Transcript From the Shortage of Jobs to the Shortage of Skills

World Bank EU8+2
Regular Economic Report
Main Report
Warsaw, September 27, 2007
Main messages
Growth continues despite recent
international disturbances.
 Sustained efforts are needed to address
on going challenges relating to CADs,
inflation and fiscal consolidation.

• GDP growth has been strong
• Slowed slightly in 2Q
GDP growth rates (% yoy)
16
14
3Q 06
4Q 06
2Q 07
2006
1Q 07
12
10
8
6
4
2
0
CZ
EE
HU
LV
LT
PL
SK
SI
BG
RO
• Consumption is strong in the Baltic States, Slovakia, and
Romania, and is driven by strong wage growth.
• Investment is strong in Poland, Slovenia and Bulgaria.
Consumption, Investment and GDP growth, yoy, %
40
Consumption
Gross Fixed Investment
GDP
35
30
25
20
15
10
5
0
CZ
EE
HU
LV
LT
PL
SK
SI
BG
RO
2Q 07
1Q 07
4Q 06
2Q 07
1Q 07
4Q 06
2Q 07
1Q 07
4Q 06
2Q 07
1Q 07
4Q 06
2Q 07
1Q 07
4Q 06
2Q 07
1Q 07
4Q 06
2Q 07
1Q 07
4Q 06
2Q 07
1Q 07
4Q 06
2Q 07
1Q 07
4Q 06
2Q 07
1Q 07
4Q 06
-5
Construction has been booming
Both residential and civil engineering.
 Especially strong in Baltics, Bulgaria and
Romania.
 Increasingly important to overall growth.
 Now being constrained by labor shortages.
 Baltic real estate boom may be ending.

External market conditions have
changed significantly





Global slowdown started in 2Q
Shock from US mortgage and housing market
developments.
Global reprising of risk and retreat from risky
assets.
Represents a test of vulnerabilities of EU8+2
now more integrated into world economy.
Potential further surprises and slowdown in US.
Two channels of communication of
external shocks to EU8+2
Trade
 Financial markets

EU8+2 exports to US are small
US slow down would have to be much bigger and pull
down RoW growth to have greater impact on EU8+2 via
the trade channel


Geographical destination of exports of the EU8+2, structure in %
100%
2.0
2.2
80%
2.4
1.5
1.5
3.2
5.6
1.7
2.1
2.3
60%
40%
20%
EU15
NMS
Russia
USA
RoW
CZ
EE
HU
LV
LT
PL
SI
SK
BG
2004
2005
2006
Jan-May 07
2004
2005
2006
Jan-May 07
2004
2005
2006
Jan-May 07
2004
2005
2006
Jan-May 07
2004
2005
2006
Jan-May 07
2004
2005
2006
Jan-May 07
2004
2005
2006
Jan-May 07
2004
2005
2006
Jan-May 07
2004
2005
2006
Jan-May 07
2004
2005
2006
Jan-May 07
0%
RO
Financial vulnerabilities stem from
need to finance CADs…..
CAD as % of GDP
Trade in goods, net
Income, net
Current account balance
10
Trade in services, net
Current transfers, net
5
0
-5
-10
CZ
HU
PL
SK
SI
2Q 07
1Q 07
2006
2Q 07
1Q 07
2006
2Q 07
1Q 07
2006
2Q 07
1Q 07
2006
2Q 07
1Q 07
2006
-15
….some of which are large and
rising
CAD as % of GDP
Trade in goods, net
Income, net
Current account balance
10
Trade in services, net
Current transfers, net
5
0
-5
-10
-15
-20
-25
EE
LV
LT
BG
RO
2Q 07
1Q 07
2006
2Q 07
1Q 07
2006
2Q 07
1Q 07
2006
2Q 07
1Q 07
2006
2Q 07
1Q 07
2006
-30
The type of finance matters
FDI is the most secure and covers 100%
of the CADs of Czech Republic and
Poland, in 90% in Bulgaria and 2/3 in
Slovakia and Romania.
 Hungary relies more on portfolio
investment.
 Baltics rely on borrowing, largely through
banks. In Latvia the rate of borrowing is
unsustainable.

