Analysis of Post War Unemployment: Country Comparison

Unemployment

With the end of the World War II, unemployment was one of the greatest difficulties the Japanese economy faced. There were 13.1 million jobless people (Nakamura 1995). It was expected at the time that a dramatic jump in the number of unemployed would be unavoidable. However, large scale unemployment never actually occurred. Many people returned to their former jobs, particularly in agriculture, but again government was concerned by how to create job for the rest of the unemployed. The most valuable lesson of Japanese industrial policy lies in this management of employment. The government supported increase in agricultural output and provided allowance for those who went to the rural areas. Already in 1947, rural communities absorbed labour force of 18 million people. In this way massive unemployment did not developed. Moreover, some policies were aimed at the supply side i.e. increasing production of output by providing subsidies and other preferential treatment. Thus, the Japanese government decided to maintain employment by blocking competition in selected industries and in this way helped to create a stable base from which development could smoothly take place (those industries are steel, chemicals, selected machinery, and other industries that are subject to dynamic internal economies). Using these measures, employment was increasing on average at a low 2.7% from 1950-1955 (Nakamura 1995). At this time, there was progress in industrialisation and great diversification in industry.

Table 2.5. Sectoral Distribution of Employment in Japan

Source: Komiya et al. (1988) p.51

The rapid pace of the industrialization can be clearly seen in changes in the sectoral composition of employment which is presented in Table 2.5. Employment dropped rapidly in the primary sector and increased in the secondary and tertiary sectors. However, the total production index in agriculture did not decrease in the post-war Japan, having 1950 as base year, indexes in 1955, 1960 and 1965 were 108, 110 and 118, respectively (Moore 1990). Comparing it with pre-war data and having 1938 as base year of rice production, index was 94.8 in 1947, 115.8 in 1956 and 127 in 1961. Production of oranges even doubled, in 1947 index was 49.4, but in 1956 it was 156, and in 1962 was 225.7 (Morris-Suzuki at al. 1989).

Before the war, Bosnia and Herzegovina had almost 4.4 million habitants. By the end of the war 1.5 million people fled the country as refugees. The war and ethnic cleansing displaced large numbers of the people from their homes. Traumatic events of the 1990s dramatically affected demographic trends and migration flows in BiH. The population residing in BiH has been substantially reduced, as many people were displaced, exiled, and killed, and ethnic cleansing produced ethnically much more homogeneous territorial units. The number of displaced persons inside the Bosnia and Herzegovina peaked at 1.3 million in 1995, but till today it is reduced to 800.000. Refugees and displaced persons could not go back to their origins and their previous jobs. They were surviving on financial support from relatives in the country or outside of country, international humanitarian assistance and activities in informal economy.

These migrations, caused by war, produced ethnically homogeneous territorial units. The international community was aware that “the most important challenge for economic recovery program will be to create opportunities for returning refugees, displaced persons and demobilized soldiers.” (WB 1996; xii) On base of the Dayton Peace Agreement the international community had to protect returnees using UN Peace Keeping Forces, and through various programs tried to help and encourage returnees but to date these flows fall far short of restoring the original balance. These migration flows provide an important context for understanding post-war labour market trends and outcomes, such as labour market discrimination and lack of internal worker mobility.

Figure 2.1.

Source: Central Bank of Bosnia and Herzegovina.

In addition to those problems, many organizations, as well as the plants and equipment of the major big companies were destroyed or demolished during the war. The devastations of the war brought huge destruction of the productive assets of many firms and enormous human casualties (Stojanov 2000). Moreover, political and economic changes in neighbouring countries resulted in the loss of traditional business partners and markets, thereby severing many trade and workers immobility. These are reasons why the need for the workers drastically changed after the war. The rate of unemployment was 18% in 1991, but was constantly increasing after the war, from 37 percent of the total labour force in 1997, 39.5 percent in 1999, to 42% in 2003 (see Figure 2.1.). Furthermore, high unemployment in case of Bosnia and Herzegovina is dangerous because poses a clear threat to security and peace. Table 2.6. shows changes in sectoral employment.

Table 2.6. Sectoral Distribution of Labour in Bosnia and Herzegovina

Source: Official National Statistics

Efficient post-war adjustment of the BiH economy inevitably calls for significant job creations. In dynamic, flexible labour market, workers are able to switch among jobs relatively quickly, but Bosnian labour market is rather static one (World Bank, 2002). By the World Bank analysis BiH labour market is unable to accommodate looming imbalances in the economy which has emerged from the war and still has to face the legacy of the socialist system. Overcoming the dramatic employment fall in 1992 in particular requires a flexible and dynamic labor market, which has not been evident in BiH in the post-war period. World Bank study shows that worker and job flows have been rather low in BiH, lagging behind flows in other transition economies during intense restructuring periods, with the lag of Republika Srpska being particularly pronounced. In spite of the tremendous need for labor reallocation due to huge accumulated imbalances, barriers to mobility proved to be very important, reducing labor mobility and ultimately hindering job creation. Low worker and job flows are primarily produced by the lack of job creation capacity of the BiH economy. This is a complex problem the solution of which requires addressing a lot of issues, ranging from political and macroeconomic ones to ensuring labor market and other institutions conducive to job creation.

