LABOUR MARKET REVIEW OF BOSNIA AND HERZEGOVINA · CONTENTS PREFACE 5 EXECUTIVE SUMMARY 7 1. ECONOMIC SITUATION AND BACKGROUND 11 1.1 Macroeconomic situation 11 1.2 Economic restructuring

LABOUR MARKET REVIEWOF BOSNIA AND HERZEGOVINA

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LABOUR MARKET REVIEWOF BOSNIA AND HERZEGOVINA

Prepared by Zoran Pavlovic and Sahrudin Sarajcic (national experts), Ray Phillips (international

consultant), Anastasia Fetsi, Henrik Huitfeldt and Ulrike Damyanovic (ETF experts)

European Training Foundation

2006

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CONTENTS

PREFACE 5

EXECUTIVE SUMMARY 7

1. ECONOMIC SITUATION AND BACKGROUND 11

1.1 Macroeconomic situation 11

1.2 Economic restructuring 12

1.3 The informal economy 14

2. TRENDS IN THE LABOUR MARKET 15

2.1 Population and the structure of the labour force 15

2.2 Employment developments and structural shifts and changes 16

2.3 Inactivity, unemployment and social exclusion 21

2.4 Qualification levels of the workforce and skill mismatches 23

2.5 Main labour market challenges 27

3. REVIEW OF POLICIES, AND LEGISLATIVE AND INSTITUTIONAL FRAMEWORKS

FOR ADDRESSING LABOUR MARKET CHALLENGES 29

3.1 Employment policies and governance 29

3.2 Increasing the adaptability of enterprises 33

3.3 Attracting more people to enter and remain in the labour market:making work a real option for all 38

3.4 Investing more and more effectively in human capital 48

4. CONCLUSIONS AND RECOMMENDATIONS 53

ANNEXES 57

Annex 1: Case study – The leather/shoe industry in Derventa municipality 57

Annex 2: The labour market institutional setting 58

Annex 3: Main provisions of labour laws and employment laws in the entities 59

ACRONYMS 63

BIBLIOGRAPHY 65

3

PREFACE

During the past decade all Western Balkancountries, at different points in time and atdifferent speeds, have started the processof economic and social transformation intofunctioning democracies and marketeconomies. As in other transition countriesthe transformation process has beendifficult, and despite the progress made todate, major challenges still exist in allfields, including social and economicdevelopment. The Western Balkancountries will need to continue theirintensive and systematic efforts in order tosucceed in the economic restructuringprocess and to ensure the necessaryeconomic growth and social cohesion toenable them to catch up with, and sustain acloser relationship with, the EU. Given thecontribution made by employment andproductivity to economic growth, some ofthose efforts need to be directed towardsthe development and implementation ofemployment policies and structural labourmarket reforms that support the economicrestructuring process and lead to increasesin productivity. In this context emphasismust be given to efforts for thedevelopment of an adaptable,entrepreneurial and well-skilled labourforce through adequate investment inhuman capital. Importance must also begiven to the promotion of inclusive labourmarkets (open for all and attracting theinactive) for greater social cohesion.

The ETF, in agreement with the EuropeanCommission, has undertaken a series ofin-depth reviews of the labour markets inthe Western Balkan countries with the aimsof contributing to a better understanding oftheir functioning and of identifying areas forfurther work in the fields of employmentpolicy and education and training reform.The reviews have a dual purpose:

1. to contribute to EU programming byproviding well-documented input to theprogramming documents of the CARDSprogramme; to the annual countryprogress reports on the Stabilisationand Association Process; to theEuropean Partnership papers; and tothe action plans that the governmentswill have to prepare in order to addressthe challenges identified in theEuropean Partnerships;

2. to provide a comprehensive backgroundinstrument that will enable the EuropeanCommission and the countries of theWestern Balkans to support policydevelopments.

