IGOR GUARDIANCICH 26th Annual Meeting of the Society for the Advancement of Socio-Economics Northwestern University and University of Chicago July 10-12, 2014 Welfare States in Post-Socialist Europe A Not-So-Long Goodbye to Bismarck 1

Churchillian wisdom… 2 Now this is not a paper. It is not even the beginning of a paper. But it is, perhaps, a paper on the beginning.

The 3 dimensions of Western dualization 3 Policy (institutional) dimension  core employees in Standard Employment Relationships (SERs) enjoy contributory benefits and occupational insurance  marginal workers employed through atypical contracts are covered only by social assistance and in-work/non-contributory benefits Political dimension  reformers pass the costs of reforms on outsiders and future generations, instead of modernizing the welfare state and protect the most vulnerable (women, low-skilled, young, immigrants) Outcome dimension  individuation of outsiders in different countries and whether a segmentation in the labour market directly translates into differential treatment via welfare state institutions

What about post-socialist Europe? Labour markets  from guaranteed employment to jobless growth and increased flexibility Pensions  from guaranteed subsistence to individualization Industrial relations  from neocorporatist aspirations to the Americanization of social partnership Leading to…  liberalization tout court?  dualization within CEE?  transnational dualization? 4

Labour Markets 5 Labour market characteristics  wages were low and not highly differentiated  supplemented by subsidized basic goods and benefits provided by SOEs  work was guaranteed Implications  no unemployment, hence rudimentary system of unemployment benefits  no poverty (officially), hence little poverty relief  no sophisticated targeting of benefits  little selectivity by income level  low state capacity – supplanted by SOEs Tranformational recessions  output collapse  severe skills mismatches  rule of thumb: 10% unemployed, 10% informal, 10% retired

Cumulative GDP growth (1990=100) 6

Unemployment rates CZ 0,74,12,64,3 4,03,94,86,58,78,8 HU 1,48,29,311,910,710,29,98,77,87,06,4 PL 6,512,214,316,416,014,913,210,910,213,416,1 SK 1,29,510,414,413,613,111,311,812,516,218,6 SI na7,38,39,1 7,26,97,17,4 6,4 BG 1,610,515,016,318,613,713,014,516,017,016,4 RO na 7,17,3 EE 0,61,53,76,67,69,710,09,69,812,213,6 LV 0,50,63,98,716,718,120,515,414,314,514,6 LT na0,31,34,43,817,516,414,113,214,616,4 RU na 5,36,07,79,29,310,811,912,910,7 UKR 0,0 0,20,3 1,32,33,74,311,6

Informal economy: Household electricity approach CZ HU PL SK SI BG RO EE LV LT RU na UKR na

Great abnormal pensioner booms % CZ na 2,5212,5192,5232,4982,5072,5452, HU 2,5872,6682,7952,8682,9483,0103,0593,1043,1393, PL 5,5986,1546,5056,7036,8737,0367,1727,3137,4667, SK na 1,3861,3871,3931,4021,4151, SI na BG 2,273 2,3472,4432,4402,4242,4092,3812,3922,3872, RO 2,5703,0183,2013,2533,4393,6003,7403,8754,0204, EE LV LT ,076na22.4 RU 32,84834,04435,27336,10036,62337,08337,82738,18438,41038, UKR na13,10013,60014,20014,500 14,48814,48714,53514,

Main labour market trends 10 Jobless growth  despite swift recovery, employment did not rebound  productivity catch-up with minimal increases in the labour input Non-participation  especially due to lay-offs of workers near retirement  the skills mismatches generated scores of discouraged workers High and persistent unemployment  low-skilled workers, young individuals, depressed regions Changes in the composition of employment  industry and agriculture to services  public to private sector  permanent to more flexible contracts  dependent employment to self-employment  formal to informal sector Growing wage inequality

Atypical contracts and self-employment 11

Employment Protection Legislation 12 Some of the countries, where fixed-term employment is not common (Estonia, Hungary, Slovakia) have very low and falling protection for permanent contracts as well.