There are several aspects of the Bosnian labour market that have strongly affected worker immobility. First, the institutional and legislative framework had huge influence on wages. Second, job protection legislatives and phenomenon of “wait-listed workers” existed after the war. Third, employment discrimination, particularly along ethnic lines, has been strongly and constitutes an important impediment for worker mobility and economic efficiency in general.

Wages – Under the self-management system the absence of the explicit property rights dictated the specific wage determination. The elaborate schemes were used to guide determination of wages. This was a product of both centralized policies and worker engagement in the decision-making process. The government set the firm’s wage bill with the objective of evening out differences in pay among firms; this was inter-firm redistribution. Within the government determined boundaries, the workers’ role was to set individual wages within the firm. The wage scale was determined by a referendum of employees. This is the process of increasing the earnings of less productive workers at the expense of the more productive once. This systematic pattern of the redistribution of income provides protection and security to the workers (Vodopivec 1990). Traditional models of labor-managed economy identify numerous sources of income differentials (Vanek 1970). The main problem in this type of economy is inability of workers to move into firms where incomes are higher and thereby reduce or eliminate wage differentials. Under capitalism, competitive forces and labor movement equalize the wage paid to a same labor type in different industries. Under self-management, this is not possible, because, in order to maintain their own incomes, existing members of labor-managed firms can prevent the recruitment of additional worker-members. Entry and exit of firms is needed to transfer labor between uses.

Systematic changes were introduced already in 1988 when Former Yugoslavia started its process of transition. This Law transferred decision-making rights from workers to equity owners. Important changes occurred in employment and wage policies. The major novelty in the area of employment was the right of employer to lay off a worker. In the case of wage setting, self-managed mechanism of administrative constrains and collective decision-making was removed leaving wage determination as managerial responsibility. These policies did not continue to be applied in the postwar period in BiH. The BiH wade determination system that is introduced in the postwar period is very formal, structured, and rigid. It determines not only minimum wages, but also prescribes base wage floors for nine categories of workers, indexation rules and mechanisms, other components of pay and fringe benefits, and automatic pay increases connected to seniority. In both Entities a bargaining system has retained most of its socialist era characteristics. Data collected in the World Bank study[1] show us that there have been several wages inequalities in the postwar period in BiH. First, profitable firms in the Federation pay 26 percent higher wages than non-profitable; interestingly, there was no such effect in 1990. Second wage inequality, medium-size and large firms pay substantially higher wages, 23 and 43 percent, respectively. Third, unsurprisingly the results obtained from survey data show that wages of workers on the waiting list are lower by 40 percent in Federation, and by 15 percent in Republika Srpska. Fourth, other things equal, some sectors pay higher wages (transportation and communications, finance and insurance, and government), and some lower (construction and trade).

Job Protection – In the former Yugoslavia, workers were constitutionally protected from the job loss. Together with other Yugoslav workers, workers in BiH were thus much more protected from job loss than workers in market economies and even more than workers in other socialist countries. Although already Yugoslav transition reforms in 1988 gave employers the right to lay off workers, but the change was taken cautiously, by imposing large costs on employers. The Yugoslav Labor Code of 1989 allowed layoffs – but only at extremely high costs for employers, essentially forcing them to keep the redundant workers on the payroll for twenty-four months after the notification of redundancy. During the postwar period, until the current legislation was accepted in 2000, “waiting lists” existed in both entities of BiH. Workers on “waiting lists” were formally employed, they were paid and had other work-related fringe benefits, while in fact often not working for a prolonged period of time. The transition to market economy means changing people ideological and moral basis and habits. The moral of self-managed system was characterized by life-time employment and equal income distribution within the company regardless of efforts. Those “waiting lists” were continuation of previous system, but as time was passing workers understood new ethics of work and behavior. The new Federation 1999 Labor Code called for large compensation for waitlisted workers (and added such rights to some other categories of worker as well); similarly, significant “waiting list” rights were granted by Republika Srpska 1998 Labor Code. In the Federation (for Republika Srpska there are no time series data on wait-listed workers), the number of workers on waiting has been steadily decreasing, from 87,781 in 1997 to 31,752 in 2001. In 2002, there were only 8,800 wait-listed workers in the Federation and 26,500 in Republika Srpska. This is significant improvement because the workers understand they should move on the other jobs instead of being trapped in low productivity jobs. Changes in the core labor market legislation in the Fall of 2000 introduced modern employment legislation and did away with the notion of “waiting lists”. Current BiH employment protection legislation is quite comparable to the legislation and regulations in developed market economies, and thus does not represent a significant barrier to labor reallocation. In sum, while the pre-2000 legislation imposed horrendous costs on employers when laying off workers, new legislation in both entities represents a major improvement. It aligns Bosnian job security legislation with the European one, and in all likelihood it is not standing in the way of worker mobility and job creation.

