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New Labour Code offers no immediate relief for labour market

Slovakia’s labour market continues to suffer from the impact of the global economic downturn. The Labour Code, amended a year ago, did not push unemployment significantly up or down. Even with the unemployment rate oscillating around 14 percent, the cost of labour continues to grow. Slovakia’s Labour Code was most recently amended in October 2012, with most of the changes becoming effective as of January 2013. While the government was satisfied with its final version, calling the Labour Code “modern and balanced”, the opposition, as well as representatives of employers, heavily criticised the changes, saying that the new rules for the labour market would only increase the costs of labour and reduce Slovakia’s growth prospects.

Economic growth is still too feeble to generate more jobs.(Source: SME)

Slovakia’s labour market continues to suffer from the impact of the global economic downturn. The Labour Code, amended a year ago, did not push unemployment significantly up or down. Even with the unemployment rate oscillating around 14 percent, the cost of labour continues to grow.

Slovakia’s Labour Code was most recently amended in October 2012, with most of the changes becoming effective as of January 2013. While the government was satisfied with its final version, calling the Labour Code “modern and balanced”, the opposition, as well as representatives of employers, heavily criticised the changes, saying that the new rules for the labour market would only increase the costs of labour and reduce Slovakia’s growth prospects.

One year after the Labour Code was amended, Slovakia’s unemployment rate continues to hover around 14 percent and the labour market is still waiting for a revival, which is yet not completely out of sight, at least according to what the economic growth forecasts for the next two years suggest.

WHAT HAS CHANGED IN THE CODE

The new rules for the labour market introduced by the Labour Code amendment, effective since 2013, include the reintroduction of the entitlement to a layoff notice period and to severance pay.

The Code also shifted the status of people working on fixed-term employment contracts closer to that of regular workers in terms of working hours and the minimum wage. It curbed the ‘chaining’ of fixed-term employment contracts, where it was possible to extend a fixed-term employment contract three times over three years. As of January 2013 it is be possible to do this only twice over a 24-month period.

The revision also changed the definition of dependent work (i.e. permanent employment). The objective of this redefinition is to specify which work should be carried out under a standard employment contract, thus providing the employee with full rights and protection, rather than in the case of self-employment, for instance. The Labour Ministry believes that the previous definition of dependent work enabled employers to push their employees into less advantageous working contracts, including so-called false self-employment licenses, and has sought to simplify the definition to prevent employers from doing this.

Employers have also criticised the capping and limiting of fixed-term and temporary employment contracts, changes to the definition of dependent work, conditions placed on flexi-accounts requiring the agreement of trade unions, and the removal of the condition of ‘representativeness’ of trade unions in a company.

UNEMPLOYMENT RATE STILL AROUND 14 PERCENT

At the time when the Labour Code was amended, Slovakia’s jobless rate stood at over 14 percent, based on data of the Statistics Office. Perceived as a high rate of unemployment, market watchers considered it one of the riskiest factors for Slovakia’s economy.

The registered unemployment rate stood at 14.7 percent in February 2013; joblessness in the districts of Rimavská Sobota and Revúca (both in Banská Bystrica Region) exceeded 30 percent.

In the second quarter of 2013, the unemployment rate was at 14 percent (or 360,000 people in absolute numbers), down from 14.5 percent in the quarter-on-quarter comparison, but up compared to the second quarter of 2012, when the unemployment was at 13.7 percent.

In April 2013 the parliamentary opposition found the unemployment rate worrying enough to become a topic of a special parliamentary session, after the number of unemployed hit a nine-year high, just under 15 percent. Representatives of the opposition listed the cancellation of the flat tax, the hiking of income and payroll taxes, and what they called reduced flexibility in the recently revised Labour Code as the causes of the high jobless numbers, while government officials repeated their mantra that it is the global crisis and not their revisions to the Labour Code or changes to the tax legislation that lie behind the growth in joblessness.

