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Vol 3, No 7
19 February 2001
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Sam Vaknin Unemployment:
The case of

Part four of a six-part series
Sam Vaknin

Read part one of Sam Vaknin's unemployment series of articles first.
Read part two of the series.
Read part three of the series.

A few pilot projects are currently under study and consideration.

One is a project to provide lump sum block grants to municipalities and to allow them to determine eligibility, to run their own employment-enhancement programs and to establish job training and child care assistance. An assessment of the success or failure of this approach in a limited number of municipalities can be done after one year of operation.

The unemployed worker who participates in a second pilot project will be provided with a choice. He can either receive a lump sum or be eligible for a longer period of unemployment benefits. Alternatively, he can be provided with a choice to either receive a larger lump sum or to receive regular unemployment benefits. In other words: he is allowed to convert all or part of his unemployment benefits to a lump sum. The lump sum is likely to represent no more than nine months of unemployment benefits reduced to their net present value (NPV).

The third pilot project involves the formation of private unemployment insurance plans to supplement or even replace the insurance (compensation, benefits) offered by the Employment Fund. In many countries, private unemployment insurance is lumped together with disability and life insurance—all offered by the private sector within one insurance policy.

Encouraging employers to hire the unemployed

The Macedonian experience teaches us that the principle governing any incentive scheme intended to encourage employers to hire hitherto unemployed workers must be that the employer gets increasing participation in the wage costs of the newly hired formerly unemployed workers—more with every year the person remains employed. Thus, a graduated incentive scale has to be part of any law and incentive plan.

Additionally, employers must undertake to continue to employ the worker for a number of months equal to the number of months they received benefits for the worker and with the same salary. It would be even better if the incentives to the employer were to be paid for every second month of employment. Thus, the employer would have an incentive to continue to employ the new worker.

Employers should receive benefits for a new worker only if he was registered with an unemployment office for six consecutive months preceding his new employment.

Finally, the size of investment incentives (including tax holidays) should be linked to the potential increase in employment deriving from the investment project.

Encouraging labour mobility

Macedonia is a traditional, agricultural and tribal society. Theoretically, this should have inhibited mobility. But the economy has always been in such a terrible mess that it forced Macedonians into becoming veteran itinerants. The massive urbanization wave that swept Macedonia after the Second World War is an example: Skopje's population increased seven-fold in this period. Macedonians have often immigrated and whole villages were left without men for years as Macedonian migrant workers sought economic relief in more prosperous lands.

The country is small (25,000 sq km). Thus, workers must be encouraged to respond promptly and positively to employment signals, even if it means relocating. Workers are obliged to accept any job offered to them in a certain geographical radius from their place of residence. Rejection of such work offered ("it is too far") results in a loss of the "unemployed" status and any benefits attached thereto. Regrettably, the Employment Bureau does not offer financial and logistical assistance in relocation and incentives to relocate to areas of high labour demand. The needs of the unemployed worker's family should also be considered and catered to (kindergarten or school for his children, work for his wife and so on).

Fixed-term labour contracts with a lower cost of dismissal and a simplified procedure for firing workers were lately implemented in a series of new labour laws and amendments to existing ones.

The Labour Relations Law was amended to allow more flexible hiring and firing procedures. Previously, to dismiss a worker, the employer had to show that it has restricted hiring, applied workforce attrition and reduced overall overtime prior to the worker's dismissal. The latter had recourse to the courts against the former. This recourse was now restricted but it should be totally replaced with conciliation, mediation or arbitration.

Reforms in the minimum wage and early retirement

The minimum wage is an obstacle to the formation of new workplaces. It needs to be reformed in all economies in transition. One solution is a scaled minimum wage that is age-related and means tested and connected to skills. In other words, the minimum wage can vary according to age, other (non-wage) income and skills.

Macedonia has allowed employers to encourage the early retirement of workers which otherwise might be rendered technologically redundant. Early retirement is an efficient mechanism to deal with under-employment and hidden unemployment. It is now massively implemented in the bloated state administration. There are encouraging precedents from other countries in transition. Romania, for instance, ameliorated its unemployment problem largely through early retirement.

Offering a severance package, which includes a handsome up-front payment combined with benefits from the Employment Fund, can encourage early retirement. A special Early Retirement Fund has been created by setting aside receipts from the privatization of state assets and from dividends received by the state from its various shareholdings to provide excess severance fees in case of early retirement.

Administrative measures: reduction of working hours

Another classic administrative measure (lately implemented in France) is a reduction in the standard working week (in the number of working hours). For reasons analyzed in the next chapter, Macedonia decided NOT to implement such a move, despite its obvious (though false) allure.

Administrative measures: public works

With the generation of massive budget surpluses, the temptation of pouring money into public works increases. In many countries in transition, all the medically capable unemployed are compulsorily engaged in public works for a salary equal to their unemployment benefits (Workfare). A refusal by the unemployed person to be engaged in public works results in the revocation of his "unemployed" status and of all the benefits attaching thereto.

Macedonia is a poor country and so, luckily for it, it was not lured into this trap.

From the Encyclopedia Britannica:

The weakness in the proposal to use disguised unemployment for the construction of social overhead capital projects arises from inadequate consideration of the problem of providing necessary subsistence funds to maintain the workers during the long waiting period before the projects yield consumable output. This can be managed somehow for small-scale local community projects when workers are maintained in situ by their relatives—but not when workers move away. The only way to raise subsistence funds is to encourage voluntary savings and expansion of marketable surplus of food purchased with these savings.

This is not to say that public works financed by grants or soft loans can serve as an interim "unemployment sink"—a buffer against wild upswings in unemployment. But it is not a long term or structural solution (as Japan is discovering so painfully).

The situation in Macedonia (and in a few other economies in transition) is so extreme, that it is comparable only to the Great Depression in the USA.

In the USA in 1932, the Civilian Conservation Corps (CCC) was established to tackle nature conservation work for young and unmarried men. They planted trees, erected flood barriers, put out forest fires and constructed forest roads and trails. They lived in work camps under a semi-military regime. They were provided with food rations and a modest monthly cash allowance, medical care and other necessities. The CCC employed 500,000 people at its peak and three million people throughout its existence.

In any case, there is always the danger that public works simply displace existing employment. Labour union and local municipality endorsements should, therefore, be strictly observed.

Sam Vaknin, 19 February 2001

Part five of this series of six articles will appear in next week's CER

The author:

The author is General Manager of Capital Markets Institute Ltd, a consultancy firm with operations in Macedonia and Russia. He is an Economic Advisor to the Government of Macedonia.

DISCLAIMER: The views presented in this article represent only the personal opinions and judgments of the author.

Moving on:

After the Rain cover

After the Rain:
How the West Lost the East

Sam Vaknin's book on sale from CER as a print book and as an ebook

Read an external review


Brian J Požun
Slovene Art

Sam Vaknin
Macedonia's Unemployed

Jessica Houghton and Balázs Jarábik
Slovaks Must Learn

Catherine Lovatt
The End of Kuchma?

Gusztáv Kosztolányi
Joint Efforts

Tiffany G Petros
High Times

Martin Šulík

Andrew James Horton
Šulík Abroad

Christina Manetti

Christina Manetti
Šulík Interviewed


Andrew Roberts
Post-Communist Party Systems

Štěpán Kotrba
Sow and Reap

Brian J Požun
Shedding the Balkan Skin

Martin D Brown
Czech Historical Amnesia

Dejan Anastasijević (ed)
Out of Time

Gusztáv Kosztolányi
Hungarian Oil Scandal

Sam Vaknin
After the Rain

Press Reviews:
Oliver Craske
Caught on Tape


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