Evidence of trouble?
Bond spreads
 Equity markets
 Currencies

Bond spreads up, but not much…
2000
1500
EMBI+ spread
EMBI+ LatAm spread
EMBI+ Asia spread
EMBI+ Europe spread
1000
500
0
Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07
…and less in EU8+2 than in other
emerging markets
300
250
EMBI+
EMBI+
EMBI+
EMBI+
EMBI+
s pread
Rus s ia s pread
LatA m s pread
A s ia s pread
Europe s pread
200
150
100
50
0
Jan-07
A pr-07
Jul-07
Some stock markets are actually up
Stock market indices
in Visegrad countries, BG and RO
115
110
120
SI
115
BG
SK
105
110
100
RO
105
CZ
100
95
LV
LT
95
90
HU
17-Jul
1-Aug
EE
90
PL
85
80
2-Jul
Baltic countries and Slovenia
16-Aug 31-Aug
85
80
2-Jul
17-Jul
1-Aug
16-Aug 31-Aug
Sep-07
Jul-07
290
280
Hungarian forint
270
260
250
240
Sep-07
Jul-07
May-07
Mar-07
Jan-07
Nov-06
Sep-06
Jul-06
May-06
Mar-06
Jan-06
Sep-07
Jul-07
May-07
Mar-07
Jan-07
Slovak koruna
May-07
Mar-07
3.5
Jan-07
3.6
Nov-06
3.7
Sep-06
3.8
Jul-06
3.9
May-06
4
Mar-06
Polish zloty
Jan-06
4.2
Nov-06
Sep-06
Jul-06
40
39
38
37
36
35
34
33
32
Sep-07
Jul-07
May-06
26
May-07
27
Mar-06
28
Mar-07
29
Jan-06
Czech koruna
Jan-07
Sep-07
Jul-07
May-07
Mar-07
Jan-07
Nov-06
30
Nov-06
4.1
Sep-06
Jul-06
May-06
Mar-06
Jan-06
Sep-06
Jul-06
May-06
Mar-06
Jan-06
Currencies are mixed
Exchange rates vs. Euro
3.8
Romanian leu
3.6
3.4
3.2
3
EU8+2 have weathered this storm
so far, but things could get worse


There remains a large block of US mortgages to rollover.
Further credit crunch could evolve despite Fed and ECB
actions
12
2006
10
2005
8
6
Sub-prime 60 day delinquencies
by mortgage vintage year,
adjustable rate mortgages, in
percent of payments due
2004
4
2003
2
0
0
10
40
30
20
months after origination
50
60
Fundamental medium term
challenges remain
•
Ensure that CADs do not grow unsustainably
• Ensure that inflationary forces remain
controlled
• Continued efforts towards fiscal consolidation
• Address overheating in Latvia
6
6
4
4
2
2
0
0
Jul-07
Apr-07
BG
Jan-07
Oct-06
Jul-06
Apr-06
Jan-06
Oct-05
Jul-05
HU
SK
Apr-05
10
Jan-05
Jul-07
Apr-07
Jan-07
CZ
PL
Oct-06
Jul-06
Apr-06
Jan-06
8
Oct-05
Jul-05
Apr-05
Jan-05
Inflationary pressures are mounting
Overall HICP
10
8
RO
Some of the pressure is from volatile food and energy.
But there are sustained pressures from wages which
are growing faster than productivity in most countries.
Overall HICP
12
LV
LT
10
SI
EE
8
6
4
2
Jul-07
Apr-07
Jan-07
Oct-06
Jul-06
Apr-06
Jan-06
Oct-05
Jul-05
Apr-05
Jan-05
0
Further efforts are needed towards
fiscal consolidation





Fiscal outcomes this year will be better than
planned in most countries because of strong
revenue performance.
Hungary, Estonia, Poland, Slovakia and Latvia
are making some consolidation efforts.
Bulgaria and Romania could make greater
consolidation efforts.
Cyclically adjusted balances are high in Bulgaria
and Estonia.
Latvia is struggling to implement fiscal
stabilization plan
Fiscal 2008
Next year’s budget plans are not fully clear
but indications are that many countries will
cut tax rates and increase expenditures,
especially social expenditures.
 There may be fiscal loosening in Estonia,
Bulgaria and Poland.