Specifically, the reviews:

1. analyse the economic context in theWestern Balkan countries, and inparticular the pace of the economicrestructuring process and its impact onjobs and employment (Chapter 1);

2. analyse recent trends in the labourmarkets with the aim of identifying majorchallenges in the labour markets interms of the economic restructuringprocess (Chapter 2);

3. assess policy responses and theinstitutional setting for addressing thechallenges identified from theperspective of supporting economicrestructuring and growth (Chapter 3);

4. provide recommendations for furtheraction (Chapter 4).

The labour market challenges and thepolicy responses are examined against thefour broad key objectives set out in therevised European Employment Strategy:

� increasing the adaptability of workersand enterprises;

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� attracting more people to enter andremain in the labour market;

� investing more and more effectively inhuman capital;

� ensuring better implementation ofreforms through better governance.

The labour market review of Bosnia andHerzegovina was prepared between July2005 and November 2005 by a team ofexperts (national experts Mr ZoranPavlovic and Mr Sahrudin Sarajcic;international expert Mr Ray Phillips; andETF experts Ms Anastasia Fetsi, Mr Henrik

Huitfeldt and Ms Ulrike Damyanovic). Thereviewing process entailed a broadconsultation of documents prepared byinternational organisations and nationalinstitutions, as well as in-depth interviewswith national and local stakeholders. Onefact-finding field visit took place in July2005, a second in September 2005, and avalidation seminar with nationalstakeholders of the draft results of thereview in November 2005. We would like tothank all representatives of national andlocal institutions who provided us withvaluable information and comments.

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LABOUR MARKET REVIEW OF BOSNIA AND HERZEGOVINA

EXECUTIVE SUMMARY

As a result of the break-up of Yugoslavia,the war and economic reforms, the oldeconomic structure and patterns ofemployment in Bosnia and Herzegovinahave been challenged to their foundations.Since the Dayton agreement in 1995, themain focus of policy in Bosnia andHerzegovina has been on maintainingpeace and a stable political environment,and initiating a process of state-building. Inthis context, restructuring of the economyand efficient governance have beensecondary issues. The establishedgovernance system, with several differentinstitutions at different levels responsiblefor policymaking, has therefore remainedintact, although it is not conducive toeffective economic reforms. Despiteincreasing macroeconomic stability, thestructural problems of the economy inBosnia and Herzegovina remainsubstantial and serious. Bosnia andHerzegovina comprises three ‘entities’: theFederation of Bosnia and Herzegovina,Republika Srpska and Brčko District. TheFederation of Bosnia and Herzegovina has10 mostly autonomous cantons. BrčkoDistrict is very small and has not beencovered in this study.

Transitory labour markets, such as the onein Bosnia and Herzegovina, are difficult toanalyse using standard data sources. Theregistered data on employment throughestablishment surveys have a limitedexplanatory value as they do not capturethe large informal economy (estimated bythe United States Agency for InternationalDevelopment and the Financial ServicesVolunteer Corps to be one-third of officialGDP), nor do they provide information onlabour mobility. According to data from theHousehold Survey Panel Series (HSPS,2001–04), conducted by the StatisticalOffices in Bosnia and Herzegovina, there

are two main labour market trends. Firstly,there have been recent increases in bothactivity rates (from 48.4% in 2001 to 57% in2004) and employment rates (from 40.6%in 2001 to 44.3% in 2004), though theseremain much lower than in the EU andother countries in the region; RepublikaSrpska has had higher activity andemployment rates than the Federation ofBosnia and Herzegovina, but the gapbetween rates for the two entities is rapidlydecreasing. Secondly, both registered andILO unemployment rates have beenincreasing and are relatively high (40% and22.1%) even for transition economies.Large differences exist in the employmentrates for groups with different educationalattainment levels, which indicates that skillsare important in the competition for jobs, atleast in the formal labour market.

