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Reasons Behind the Structural Unemployment in Poland

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Reasons Behind the Structural Unemployment in Poland Department of Economics Master Thesis April 2008 Reasons Behind the Structural Unemployment in Poland - A Cross-Country Regression Analysis Supervisor: Klas Fregert Author: Annika Eriksson Abstract The study focused on possible reasons behind Poland’s structural unemployment. The purpose was to examine and provide a macroeconomic explanation for this phenomenon. The labour market was scrutinized by utilizing cross-country analysis that related Poland with seven other Central- and Eastern European countries; the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Slovakia and Slovenia. The study examined if structural causes might be part of the reason behind Poland’s sluggish labour market, by applying three elements that might have an affect namely; human capital, employment protection legislation and spending on active labour market programmes. The study was based on the main hypothesis regarding that poor human capital is associated with the structural unemployment in Poland. Two different labour market approaches were examined in the study, initially by applying a panel regression model and subsequently by analysing the unemployment – output growth relationship, acknowledged as Okun’s law. The results supports the central hypothesis concerning that inadequate human capital can be associated to the poor labour market performance in Poland. Keywords: Poland, Unemployment, Eastern Europe, Okun’s law, Human capital - 2 - Table of Contents 1. Introduction ..................................................................................................................... - 4 - 1.2 Research Question and Purpose .................................................................................. - 6 - 1.3 Methodology ............................................................................................................... - 6 - 1.4 Delimitations ............................................................................................................... - 7 - 1.5 Disposition .................................................................................................................. - 7 - 2. Historical Background.................................................................................................... - 8 - 2.1 The Economic Collapse .............................................................................................. - 9 - 2.1.1 A New Poland .................................................................................................... - 10 - 2.2 Present Economic Facts ............................................................................................ - 11 - 3. Structural Characteristics of the Polish Labour Market .......................................... - 15 - 3.1 Categories of Unemployment.................................................................................... - 15 - 3.2 Labour Market Institutions........................................................................................ - 16 - 3.2.1 Employment Protection Legislation................................................................... - 16 - 3.2.2 Active Labour Market Policies .......................................................................... - 17 - 3.3 Human Capital........................................................................................................... - 18 - 3.3.1 Unemployment in Different Educational Groups .............................................. - 21 - 3.4 Employment Structure in the Central- and Eastern European Countries.................. - 22 - 3.5 Other Labour Market Observations........................................................................... - 23 - 4. Empirical Analysis of Unemployment......................................................................... - 25 - 4.1 Panel Model............................................................................................................... - 25 - 4.2 Results of the Cross-Country Panel Regressions ...................................................... - 27 - 5. Okun’s Law.................................................................................................................... - 31 - 5.1 Okun’s Coefficient .................................................................................................... - 32 - 6. Empirical Analysis of Okun’s Law.............................................................................. - 35 - 6.1 Single Country Regressions ...................................................................................... - 35 - 6.1.1 Single Country Okun Model .............................................................................. - 35 - 6.1.2 Empirical Results of the Single Country Regressions ....................................... - 37 - 6.2 Okun Relationship in the Central- and Eastern European Countries........................ - 41 - 6.3 Unit Roots Tests........................................................................................................ - 43 - 7. Discussion and Conclusion ........................................................................................... - 46 - 8. References ...................................................................................................................... - 49 - Appendix A – Yearly GDP Growth Rates ...................................................................... - 52 - Appendix B – Yearly Unemployment Rates ................................................................... - 53 - Appendix C – Panel Regression Results.......................................................................... - 54 - Appendix D – Unit Root Tests.......................................................................................... - 56 - - 3 - 1. Introduction Since the collapse of the iron curtain in the end of the 1980s, Poland as well as other Central- and Eastern European (CEE) countries has struggled with difficulties to sustain a low unemployment rate. Poland has been trying to cope with structural weaknesses and an unstable macroeconomic environment. Moreover, one of the difficulties has been to design a policy that would lead to low unemployment rates, as well as low inflation and high economic growth. The current unemployment rate in Poland is 13.8 %, in comparison to the OECD European average of 7.8 % (OECD 2007a) and 8.3 % in the CEE countries1. Employment implies a more socially secured status and enhanced livelihood for an individual, not only in monetary terms but also in social welfare. Long-term unemployment results in poverty and may cause social exclusion and deteriorating physical and mental health especially in the absence of established safety nets. The country’s economic growth has been strong over a long period and it was higher than in the other CEE from 1991 until 1997. This development is related with the level of unemployment which started to increase around 1997. The phenomenon of jobless growth might be relevant for Poland’s poor labour market performance. The economic growth’s positive effect on the level of unemployment has been left out. Since the developments in the labour market cannot be related to cyclical variations, one of the reasons for this inflexible labour market might be linked to structural reasons within the economy. Therefore, the characteristics of Poland’s labour market are of great interest in the study. At present Poland’s level of unemployment is among the highest in Europe. The severe labour market situation has increased the incentives for the Poles to seek enhanced work opportunities abroad. Recent estimates account for 1.1 Million labour emigrants from Poland to other European Union member states. This corresponds to 6.4 % of the total labour force (World Bank 2007b). The Polish government has made attempts to minimize the labour 1 Author’s own calculations, based on data from OECD (2007) that includes; The Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia. - 4 - emigration by reducing taxes and costs of employment and also by creating improved inducements for business activity (Eurostat 2006). Figure 1: Standardized unemployment rates, 1994-2006 25 20 15 10 Standardized 5 0 % rate, unemployment 1994 1996 1998 2000 2002 2004 2006 Year Czech Republic Hungary Poland Slovakia OCED Source: OECD (2007) Furthermore, Poland’s GDP level did not fall sharply when the communism fell, whilst in Estonia and Slovakia the GDP level declined with more than 25 % over a period of two years, implicitly this affected the standards of living. The Polish economy started expanding in 1992 and real GDP growth increased until 1997. In 2006, the country experienced a real growth rate of 5.8 %. Figure 2 below illustrates the real GDP growth development for five Central- and Eastern European (CEE) countries since the fall of communism. Figure 2: Real GDP growth rate for five CEE countries, 1991- 2006 15 10 5 0 -5 -10 -15 -20 Real GDP growth rate, % rate, growth GDP Real 1991 1993 1995 1997 1999 2001 2003 2005 Year Poland Czech Republic Hungary Estonia Slovenia Source: UNECE (2007) The Polish labour market appears very sluggish in comparison to the other post-communist economies, this labour market slump could perhaps be explained by the lack of human capital. Educational attainment for adults is the lowest among the post-communist nations (OECD 2006b). Hence, this may convey in the vast difficulties of moving people from the agricultural - 5 - sector into other industries within the economy. A possible reason for this is that their educational
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