Thank you for your attention
http://www.worldbank.org/eca/eu10rer
World Bank EU8+2
Regular Economic Report
Special Topic
From the Shortage of Jobs
to the Shortage of Skills
Recent Labor Market
Developments in EU8+2
Countries
Main questions
What have been the main changes in the
EU8+2 labor markets since the EU
accession?
 What are the emerging challenges?
 How can they be addressed?

Main LM Developments in EU8+2
1.
Substantial improvement in labor market conditions
over a short period of time

2.
But labor resources are still underutilized



3.
4.
A strong growth in domestic labor demand is the main factor
behind the improvement
Low employment rates among certain groups
Long-term unemployment
Low-productivity employment
Still labor and skills shortages have emerged and may
become an impediment to further growth
Challenge of mobilizing effective labor supply

Workers who have incentives to seek employment, and skills
that enable them to take available jobs
Outline
1.
Labor market conditions have improved
2.
Labor remains underutlized
3.
Skills shortages: an emerging challenge
4.
How to mobilize labor supply to address
skills shortages
Employment outcomes
have improved
More people of working age are
employed and less are unemployed
Change in employment rates 2000-2006 (15-64)
75
Lisbon Goal
2006
2000
70
65
60
55
50
CZ
EE
HU
LV
LT
PL
SK
SI
BG
RO
HR
EU15
thanks to a growth in labor demand
Vacancy rates in EU8+2
3.5
1Q 05
1Q 06
1Q 07
3.0
2.5
2.0
1.5
1.0
0.5
0.0
CZ
EE
HU
LV
LT
PL
SK
SI
BG
RO
Why labor demand picked up?



EU accession and access to new markets
Global economic prosperity
But most importantly the responsiveness of
employment to growth has significantly increased



All EU8+2 countries experienced periods of “jobless growth”
The increase in the “employment content” of growth reflects
successful enterprise restructuring
Move from “defensive” to “strategic” firm restructuring:




Initially firms were restructuring by shedding off redundant labor,
and using productivity gains to meet increasing demand
Productivity growth has made EU8+2 firms more competitive
Which allowed them to expand and gain market shares
They need to hire additional workers to meet increasing demand
and sustain growth
Other factors have played a
negligible role
Three main suspects:
 Labor market flexibility



Out-migration




No major reforms and no improvement =>
cannot explain the fall in unemployment
It is not the hard core unemployed who migrate
Out-migration cannot account for job creation and employment
growth
The fall in unemployment was associated with strong
employment growth
Active Labor Market Programs



Limited impact
Tend to redistribute jobs rather than create new ones
Cannot account for the increase in employment
Strict EPL has not hampered
improvement in employment outcomes
Rigidity of Employment Index
70
2003
60
2006
50
40
30
20
10
0
CZ
PL
HU
SK
BG
LT
HR
RO
SI
EE
LV
Labor remains
underutlized
many people of working age do not
contribute to output growth