The session concluded without any resolution.

BETTER TIMES AHEAD?

In September, however, both the Finance Ministry and the National Bank of Slovakia (NBS) offset the statistics with an upbeat forecast, with both expecting Slovakia’s economy to grow faster than previously forecast. The number of jobless people is thus expected to decrease.

Unemployment rate data for July and August show that the negative trend in the labour market has stopped, deputy governor of the NBS Jan Tóth said, adding that the number of available job positions has increased.

“Therefore, in the coming period we expect stabilisation of the employment rate on a quarter-to-quarter basis, and gradually, with the acceleration of the economy, new job positions should start emerging,” Tóth said.

The NBS expects employment increase in 2014 and 2015, while the unemployment rate is expected to drop to 13 percent. In September, the Finance Ministry announced the economy should growe at 2.2 percent in 2014. In 2015 economic growth should reach 2.9 percent, and 3.1 percent in 2016. The Finance Ministry predicts the jobless rate will start decreasing in 2014, while a more significant drop in the number of jobless will be visible in 2015.

WAGES IN THE SLOVAK ECONOMY

The Slovak government set the minimum wage to increase by 4.2 percent in 2014 after it failed to agree on a minimum wage level with social partners. On October 2, the cabinet decided the minimum gross monthly wage in Slovakia will be €352, up by €14.3 compared to 2013.

The net value of the minimum wage is €304.84 per month, an increase of €12.36 over 2013’s wage level.

While employers insisted on not increasing the minimum wage at all, the Confederation of Trade Unions (KOZ) proposed that it be increased so that its net value at least reached the poverty level in Slovakia.

The average monthly salary in the Slovak economy was between €805 and €888 in 2012 depending on data sets, but nearly two-thirds of Slovaks earned less. In addition, one in 10 Slovaks working in full-time employment earned less than €400 gross per month, which comes to just under €340 after taxes, according to an analysis by Poštová Banka, which utilised data of the Statistics Office on wages in Slovakia in 2012.

Wages also differ significantly depending on age, and low wages are common especially among newcomers to the labour market. As many as one in four people aged up to 19 years see less than €400 gross on their paychecks. The same is true for one in six people aged between 20-24. The lowest occurrence of people earning less than €340 net is among people in their 30s, just 9 percent.

Lower levels of education also mean lower wages, with nearly 24 percent of people with only basic education levels falling in the low-income category. Among university graduates the number is almost non-existent.

In the second quarter of 2013, the average nominal monthly wage in the Slovak economy was €818, which, compared with the same period in 2012, grew by 3.2 percent, the Statistics Office reported on September 4, 2013.

Salaries in the Slovak economy grew very unevenly over 2013, with those working in the IT and telecom sectors being the best off.

The highest average nominal monthly wages were found in the financial and insurance sectors (€1,593), information and communication (€1,572), and electricity, gas and steam supply (€1,568).

The monthly wage was lower than the average in 10 surveyed sectors. The lowest average nominal wage was in accommodation and food service activities (€484), arts, entertainment and recreation (€584) and construction (€598).

Compared with the same period in 2012, the fastest average nominal wage growth was recorded in professional, scientific and technical activities (9.8 percent), water supply (6.6 percent) and in manufacturing (5.2 percent). It decreased the most in real estate (6.3 percent) and in financial and insurance activities (3.1 percent).

“For the time being professions in the IT sector are the best paid,” Martin Miklánek, regional manager of Manpower in Slovakia, told The Slovak Spectator. “More specifically, these are programmers and developers, but, of course, specialists in the automotive industry and production as well.”

Miroslav Dravecký, senior product manager at Profesia, the biggest job portal in Slovakia, agrees that in addition to IT, people can also earn a sound wage in the sectors of telecommunications, energy and industrial production, while attorneys, medical advisors, pilots and key account managers also enjoy healthy salaries.