Labour market discrimination – the demographic changes which occurred in the 1990s, by ethnically controlled areas represent an important element in analysing the labour market and understanding phenomenon of labour market discrimination in the post-war BiH.

During the war years, enormous migration – driven by ethnic cleansing – took place in BiH, producing vastly more homogeneous territorial units. By OECD data, in 2000, over 93 percent of the population from the territory which used to be under Serbian military control was Serbian, 81 percent of the population of the territory which used to be under Croat military control was Croatian, and 83 percent of the population of the territory which used to be under the Bosniak military control were Bosniak. This represents a huge increase from 1992, when the corresponding percentages were 55, 60, and 61, respectively (World Bank 2005).

War caused huge migration inflows of the ethnic groups to the territories controlled by the respective groups. In the postwar years, the previous trends have been reversed and some refugees and displaced people have returned to their homes. Overall, however, these flows fall far short of restoring the original balance and as mentioned above, by 2000, territorial units were ethnically much more homogeneous than they were at the start of the war. In post-war period employment discrimination on ethnical base has been strongly present and still continues to impose an important impediment for worker mobility and economic efficiency in general.

In spite of recent legislation which prohibits any form of discrimination in the workplace, there is little doubt that workplace discrimination exists in Bosnia and Herzegovina, with serious consequences for individuals and society in general. Access to employment largely determines the well-being of a person, and also profoundly affects the decision of the displaced to return to their prewar homes. Thus, employment discrimination is a major source of economic inefficiency.

In the virtual absence of any micro-level postwar labor market data which includes information on ethnicity, it is impossible to investigate this topic with rigor. We will summarize a report by OSCE on employment discrimination, based on a systematic gathering of evidence by OSCE Human Rights officers. It has to be emphasized that the report is based on the alleged cases of discrimination – many of these cases were not brought to court, and the outcomes of those which were are not reported.

Summarizing the evidence, the report claims that there has been (OSCE, p.2): widespread firing of persecuted ethnic groups and political opposition members; recruitment of workers from the majority ethnic group while minority employees remain on the waiting list; dismissals of opposition party members from key positions after elections; exclusion of women from new vacancies by a system giving priority to ex-soldiers; extensive discrimination against teachers from minority groups. The OSCE report documents numerous cases of workplace discrimination – victims of which were individuals from all three major ethnic groups. However, most cases, about 80 percent, have happened in Republika Srpska. The majority of cases reported arose around the lines of conflict. These cases included: dismissal of workers of other ethnicity, putting workers on “waiting-lists” along ethnic lines, unlawful reason or no reason given for dismissal, and dismissal for absence related to the war.

In the postwar period, methods of discrimination have become more subtle and varied, and the cases concerned, among others, discrimination based on ethnicity, political affiliation, gender, trade union activity, as well as cases where undue priority was given to demobilized soldiers. The majority of reported cases of alleged ethnic discrimination, for example: members of ethnic minority complaining that there is no more work for them, workers being dismissed for not “speaking the language”, or workers being fired for an alleged failure to meet qualification requirement, only to be replaced by less qualified persons of other ethnic group. Political discrimination has happened mostly after elections, when the winning political parties in some cases removed supporters of the other political parties from prominent posts. Gender discrimination was also reported, mostly because the recruitment priority was given to demobilized soldiers.

Some economists believe that “high unemployment is the most dramatic and most convincing evidence of the market failure” (Stiglitz, 1986). They consider unemployment as sign of market failure because unemployment is a waste of scarce resources and lead to loss of potential output. It is certainly cannot be said that the government should always intervene whenever there is a market failure. In case of BiH, where the international community failed to protect returnees what sorts of policies would be appropriate to reduce or eliminate labour market immobility? We have to keep in mind that markets fails, but the government can fail, too. What could possibly weak state government, with very complicated decision-making system, like it is in BiH do to help employment? The “Washington Consensus” measures, which are introduced in BiH, do not promote employment because they are based on the neoclassical theory, which assumes free movements of the labour. The Washington Consensus policies were based on the Dayton Peace Agreement, which guaranteed protection and free movements of people in case of BiH. This means the Washington Consensus did not fail in case of BiH, but the Dayton Peace Agreement did.

Comparing it to Japan, the problem of unemployment could not be solved in a same manners because people in Bosnia and Herzegovina were very immobile and going to the places of the other ethnic group or to their origin was (and is still) dangerous. In addition to this, Bosnian government was budget constrained and could not offer any kind of allowance to returnees or other who would go to the rural areas.

[1] World Bank (2002)