analysis of the amendments to the labor code - eng - final

7/28/2019 Analysis of the Amendments to the Labor Code - Eng - Final

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PMC Research Center

June 6, 2013The project is implemented in the framework of The East-West Management Institutes (EWMI) Policy, Advocacy, and Civil

Society Development in Georgia (G-PAC) Program, funded by United States Agency for International Development (USAID).

The study is made possible by the generous support of the American people through the USAID.

The content is the responsibility of the authors and PMC Research Center and do not necessarily reflects the view of USAID, the

United States Government, or EWMI.

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The Economic Effects of Labor Market Regulations

Georgia

Presenter: Lasha Chochua


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The Economic Effects of Labor Market Regulations - Georgia

Content

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Introduction;

Labor relations essence and importance;

Labor market regulations;

Economic analyses of initiated amendments to the LaborCode of Georgia;

The analyses of the survey of business leaders attitudes to

the initiated amendments to the Labor Code of Georgia;

Conclusion; Recommendations.


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Introduction

The main motivations of Governments interference in

functioning of the labor market are:

The imperfections of free labor market;

Minimization of exploitation and discrimination.

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Introduction

The forms of labor market regulations by the state are:

prohibition of discrimination by the law and protection of

basic rights; regulation of contents and forms of employment contracts;

maintaining monopoly of Trade Unions;

formation of State Employment Protection mechanisms.

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Introduction

How effective are such regulations?

Do they contribute to creation of new jobs or improvement

of existing working conditions?

What is expected response of employers ?

What is a relationship between tightening labor marketregulations and economic crisis?

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Labor relations- essence and importance

Freedom of entry and exit in labor relations:

free choice should not be limited during the formation of

labor relations;

restriction of free labor relations prevents efficient

distribution of economic resources;

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7/31The Economic Effects of Labor Market Regulations - Georgia

The directions of initiated amendments to thelabor code of GeorgiaThe initiated amendments to the Labor code of Georgia:

restriction of signing term contracts;

tightening regulation of employment contract termination; maintaining monopoly of Trade Unions by the law;

regulation of mass dismissal;

increase the role of State in cases of collective disputes.

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Labor Market Institutions

While looking for the reasons of differences inunemployment levels among OECD countries, theimportance of labor market institutions were underlined

Even in its 1990 report The World Bank noted :Labor market policies minimum wages, job securityregulations, and social security are usually intended toraise welfare or reduce exploitation. But they actually workto raise the cost of labor in the formal sector and reducelabor demand ... increase the supply of labor to the rural andurban informal sectors, and thus depress labor incomeswhere most of the poor are found.

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Labor Market Institutions

A lot of empirical studies are examining the expected

impact of labor market institutions on economy;

Most of them study the experience of developed countries;

In recent period analyses include also less developed

countries;

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Empirical Studies

Layard, Richard and Nickell, Stephen, Labor Market,Institutions and Economic Performance Handbook of LaborEconomics ed. By O. Ashenfelter and D. Card (AmsterdamNorth-Holland, Vol. 3E. 1999)

Research objective: the effects of the labor marketinstitutions of OECD 20 countries;

Research results: increase of Tax Wedge, BenefitsDuration, Union Density and Union Coverage increasesoverall unemployment as well as long term unemployment;

Based on the research, the effect of Employment Protection

Law (EPL) on unemployment is not statistically significant.

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Empirical Studies

Blanchard, Oliver and Wolfers, Justin, The Role of Shocks andInstitutions in the Rise of European Unemployment: theAggregate Evidence, Economic Journal, Vol. 112, pp 879-90(2000)

Research objective: the effects of the labor marketinstitutions of OECD 20 countries (in the period of 1960-1995 );

Research results: increase/tightening Tax Wedge, BenefitsDuration, Union Density, Employment Protection Law,Minimum Wage Lawmaintain increase of unemployment;

The labor market institutions are highly significant whenmacroeconomic shocks are included;

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Empirical Studies

Gomez-Salvador, Ramon; Messina, Julian and Vallanti,Giovanna, Gross Jobs Flows and Institutions in EuropeEuropean Central Bank working paper series, no. 318 (2004)

Research Objective: Effects of Labor Market Institutions inEuropean countries based on company data.

Research Results: Employment Protection Legislation (EPL) has negative and

statistically significant impact on a job reallocation

coefficient; It lowers a job creation coefficient;

Has negative but statistically insignificant impact on the jobdestruction.

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Empirical Studies

Botero, Juan, Djankov, Simeon, La Porta, Rafael and Lopez-de-Silanes, Florencio, The Regulation of Labor The QuarterlyJournal of Economics, Val. 119, Issue 4, pp. 1139-1382 (2004).

Research Objective: Effects of Labor Market Institutions based on thestatistical data of 85 countries.Research Results:

Tight regulation of collective labor relations is associated withthe high share of shadow economy;

Strict laws of labor relations, collective relations and socialsecurity legislation lead to the reduction of labor force;

EPL leads to increase of unemployment;

Such legislations has more strong negative impact in case ofyoung labor force.

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Empirical Studies

Feldmann, Hornst, The Unemployment Effects of LaborRegulation around the World, Journal of ComparativeEconomics, Cal. 37, Issue 1, pp. 76-90, (2009)

Research Objective: the effects of Labor Market Institutions basedon the statistical data of 85 countries in the period of 2000-2003. Research Results: Tight regulations of hiring and dismissalprocedures have negative impact on employment level. The effects

are particularly high in case of young labor force and women;

Evidence: Overall, women and youth unemployment rate wouldhave been on average 2.3%, 3.6% and 5.6% lower respectively, ifItaly had as flexible labor market regulations as USA.

