The Jobs Crisis in Easter Europe and Central Asia - Essay Example

The Jobs Crisis in Easter Europe and Central Asia (2007 And The Informal Labour Market in the Czech Republic on the document The Jobs Crisis in Easter Europe and Central Asia, 2007-2011 The financial crisis, which had begun from the end of 2007, took almost no time to cripple the economies of developed countries and then, slowly had spread to the developing ones. This depended to a large extent on the share of FDI that developed countries had in the latter ones. The most severe effects of the Great Recession were felt in Eastern Europe and Central Asian countries. It was observed that global output had declined during this period, but extent of the decline was highest in these regions. The decline in welfare of households, on account of the recession, can be felt through four transmission channels, namely the financial markets, product markets, labour markets and government services. This report of World Bank particularly focuses on labour markets and the government services. The findings of the report clearly point out that the factor which can be attributed for the major decline of household welfare is the loss of jobs in labour markets. This period had witnessed major job cuts in most of the industries (more in construction and manufacturing), which had directly impacted the households. The youth unemployment had also reached record high in this period. The biggest disadvantage was, perhaps, long-term unemployment in the labor market. The workers, who could save their jobs, had also experienced a contraction in their real wages as most companies started to cut back on the paychecks. The households began to cope by reducing their expenditure and increasing their labour supply to earn more. The reduction in expenditure was felt most in sectors of healthcare and food. The governments in most of the countries were aware of the plight of people in the economy and the government launched social assistance programs to help the poor of the country. However, the results of these were not immediately felt because of the bottlenecks that had existed in various sectors during that period. Therefore, there were delays in response of the programs to improve the plight of the poor (Ajwad, n.d.). The report had applied the concept of GDP to measure the reduction in economic growth of the country and its consequent effect on the labour market. GDP measures the total income earned domestically, including the income earned by foreign factors of production, whereas GNP measures the income earned by all residents of the nation, including factors of production from abroad (Lochner, 2013). GDP was used as it captured the economic performance of the geographic region that is under study. If residents of the country received large sources of income from foreign countries, then GNP of the country would be much higher than GDP, but this would not have measured the exclusive performance of the country under study. A fall in GDP means that the level of income and expenditure of residents of the country is falling. This is directly related to labour markets as workers earn their wages from labour. Firms cut on employment, workers lost their income and GDP began to fall. The impacts of the fall in employment were most strongly felt in Estonia, Latvia, and Lithuania. These countries had also experienced severe fall in the paychecks of existing employees. The position of Czech Republic was relatively better than other countries of the European Union. It was observed, during the crisis, that the level of male unemployment was higher on an average in EU. For Czech Republic, it was found that the level of unemployment was more severe, in case of females (Czech Statistical Office, 2014). One of the coping strategies that were adopted by the households was to reduce the level of expenditure on education and health. These can have severe consequences on the long-run health index of the country. Poor quality of food increases the chances of diseases and a weak labour force. If labour force of the country is not healthy, then it cannot work efficiently, thereby leading to a fall in output. Reduction in education expenditure means that human capital formation of the countries will be poor, which will adversely affect the economic development (OECD and The World Bank, 2009). The report has established that any good policy response to a crisis must be timely, targeted and temporary. It should timely inject liquidity in the economy, targeted by providing support to the groups who needs it most and temporary in the sense that it should be dynamic and alter itself with changes in the crisis. The report recommended three measures for a better policy response, namely automatic stabilizers, adjusters and starters. The first one allows the economy to deal with any external shocks in a better manner. The second one deals with the adjusting of parameters of social assistance and unemployment insurance in order to improve their performance and the last one deals with the initiation of new avenues like, youth apprenticeship programs and other public works, that can benefit the economy. The most pertinent question that comes to mind is regarding reduction of expenditure on education and health. These two factors contribute largely to the development of the economy. Reduction of these will not improve the economic condition at any point. In from the Shadow-Integrating Europe’s Informal Labour This article is devoted to the shadow economy of Europe and informal labour markets. The experience of Europe has shown that the level of shadow economy has shrunk over the last few years. Though most of the countries have moved from