Activation and Smart Safety Nets in FYR Macedonia: Constraints in Beneficiary Profile, Benefit Design, and Institutional Capacity June 2013 This study is part of the Western Balkans Activation and Smart Safety Nets analytical and advisory services. It was completed by a World Bank team led by Boryana Gotcheva and Aylin Isik-Dikmelik, and including also Matteo Morgandi, Victoria Strokova, Tomas Damerau, Bojana Naceva, Zlatko Nikoloski, and Nikica Mojsoska-Blazevski. 1 Table of Contents List of Figures ...................................................................................................................................................................... 3 List of Tables ....................................................................................................................................................................... 4 List of Boxes ........................................................................................................................................................................ 4 Abbreviations....................................................................................................................................................................... 5 1. Introduction ................................................................................................................................................................ 6 1.1 Motivation of the Note .................................................................................................................................... 6 1.2 Objectives .......................................................................................................................................................... 7 1.3 Scope of Work and Methodology .................................................................................................................. 8 2. Profiling of Social Assistance Beneficiaries in FYR Macedonia ...................................................................... 10 2.1 A Framework to Understand Labor Market Outcomes for Safety Net Beneficiaries ........................ 10 2.2 Labor Market Profile of Social Safety Net Beneficiaries .......................................................................... 12 2.3 Advanced Profiling of SSN Beneficiaries ................................................................................................... 21 2.4 Implications of Profiling Results for Activation Policies ......................................................................... 26 3. Incentives and Disincentives in the SFA Design in FYR Macedonia ............................................................. 32 3.1 Main Benefits for the Work-Able ................................................................................................................ 32 3.2 Spending and Performance Characteristics of the SFA Program ........................................................... 35 3.3 Incentives and Disincentives in SFA Benefit Design ............................................................................... 38 3.4 Financial Disincentives Stemming from the Tax-Benefit System .......................................................... 43 4. Institutional Setup for Activation ......................................................................................................................... 47 4.1 Institutional Setup and Capacity .................................................................................................................. 47 4.2 Active Labor Market Programs .................................................................................................................... 51 5. Conclusions and Recommendations .................................................................................................................... 56 References .......................................................................................................................................................................... 59 Annex 1: Administrative data on Social Financial Assistance spending and beneficiary numbers ..................... 63 Annex 2: Performance indicators for Last Resort Social Assistance programs ...................................................... 64 Annex 3: Analysis of financial disincentives stemming from the tax-benefit system ............................................ 66 Introduction .................................................................................................................................................................. 66 Measures of financial work incentives and benefit adequacy ................................................................................ 66 Unemployment benefit, as currently designed, is unlikely to weaken incentives to seek or accept low-paid jobs.................................................................................................................................................................................. 69 LRSA program’s design can be improved ................................................................................................................ 70 The extent of “inactivity traps” is limited in Macedonia ....................................................................................... 71 2 Reducing tax wedge for low wage earners, especially those working full-time, can increase financial gains from work ...................................................................................................................................................................... 73 Additional figures ......................................................................................................................................................... 75 Annex 4: Staff and caseload by local EA office ........................................................................................................... 77 Annex 5: Behavioral Requirements and Benefit Sanctions in Selected EU and OECD Countries, and the Western Balkan Countries ............................................................................................................................................... 79 List of Figures Figure 1: Employment Rates in the Western Balkans and Other European Countries, 2011-2012 ..................... 7 Figure 2: Analytical Framework of Constraints to Employment of Safety Net Beneficiaries.............................. 11 Figure 3: Age Composition of SSN Beneficiaries Relative to General Population in FYR Macedonia, 2009 .. 14 Figure 4: Labor Market Characteristics of Work-Able Population in FYR Macedonia, 2009 ............................. 14 Figure 5: Labor Force Participation Rates of SSN Beneficiaries in FYR Macedonia, by Gender, 2009 ............ 15 Figure 6: Gender and Age Composition of Employed, Unemployed, and Inactive in FYR Macedonia among work-able population, 2009 ............................................................................................................................................. 15 Figure 7: Safety Net Coverage of the Work-Able Population in FYR Macedonia, 2009 ...................................... 16 Figure 8: Employment and Unemployment Rates among the Work-Able Population in FYR Macedonia, 2009 .............................................................................................................................................................................................. 17 Figure 9: Work Status of Employed Safety Net Beneficiaries in FYR Macedonia, 2009...................................... 17 Figure 10: Share of Employed in Precarious Working Conditions in FYR Macedonia, 2009 ............................. 17 Figure 11: Education Distribution of Work-Able SSN Beneficiaries in FYR Macedonia, 2009 ......................... 18 Figure 12:: Employment and Labor Force Participation, by Education, in FYR Macedonia, 2009 ................... 18 Figure 13: Age Distribution of Work-Able SSN Beneficiaries in FYR Macedonia, 2009 .................................... 19 Figure 14: Likelihood of Working Informally, by Age, in FYR Macedonia, 2009 ................................................. 19 Figure 15: Share of Work-Able Population Living with At Least One Person in Need of Care in FYR Macedonia, 2009 ............................................................................................................................................................... 21 Figure 16: Employment Rate of Work-Able Women Living with a Person in Need of Care in FYR Macedonia, 2009 ............................................................................................................................................................... 21 Figure 17: Classes of Work-Able Beneficiaries in FYR Macedonia, 2009 ............................................................... 24 Figure 18: Degree of Labor Market Attachment, Poverty, and Education Level among Work-Able SSN Beneficiary Clusters in FYR Macedonia, 2009 ............................................................................................................. 26 Figure 19: Likelihood of Living in a Household with Caretaking Duties Relative to Employment Outcomes among Work-Able Beneficiary Clusters in FYR Macedonia ..................................................................................... 27 Figure 20: Matching Beneficiary Profiles and Activation Services in FYR Macedonia, by Client Group .......... 28 Figure 21: Structure of Spending on Social Protection in FYR Macedonia and