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Empirical Studies

Bernal-Verdugo, Lorenzo, Furceri, Davide and Guillaume, Dominique, LaborMarket Flexibility and Unemployment: New Empirical Evidenceof Static andDynamic Effects, IMF Working Paper, (2012)

Research Objective: Dynamic and static effects of Labor MarketInstitutions based on the statistical data of 97 countries in the period of

1986-2008.Research Results:Labor market regulations have a strong negative and statistically

significant impact on employment rate. Results are robust fordifferent specifications of the model;

Regulations and costs of hiring and dismissal have particularly high

negative effect on employment rate;Increase of labor market flexibility reduces the vatiation of change in

unemployment rate;

Results are similar for developed and less developed countries.

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Summary of Empirical Studies

Most of the empirics show that EPL:

Does not have effect or have small negative impact on

overall employment rate;

Has significant negative effect on the employment rate ofyouth, women and low educated individuals;

Increase duration of unemployment and the duration of

exclusion from labor force;

Makes it difficult to adapt during the economic crisis.

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Summary of Empirical Studies

Based on the empirics:

Trade union density has negative impact on employmentrate;

Growth of trade union density is associated with theincreased share of shadow economy;

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Dynamics of labor union density indicator in the

period of1960-2010

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5

10

15

20

25

30

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Chile Estonia France Korea Mexico Spain Turkey United States OECD (a)



Dynamics of labor union density indicator in the period

of1960-2010

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10

20

30

40

50

60

Czech Republic Germany Greece Hungary Japan

Netherlands Poland Portugal Switzerland




of1960-2010

20

10

20

30

40

50

60

70

Australia Austria Canada Ireland Italy

New Zealand Slovak Republic Slovenia United Kingdom




of1960-2010

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30

40

50

60

70

80

90

100

Belgium Denmark Finland Iceland Luxembourg Norway Sweden


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Expected economic effects of initiated

amendments

Tightening the regulations of making and terminating a labor

contract increases labor force related costs for businessmen;

Increase of cost will lead to decrease of labor demand;

Reduction of labor demand will have a negative impact on the

job creation process;

Burden of the term contracts increases incentives forentrepreneurs not to create new jobs;

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Expected economic effects of initiated

amendments

Direct involvement of state in case of mass dismissal andcollective disputes increases the impact of state onbusinesses;

The strength of interest groups might lead to crony forms of

relations between state and businesses or to populistdecisions;

Tightening labor market regulations may lead to thedifficulties for adaptation in case of economic crisis;

Strengthening the role of trade unions might increase theshare of shadow economy.

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Survey result analysis of business leaders attitude to the

proposed amendments

Proposed amendments to the Labor Code of Georgia is supposed

to have impact on business operation processes;

Survey was conducted in order to study business leadersattitude in Georgia to proposed amendments to the labor code;

The leaders of small, middle and large business organizations

were asked to assess statements from the certain articles of theLabor Code;

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proposed amendments

Totally, 17 statements were prepared:

Award the contract/probationary period (5 regulations)

Overtime (3 regulations)

Suspension/Termination of Labor Contract (3 regulations)Mass Dismisal (1 regulation)

Termination of employment (1 Regulation)

Collective Dispute (2 Regulations)

The Strike/Lockout (2 Regulations)

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Methodology

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Non-financial Financial

Small 97 3

Medium 72 3

Large 73 3

Total 241 9

Survey methodology Quantitative Research

Survey tool Face to face interview

Target Sample Managers of small, medium and large

size enterprises

Survey Area Tbilisi

Sample size 250 enterprisesSampling method Stratified Random Sampling

Sampling error 6-7%

Period of survey April 2013


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proposed amendments

Assessing each statements shows:Businessmen sharply negatively assess regulation rules of

collective contracts, increasing role of the trade unions and

states rights to intervene in the collective dispute

resolution as a mediator on its own initiative; In case amendments are adopted, the scope of

businessmens possible response includes:

Refrain from recruitment of new staff;

Decrease the current number of staff;

Decrease marketing and other type expenses;

Reduction of current wages.

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S l l i f b i l d i d h


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proposed amendments

Businessmen assessed the total effect on the businessenvironment and creation of new jobs taking into account all

amendments which are reflected in the statements

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Very negative

Negative

No effect

Positive

Very positive

Do not know

7.5%

25.6%

12.5%

32.7%

2.6%

19.1%

9.9%

21.2%

19.6%

3.3%

21.0%

Effect on business environment and on job creation

33%

35%

31%

28%

3.3%


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Conclusion

The results of the empirical studies uniquely obviouslyreveal negative effects of the tightening labor marketregulations

As a result of tightening regulations the followingoutcomes are anticipated:

Higher unemployment rate (especially within theyouth and women groups)

Decrease the number of new jobs;

Increase the share of shadow economy;

Increase the negative effects of economic crisis.

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Conclusion

According to the Business leaders survey results :

46% ofinterviewed businessmen consider that

amendments will not have positive influence on

improvement of the business environment;

51% of interviewed businessmen consider that amendments

will not promote creation of new jobs.

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Recommendations

To reduce at maximum level or abolish restrictions on fixed-term contract;

To ensure equality between employee and employer in case of

termination of employment, which implies a freedom of action

for both parties to enter into or exit from the relations;

To increase the degree of freedom of collective agreements.

The trade unions do not have a monopoly status granted by

law, to conduct collective negotiations on behalf of employees;

To exclude possibility of the Minister of Labor, Health and

Social Affairs to take part in any way in the collective dispute

resolution process;

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analysis of the amendments to the labor code - eng - final

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