LSE Business Review Mon, 11 Nov 2019 06:00:19 GMT language
Labour market reforms are notoriously difficult to grasp, especially compared to other reforms such as trade or financial liberalisation. One can argue that this is because labour reforms are broader in that they affect directly the whole working population, while, say, trade and financial reforms directly affect mostly tradables and financial sectors, respectively. This may explain why labour reforms are often extensively debated, are so contentious and hard-fought, are commonly approved in bundles, and frequently contain agreed upon implementation lags. The effects of labour market structural reforms are wide, deep and take a long time to set in.
This post looks at this important reform in an understudied yet key country and over a long and eventful period. We present a method for systematically identifying important structural labour market changes, i.e. the “narrative approach.” We focus on Hungary, which is an important country both to understand the transition from communism to market economy and also because one can argue that it is where the recent populist wave in Europe started. Our data covers 1986 to 2016, a momentous period encompassing the fall of communism in 1989, the Russian crisis in 1998, EU accession in 2004, the global financial crisis in 2007, the European sovereign debt crisis in 2011, as well as the EU migrant crisis in 2015. We are not aware of many studies about former transition economies covering such a lengthy time window.
The narrative approach to reform
The narrative approach that has been used previously and here we apply it to the most comprehensive compendium of labour laws we are aware of, namely the International Labour Organisation (ILO) NATLEX depository. The way we implemented the narrative approach was to collect and read all labour laws about working time, employment contracts, hiring and firing, and gender discrimination enacted by Hungarian governments from 1986 to 2016. We then establish whether the intended effect of each law is to increase, neutral or decrease employment protection. On this basis, we can determine in which periods there is more legislative activity and identify the overall direction or the intended effects of these reforms.
We identify three main clusters of labour market reforms in Hungary: in 1992 and 2002 aiming at increasing, and in 2012 at decreasing, employment protection.
There are at least three surprising implications from this headline finding. One is that only the third and last reform aim at lowering the extent of employment protection in Hungary. One would expect that the transition from communism to a market economy entails instead a decrease in employment protection. Yet this is not what we observe in Hungary. Secondly, the role of ideological orientation seems less straightforward than commonly thought: the first and third reforms were enacted by centre-right governments, while the 2002 reform was enacted by a centre-left government. The third is that transition in Hungary is often considered a textbook example of gradual and linear transformation but the sequence we identify challenges this view.
A tale of three reforms
In 1992 a new Labour Code was adopted, and it was in force until 2012 when a new Labour Code came into force in the wake of the 2011 Constitution. Our analysis shows that the 1992 reform was mostly driven by changes in working time, in hiring and in firing legislation. We find that major changes occurred regarding the regulation of working time. For instance, there were increases in annual leave and public holidays entitlements, in overtime work and weekend working premia, stricter limits on overtime working, and a reduction of normal working hours (from 48 to 40 per week). As for hiring and firing, the 1992 reforms included an increase in the legally mandated notice period (from 15 to 30 days), redundancy compensation, and the imposition of various constraints on dismissals. In terms of forms of employment, the main change was that a five-year maximum limit was set for fixed-term contracts, while no such limits existed before 1992. Our analysis suggests that the 1992 reform is the most significant of the three in terms of magnitude.
The second reform we identify is in 2002 but this requires further explanation. In 2002 a narrow election victory led to a centre-left government coalition that proposed important new labour laws when coming into office, but they were only approved in 2003 due to the government’s tight parliamentary majority. This 2002 reform is also noteworthy because it contrasts with the “goulash populist” approach of the previous centre-right government coalition led by MP Orbán from 1998 to 2002, which doubled the minimum wage after shortening the maximum duration of unemployment benefits and making eligibility more restrictive (e.g., requiring participation in public works.)
