Cost-reduction in the labour market- EU vision and Polish reality

by Izabela Styczyńska, Vice-President of CASE — Center for Social
and Economic Research | 12.03.2015

Since 2010, the European Commission (EC) has taken an increasingly strong stand in favor of a smart and sustainable growth, which also aims at minimizing social exclusion. The new strategy reflects on ambitious objectives imposed to the Member States and aiming at an increase in employment and productivity, as well as a reduction of the number of low-skilled workers and a boost of economic growth. In order to support and monitor this strategy, the EC implemented the so-called European Semesters, which provide guidance for national reforms. In the fourth semester, which began in November 2013, the EC recommended again a reduction of labour and administration costs as significant tools for improving employment and social inclusion.

Neoclassical economists have long pointed out the fact that the imposition of tax burdens on any production factor leads to a decline in its demand. In Poland, similar to many European countries, labour taxes are high, and the legislation regulating the relations between employees and employers are complicated. In addition to the standard personal income tax, contributions to pension and health insurances are imposed on the net income, and those costs are incurred on the employee. On the side of employer, the company is obliged to cover such costs as pension insurance, disability insurances, accident insurance, percentage contribution to Labor Fund, as well as contribution to Guaranteed Employee Benefits Fund, which aims at paying individuals’ remunerations once an employer goes bankrupt. In companies employing more than 20 employees, there is an obligation of creating a Social Benefits Fund, where an employer has to contribute with a fixed sum per employee. For companies that do not hire disabled people, but employ more than 25 workers, there is an obligation to contribute to the State Fund for Rehabilitation of Persons with Disabilities. In addition to that, several interpretations of the overall tax law are created by Tax Offices, which complicate the understanding and application of the various elements of the tax legislation.

On the other hand, we observe that new rules being introduced to the Labour Code, which regulates the relationship between employers and employees, are reaching an increasingly worrying level of detailedness. In theory, the aim of the Labour Code is to clarify the relationship and secure interests of both parties of the labour contract. In practice the level of detail introduced significantly reduces flexibility in setting the rules of cooperation between employer and employee. Regulations apply to almost every stage of employment, including medical examination, occupational safety and health trainings, monitoring of working time, holidays, bonuses, severance pay, notice periods and conditions of termination. Simultaneously, in many professions (e.g. doctors, nurses, or drivers), these regulations are much more restrictive and are included in additional national and European documents.

These factors imply that the burden imposed on employment, directly in the form of taxes and indirectly in the form of regulation and administration, are disproportionately high in comparison to the employees’ net salary.
For employers, these costs are often impossible to incur regularly. Therefore, labour demand is falling, causing an increase in unemployment. As an alternative to permanent contracts regulated by Labour Law, companies use civil service contracts, regulated by civil law. They give more flexibility in building working relations, not necessarily decreasing the costs of employment. Calls for entrepreneurs to employ workers on permanent contracts seem to be irrational if we look at the current level of its costs and regulations. The data of Polish Agency of Development and Entrepreneurship (PARP) show that 99.8% of Polish companies are small and medium-sized enterprises. They generate half of the Polish GDP, whereas their survival rate is only 54% in the second year after starting business and 33% by the fifth year. This means that only one company in three does not go bankrupt before its sixth year of existence.
The corporate sector is a major factor in the economic development. Nevertheless, the level of added value generated in Poland by an average enterprise remains one of the lowest in the EU (PARP, 2014). Complicated legal regulations as well as costs imposed on companies- such as labour costs — have a strong negative impact on employment and development.
To meet these challenges, the European Commission has highlighted high labour tax burden and complex administration as causes of stagnation or even decline in employment (EC, 2014). Therefore, its current recommendations are targeted at lowering the tax burden and encouraging the shift of tax burdens towards less harmful taxes, like taxes imposed on consumption or property. In addition, the EC recommends a simplification of bureaucracy and an alleviation of tax burdens for people with low income.

Does Poland satisfy in any way the goals and recommendations indicated by the EC? The answer is “no”. As shown in the EC report, as of the end of 2014, none of these recommendations have been implemented in Poland (EC, 2013; 2014).

Moreover, 2014 brought additional changes in the tax law and Labour Code. Social Security Contributions have been imposed on the remunerations of members of supervisory boards. In 2015, the minimum wage was raised, which consequently increased the contributions for health and pensions insurance paid by entrepreneurships. From January 2016, social security contributions imposed on civil service contracts will increase as well. In addition, the Polish parliament rejected a bill proposing to raise the income tax threshold from 3,091 PLN to 6,253.32 PLN. Furthermore, changes in the Labour Code prolonging the notice period for workers with fixed-term contracts are being introduced.

Again the proposed changes increase the complexity of the Labor Code, tax law, and increase labour costs, discouraging companies to hire people and risking a shift of employment to the black market. Moreover, the majority of proposed changes applies to workers at minimum wage levels, and thus stronger affects people with the lowest income. As a result, labour market exclusion, poverty, and social stratification are increasing. It should be recalled here that the mode wage (the remuneration which appears the most often) reached the level of 2 189 PLN (about 524 EUR) in 2012 in Poland (Polish National Statistics Office, 2013). Changes in tax laws and in the Labor Code will undoubtedly affect this already low income.

To summarise, the majority of European Directives and Recommendations introduced in the past by the European Commission and implemented by Poland imposed regulations which increased administrative burden and hindered the functioning of businesses, thereby reducing their competitiveness. The current Recommendation, at the very least, would significantly improve the situation on the Polish labor market and Poland’s economic growth. A reduction in the personal income tax would increase employees’ disposable income. The elimination of complex contributions to various Funds, whose objectives are often not reached, would also reduce the cost of labor from the employer’s side. An increase of the tax-free threshold would improve the financial situation of the poorest, as well as raise the employment rate of low-qualified workers. In addition, such means as simplification of the Labour Code, elimination of privileges for certain group of workers, and introduction of flexibility in the employer-employee relationship could better address the needs of both employers and workers. However, to this point, it has been ignored by the Polish government.

CASE — Center for Social and Economic Research is an independent, non-profit economic and public policy research institution, established in 1991 in Warsaw.

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