Summary 13 Labour markets in Central and Eastern Europe are not univocally dualized. Some countries show the presence of institutional dualism  prominent in Poland as well as Slovenia  emerging in Croatia and the Czech Republic Liberalization across the board plagues many others  especially the Baltics, Bulgaria, Romania  increasingly so, Hungary and Slovakia

Pensions 14 Three layers of a socialist pension system  Bismarckian core  (constitutionally guaranteed right to) work as legal basis of retirement  post-war socialist social solidarity  PAYG system; increased coverage (small entrepreneurs and farmers)  imported Stalinist centralization  monolithic public administration Crisis under socialism  financial strains  low retirement age and long assimilated periods (e.g. maternity leave); best- or last-years calculation formulae  cross-subsidization of other budget expenditures (e.g. social assistance)  poverty in old age  the ‘old portfolio’ problem, due to insufficient indexation

Labour shedding and consequences 15 (In)voluntary labour shedding  steep rise in unemployment and informal employment  lower overall contributions  great abnormal pensioner booms  higher overall expenditures Vicious circle  revenues not matching expenditures led to deficits CroatiaHungaryPolandSlovenia Insured-30%-25%-15%-10% Pensioners+55%+21%+38%+26% % of GDPCroatiaHungaryPolandSlovenia Deficit/year6% %1990s6% %1999

Retrenchment and refinancing 16 Refinancing  rapid increase in social security contributions  discontinued due to declining international competitiveness Retrenchment  arbitrary freezing of indexation of all but minimum benefits  struck down by Constitutional Courts (no exceptional circumstances)  scaling down of public pillars  NDC in LV, PL  point systems or DB life in BG, HR, HU, LT, RO, SK Croatia18.5%199122% %1994 Poland25%198138% %1990 Slovenia22.7% % %1993-5

Restructuring via privatization 17 Restructuring via privatization  politically superior, allows for quid-pro-quos  resonates with the public (equity as individualization)  obfuscates cuts in public pillar Size of mandatory funded pillar  Substantial HU 6  8/33.5 LV 2  10/20 PL 7.3/19.52 SK 9/18  Medium BG 2  5/23 CZ 3+2/28 HR 5/20 EE 4+2/20 LT 2.5  5.5/18.5 RO 2.5  6/28 SubstitutiveParallelMixed 90s Kazakhstan (1998) Hungary (1998) Poland (1999) 2000s Kosovo (2002)Lithuania (2004) Bulgaria (2000) Latvia (2001) Croatia (2002) Estonia (2002) Russia (2003) Slovakia (2005) Uzbekistan (2005) Macedonia (2006) Romania (2008) 10s Czech Republic (2013)

Summary 18 Despite recent setbacks most post-socialist countries have firmly embraced a multi-pillar DC design for their pensions. This breeds dualisims as it requires long contribution periods to guarantee benefit adequacy  compatible with uninterrupted SERs  incompatible with  atypical contracts  unemployment spells  insufficient coverage of assimilated periods (maternity, childcare, military, education).

Unemployment insurance 19 Max duration (months) Net replacement rate in 2009 (% of APW) ± difference from 1991 (or earliest year) BG CZ549-6 EE HU LV LT PL RO SK663-8 SI965±0

Characteristics 20 CEE countries initially introduced fairly generous benefits in terms of duration, levels and eligibility. In response to the rise in claimants retrenchment tout court followed. Duration of benefits always inferior to one year, against two or longer in Belgium, Denmark, Finland, France, the Netherlands, Portugal, Spain and Sweden. Benefits roughly in line with the Old Member States swiftly declines in time already during the first 12 months Eligibility fairly generous, initially access was far less problematic Harmonized net replacement rates have fallen in 7 out of 10 countries, stayed the same in Slovenia, and increased only in Estonia and Latvia from very low initial levels

Summary 21 Being unemployed in CEE is a prelude to social assistance. Active Labour Market Policies in post-socialist countries are notoriously underfunded and ineffective. Atypical contracts, if covered at all, carry an inherently higher risk of involuntary unemployment spells than SERs, hence  dualization in the labour market is considerably reflected in unemployment insurance.

Lessons learned or more questions? 22 Dualization is emerging in countries such as Poland and Slovenia  dualisms in the labour market coupled with weakening workers’ representation may translate into segmentation in welfare. Liberalization tout court was embraced in many more  labour markets are increasingly atomized  industrial relations are ‘Americanized’ in all but the most sheltered sectors  social policies have been  individualized and privatized, e.g. through pension multi-pillarization  stripped to the bone, so that unemployment is a stepping stone towards social assistance