We find the 2002 reform to be mostly driven by changes in employment contracts. Chiefly among them are the laws that gave part-time workers and fixed-term workers the right to equal treatment (with full-time workers.) Because temporary contracts were not common early on, most of the changes from the 1992 reform only applied to full-time workers. The 2002 reform extend these rights. Another important change is introduced in 2001, when Act 60 transposes the Protocol to the UN Convention on the Elimination of All Forms of Discrimination Against Women into Hungarian law. Notice that there are, in NATLEX for Hungary, only six laws under equality of opportunity and non-discrimination, but most relate to ethnic minorities.
The 2012 reform is encapsulated by the New Labour Code that followed from the 2011 Constitution. Differently from the previous two reforms, we find the 2012 aims at reducing the level of employment protection and the main components of this reform were firing legislation and working time regulations. The 2012 Labour Code halves the premium for weekend working and increases by a quarter the legal limit for overtime work (in hours). As for dismissals, the major change is that it eliminates the disciplinary procedures requirements established in 1992 and that employee’s right to contest dismissal were curtailed.
Benchmarking our findings
We compare our results to other exiting measures and we find that the OECD EPL misses the 1992 reform (but not the 2002 and 2012); that the IMF narrative approach to reform study does not include Hungary; but that the ILO recent analyses provide broad support for our conclusions, although they do not focus or include gender discrimination laws.
The ILO (2019) has recently quantified NATLEX information for 117 countries. They cover the period up to 2013 for five main areas (full or part-time contracts, hiring, firing, representation/unions and strike legislation). Figure 1 shows their overall index for Hungary, which broadly confirms the three main reforms we identified above using the narrative approach. It confirms that the reforms we identify for 1992 and 2002 were aimed at increasing regulation, while the one for 2012 aimed at decreasing regulation, and that the first reform is “bigger” than the other two, which are of comparable “size” although of opposite “directions.”
Figure 1. ILO labour regulation index: Hungary and comparators, 1990-2013
Source: Author’s calculations using data from ILO (2019). EU27 is defined all current EU members except Hungary; Northern EU as Sweden, Finland, Latvia, Lithuania, Estonia and Denmark; Western EU as Belgium, France, Germany, Ireland, Luxembourg, Netherlands and UK; Southern EU as Italy, Spain, Greece, Malta, Cyprus and Portugal; and Visegrad as Czech Republic, Slovenia, Slovakia and Poland.
An obvious advantage of the ILO measure is that it allows cross-country comparisons. We contrast Hungary to comparator groups of EU (excluding Hungary), Visegrad, Northern, Southern and Western EU averages for all the years for which their index is available.
In comparison, the level of employment protection in Hungary seems to have been consistently low. Except for the years between 1992 and 1995, the values of the ILO index for Hungary have been substantially below the EU average indicating that Hungarian labour market seems less regulated or more flexible. The ILO index shows that for most of the period between 1990 and 2013 the Southern EU group had the highest levels of employment protection. After the global financial crisis there seems to have been some convergence between Southern and Western EU countries, although the Northern EU countries still show a lower level of employment regulation and the average value of the ILO index for Hungary now resembles this latter group more than any of the others.
Using the narrative approach to track changes in labour laws, our analysis identifies three main labour market reforms in Hungary: in 1992 and 2002 aimed at increasing, and in 2012 at decreasing, employment protection. In terms of magnitude, our analysis shows that the 1992 reform is the most significant of the three. These findings are corroborated by other studies and suggest that future research should yield new insights from applying the narrative approach to other EU countries.
- This blog post is based on the author’s chapter entitled “Goulash Labour Market Structural Reforms: Hungary, 1986-2016” which is forthcoming in N. Campos, P. De Grauwe and Y. Ji (eds.), Structural Reforms and Economic Growth in Europe, Cambridge University Press.
- The post gives the views of its author(s), not the position of LSE Business Review or the London School of Economics.
- Featured image by johnondreasz, under a Pixabay licence
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Nauro F. Campos is a professor in economics at University College London, research professor at ETH Zurich, and research fellow at the Institute for the Study of Labour (IZA Bonn).