an important role. As a result, hotly debated labor law stipulations aimed at protecting certain groups of employees increase the implicit cost to enterprises and risk their greater exclusion from the primary labor market, the one in which labor law stipulations and collective bargaining agreements apply and are enforced. Well-intended clauses—typically popular demands in political debates—often prove counterproductive and, rather than protecting affected groups, end up excluding them from access to well-paid jobs with full benefits that are compliant with formal labor standards. The draft labor law seeks to define such a broad trade-off between these two objectives and, as such, represents an improvement over the status quo. These changes, if approved by parliament, should help to reduce the severity of underemployment and redundancy in more adverse economic environments, notwithstanding the fact that Montenegro is likely to retain its mixed system, which combines legislative obligations with those stemming from collective bargaining agreements. Montenegro’s general collective agreements have imposed additional non-wage costs to employers, irrespective of the particular circumstances of an individual employer or those prevailing in a given sector. For that reason, European countries are in the process of decentralizing collective-bargaining agreements and make them applicable to the enterprise level; this might be a worthwhile debate of whether or not similar possibilities should be included in the Montenegrin labor law as well.

Governments cannot determine companies’ staff size, but their labor laws can define labor standards and basic protection and provide workers with instruments to facilitate the adjustment to changing economic environments. Firms’ decisions of whether or not to hire follow an inherent economic logic—and if the labor costs cannot be reduced in instances of sluggish demand and low profits, they will hesitate to recruit even in periods of high demand and large profits. And this is not in the interest of Montenegrins that could have found (formal) employment and protection under the law, firms that could have expanded production and increased profits, and the government that could have benefited from higher tax revenues to finance needed investments to strengthen public hospitals, schools, roads, and electricity. Montenegro cannot afford to waste—without need—its productive resources.