middle-income to higher income levels, the population share involved in the informal labour market has still remained fairly stable. The findings from the report suggest that the countries like, Poland, Cyprus, Slovakia and Latvia, have a large proportion of their labour force employed in the informal economy. Romania is the country, which had faced the highest share of unpaid family work among other member countries. The maximum share of labour in the informal market lies in Estonia. The gender-wise break-up had shown that males dominate most of the informal employment in countries of the European Union. The percentage of youth employed in the informal economy was again higher, as per findings of the report. The report had considered three parameters to capture the informal labour market, namely non-contributing employee, self-employed and “unpaid” family worker. For Czech Republic, it was found that the country had almost all the informal labour employed as self-employed workers. The other two parameters for Czech were almost negligible. The age profiling of the informal labour market has revealed that the majority of people, which was involved in informal labour market of Czech Republic, belonged to the age group of 25-54 years (Packard, Koettl and Montenegro, 2012). The ongoing discussion of the report makes it important to underline the exact meaning of a shadow or informal economy. This part of the economy includes all those economic activities that lie outside the purview of formal labour market. The work done by workers in the shadow economy are not recognized by any statutory or government framework. This part of the economy cannot be taxed properly and it is difficult to extract social contributions from them. There are primarily three problems of such an economy (Langford, Forster and Malcolm, 1999). Firstly, the individuals are excluded from safety nets of the government; secondly, registered firms are overtaxed to compensate for the losses of tax not paid by them; and thirdly, the free rider problem raises cost of the economy. For the Czech Republic, it has been observed that a high proportion of laborers were involved in informal sector of the economy, in the form of self-employment. The construction sector, which is largely dependent on the males, contributes to the largest section of this workforce. As majority of the workers are employed in the informal sector as self-employed, it becomes easier for them to show lower levels of income than they actually earn and this in turn allows them tax evasion. Many of them show their income levels as minimum wages to reduce the level of taxation. It has been noted that the self-employed have a low effective tax-burden compared to those in formal sector. In order to reduce incidence of tax evasion, the government had introduced a uniform tax system in place of the progressive tax system. This was done to prevent the self-employed from understating their levels of income. When economy of a country is largely dominated by the informal sector, then there can be adverse effects on the economy. This is because if a large section of an economy is out of the formal sector, then the government’s policy regarding old age assistance, health care and unemployment benefits cannot be properly implemented. The people, engaged in the informal sector of an economy, cannot access the government benefits of old age assistance, when they can no longer work. As these people are not included in the formal labour market, they continue to be free riders on the economy. A similar fate awaits them, if they fall ill or meet with accidents, as they are formally eliminated from the security net of the government. It is implied in theoretical literature that the existence of a shadow economy will raise the level of corruption. However, a research work conducted by Choi and Thum (2004) has revealed that the presence of shadow economy can reduce the level of corruption (Schneider, 2007). Czech Republic is one of the countries in EU that has consistently been ranking low among other countries, in terms of share of the shadow economy. This implies that the country has fared relatively better than other countries in bringing its labour force under the purview of the formal sector. The tax reforms of the country have been introduced with the objective of improving tax revenues and locate people who evade taxes. The main points are: Replacing progressive tax by flat tax. Tax-credit and allowances of the low working group has been increased. Imposition of ceiling on income to raise social contributions. Corporate income tax is lowered. Rise in VATs. The effectiveness of these reforms is yet to be seen. Reference List Ajwad, M. I., n.d. The Jobs Crisis in Easter Europe and Central Asia, 2007-2011. [pdf] World Bank. Available at: [Accessed 24 January 2014]. Czech Statistical Office, 2014. Situation in the labour market in the Czech Republic in comparison to other European countries. [online] Available at: 3 [Accessed 24 January 2014]. Langford, K. J., Forster, C. L. and Malcolm, D. M., 1999. Economic growth with equity: Ukrainian perspectives. Geneva: World Bank Publications. Lochner, M., 2013. Are GDP/GNP appropriate measures of development? Munich: GRIN Verlag. OECD and The World Bank, 2009. OECD reviews of health systems oecd reviews of health systems: turkey 2008. Paris: OECD Publishing. Packard, T., Koettl, J. and Montenegro, C. E., 2012. In From the Shadow Integrating Europe’s Informal Labor. [pdf] The World Bank. Available at: [Accessed 24 January 2014]. Schneider, F., 2007. Shadow Economies and Corruption All Over the World: New Estimates for 145 Countries. 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