Andrea Lišková, corporate marketing and PR director at McRoy Slovakia, added that financial analysts, auditors and senior positions in the pharmaceutical industry and in banks are also well remunerated.

“This ranking in Slovakia does not differ too much from how it looks in other countries, but the wages themselves are, for example in Germany, several times higher,” said Dravecký.

For instance, while on its website the Salary Explorer lists the four highest paying jobs in Slovakia in the IT sector, with monthly salaries of €2,000, civil engineers in Germany earn €7,958 per month.

LABOUR COSTS GROW

This gap in salaries is gradually closing, but it will still take a very long time to disappear despite the fact that labour costs continue growing in the Slovak economy, experts say.

“That [labour costs] grow is rather normal,” Michal Páleník, the director of the Employment Institute, a non-government and non-profit organisation that studies employment, told The Slovak Spectator. “The European Union is a single labour market and thus wages should converge.”

In 2012, average hourly labour costs in the whole economy were estimated to be €23.4 in the European Union and €28 in the eurozone, based on data from Eurostat. In its statistics labour costs consist of wages and salaries and non-wage costs, such as employers’ social contributions.

In Slovakia, however, average hourly labour costs amount to only €8.3. Lower labour costs were reported only in Bulgaria (€3.7), Romania (€4.4), Lithuania (€5.8), Latvia (€6.0), Poland (€7.4) and Hungary (€7.5). Of the Visegrad Group countries, the Czech Republic had the highest hourly labour costs, at €10.6. On the other side of the ranking is Sweden with the highest hourly labour costs in the region, €39, followed by Denmark (€37.2) and Belgium (€37.2).

While labour costs in Slovakia in 2012 were just slightly more than one third of the EU average, it experienced one of the most robust growth rates. Between 2008 and 2012 its hourly labour costs rose 13.8 percent, the fifth fastest growth in the EU. Bulgaria ranked first with 42.6-percent growth, followed by Sweden (23.3 percent), Austria (15.5 percent) and the Czech Republic (15.3 percent). Thus, within the eurozone Slovakia achieved the second fastest growth, after Austria.

Vladimír Baláž, an economist with the Institute for Forecasting of the Slovak Academy of Sciences, sees three factors intervening to create both comparatively low wages but also high rates of growth.
“The first factor is that wages grew from a very low starting base,” Baláž told The Slovak Spectator. “In 1989 the average wage in Slovakia was roughly €200, i.e. €0.5 for one hour worked. This means that they grew from a very low base and they are still relatively low. The high joblessness, one of the highest within the EU, is the second factor. Under such circumstances it is very difficult for employees to negotiate higher wages.

The third factor is the structure of Slovakia’s economy, in which production with low added value prevails that does not create room for the growth of wages.”

Ján Dinga, an analyst with INESS, a think tank, sees the arrival of foreign investors, in particular, as the driving force behind wage growth in Slovakia. This brought to Slovakia capital, expertise, increased employment and, naturally, an increased wage level.

“Of course, it is also easier and faster to grow from a low level: growth by one euro from the level of one euro means 100-percent growth, while growth by one euro from the level of 20 euros means only 5-percent growth,” explained Dinga.

While it is generally expected that labour costs in Slovakia will continue to rise and that the growth will be faster than, for example, in Germany or Austria, experts estimate that it will take decades for this wage gap to disappear.

Having said that, the growth in labour costs has yet to reduce Slovakia’s attractiveness to investors, Baláž said, and explained that “in absolute numbers Slovakia is a very cheap country”. He pointed out that while in Slovakia an employee costs the employer, including the wage and social and health insurance contributions, about €1,100 per month, in Germany this is about €3,500-€4,000.

“This gap is dramatic and even if Slovak wages grow much faster than those in Germany, which is also happening, it will take years or decades until this gap disappears,” said Baláž. “This means that Slovakia will also remain a cheap country in terms of wages in the future.”

For more information about the Slovak business environment please see our Investment Advisory Guide.

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