Youth
 Hungary,

Older workers
 Poland,

Lithuania, Bulgaria
Slovakia, Hungary
Long-term unemployed
 Slovakia,

Croatia, Romania
Subsistence farmers
 Romania,
Bulgaria, Poland
0
Netherlands
Denmark
Sweden
Finland
United Kingdom
Slovenia
France
Spain
Belgium
Poland
Germany
Italy
Romania
Austria
Malta
Greece
Estonia
Cyprus
Lithuania
Luxembourg
Latvia
Portugal
70
Hungary
60
Czech Republic
Slovakia
Bulgaria
Youth in EU8+2 do not combine
education with work
Share of 15-24 in part-time employment, 2006
EU 25 Average
50
40
30
20
10
Early retirement is a particular
problem in aging societies
Official and Actual (Median) Retirement Age in EU8+2, 2005
(Men)
EE
LT
LV
RO
CZ
Official
Median
BG
SK
HR
HU
SI
PL
52
54
56
58
60
62
64
66
As a result many older workers are
out of the labor force
Workers Aged 55-64
Employment/Population Ratio
2006
70
60
Lisbon target
50
%
40
30
20
10
0
EE
LV
LT
EU15
CZ
HR
RO
BG
HU
SK
SI
PL
0
Slovakia
Croatia
Germany
Romania
Bulgaria
Poland
Greece
Belgium
Czech Republic
Italy
Portugal
Slovenia
Hungary
Estonia
Netherlands
Lithuania
France
Latvia
Malta
Luxembourg
Ireland
Austria
United Kingdom
Finland
70
Denmark
Spain
Cyprus
Sweden
High shares of LTU point to
structural unemployment
Share of long-term unemployment in total unemployment, 2006
80
EU 25 Average
60
50
40
30
20
10
Many workers are employed in lowproductivity agriculture
Share of employment by sector, 2006
Employment in Agriculture
Employment in Industry
Employment in Services
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
RO
BG
PL
HR
LT
LV
SI
EE
HU
CZ
EU15
SK
Skills shortages
Shortages of skilled labor have
become employers main concern
Percentage of firms that report worker skills as an important
obstacle to firm operation and growth, 2005
Latvia
Czech
Lithuania
Hungary
Expanding firms
Bulgaria
Non-expanding firms
Romania
Poland
Estonia
Croatia
EU8+2 average
All firms
Slovenia
Slovakia
0
10
20
30
40
50
60
Poland: hiring a worker with required
skills is increasingly difficult
Enterprises reporting hiring difficulties in an open survey on key
obstacles to growth (in %) and the rank of this obstacle
14
number of enterprises (%)
rank of obstacle
2
2-3
12
1-2
1
10
8
7
6
11
4
2
10.1
10.7
5.3
13
1.8
10.7
12.7
3.0
0
4Q 05 1Q 06 2Q 06 3Q 06 4Q 06 1Q 07 2Q 07
Filling vacancy for a skilled worker can take
a long time even if unemployment is high
Time needed to fill a vacancy for a skilled worker
2005 (in weeks)
SK
LV
EE
CR
LT
HU
SI
EU8+2 and
HR average
CZ
PL
BG
RO
0
2
4
6
8
because of the skills mismatch:
excess supply of low-skilled labor
“Excess Supply” of Labor by Educational Attainment, 2006
30
Primary and low er secondary
Upper secondary and post-secondary
Tertiary
25
20
15
10
5
0
-5
-10
-15
-20
CZ
EE
HU
LV
LT
PL
SK
SI
BG
RO
EU15
Skill shortages have given rise to wage
pressures and to growing ULC
(Example: construction)
Unit labor costs in construction, 4Q moving average, yoy %
40
PL
SK
EE
LT
30
20
10
0
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
03
03
03
03
04
04
04
04
05
05
05
05
06
06
06
06
-10
How to mobilize
labor supply?
The big shift





Until recently low employment/population ratios
in EU8+2 were due to insufficient labor demand
Now they are they reflect supply side
constraints
There are labor shortages despite a large pool
of working age population which out of the labor
force but able to work
The policy priority has shifted from fostering job
creation to mobilizing effective labor supply
Otherwise labor shortages may hinder economic
growth
EU8+2 need to mobilize labor
supply to sustain economic growth
Three main ways of achieving this:
 Improving labor supply incentives through
reforming social security systems
 Improving worker skills by making the
educational system more responsive to
labor market needs
 Opening labor markets to foreign workers
to import labor with required skills
Thank you for your attention
http://www.worldbank.org/eca/eu10rer