One of the major challenges for the labourmarket in Bosnia and Herzegovina is thelow level of job creation in the formaleconomy as a result of the slow pace of theprivatisation process and the overallrestructuring of the economy. Thedestruction of old industrial jobs inpreviously state-owned enterprises has notbeen offset by increased job creation ingrowing and newly created enterprises. Asa substantial number of large enterprisesare still undergoing privatisation, thepressure on the labour market is likely toincrease further. So far the informaleconomy and the agricultural sector (andperhaps also the service sector inRepublika Srpska) have absorbed laid-offworkers and labour market entrants. Theyhave also provided income-generationopportunities for people who have anemployment contract in enterprises underprivatisation, but who do not actually workor get paid. The share of employmentaccounted for by the informal sector is high

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(39.5% of total employment in 2004), and ishigher in Republika Srpska than in theFederation of Bosnia and Herzegovina(44.4% vs. 35.4%). In the Federation, thenumber of both formal and informal jobsincreased between 2001 and 2004, while inRepublika Srpska the number of formaljobs decreased. Overall, a large part of thegrowth in employment is a result of agrowth in informal employment.

A second challenge is to attract morepeople into the formal labour market, inparticular women and young people. Theemployment rate for women (31.7%) ismuch lower than that for men (57%), thegap being particularly large in theFederation of Bosnia and Herzegovina (30percentage points); the employment ratefor young people aged 15–24 years(22.4%) remains much lower than the EUaverage, though at least it has increasedduring recent years. The challenge is alsoto address the issue of weak attachment tothe formal labour market on the part of alarge proportion of the labour force.According to HSPS data, only 19.3% of thepopulation had a formal job for all fouryears between 2001 and 2004. The rest ofthe labour force moved between informalemployment, formal employment,unemployment and inactivity. The mobilityof the labour force in Bosnia andHerzegovina is higher than in manytransition countries, but this is not anindication of a well-functioning labourmarket: instead, it is a result of the scaleand pervasiveness of the informaleconomy, which is characterised byrepeated irregular jobs.

A third challenge is to improve the qualityof the supply side. The educationalattainment levels of the population aged25–65 years are lagging behind those ofthe same age group in the EU as a whole,with a higher percentage of people with alow level of education and a lowerpercentage of people with highereducation. Women are particularlydisadvantaged. Furthermore, it is likelythere has been a depletion of the skills ofthe population over recent years becauseof a lack of employment and developmentopportunities and the country’s low level ofeconomic activity. Young people’s

participation in education and training hasincreased during recent years, butdeficiencies in the quality of the educationprovision raise questions about thepreparedness of young people for thelabour market. Although widespread skillgaps do not yet exist, there are particularshortages and a general concern aboutbasic skills, partly concealed by the lowlevels of demand in the formal economy. Ifit is not addressed, the weakness in thesupply side will be a serious impedimentfor the economic restructuring anddevelopment of the country.

EMPLOYMENT POLICYFORMATION

There is clear recognition of the importanceof employment in the wider economic anddevelopment strategy. Employment isrecognised in a number of importantcontexts: SME development, educationreforms and poverty strategy. The PovertyReduction Strategy Paper (2002–04;2004–07), signed by the Council ofMinisters, clearly alludes to the importanceof labour market reform in the fight againstpoverty. However, in practice labourmarket issues are not being addressedsuccessfully, nor have relevantemployment policies been developed andtranslated into operational plans. Whilethere are a number of themes (more jobsand reducing the grey economy), there isno overarching employment strategy orpolicy at state or entity level that has clearaims and objectives and that helps to directthe priorities of the labour marketinstitutions.

The institutional arrangements for thelabour market in Bosnia and Herzegovinaare complex. They mirror generalgovernance arrangements, with the addedcomplication of parallel employmentbureaux. The state, the entities and thecantons are all involved in aspects oflabour market regulation or provisionthrough labour ministries, employmentagencies/services, labour inspection andsocioeconomic councils at entity andcantonal level (for the Federation of Bosniaand Herzegovina), and the Ministry of CivilAffairs and State Employment Agency at

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state level. In fact the state plays little partin labour market policy, although there aresigns that the State Employment Agency isbeginning to involve itself in aspects ofoperational policy. These arrangementshave significant costs in terms of the effortneeded to achieve reasonable coherenceacross the institutions and labourmarket(s); to service the many politicalinterfaces; to develop, install and maintaincommon information systems and otheroperational processes; and to developsufficient expert capacity in any singleorganisation.

The institutional structure does little toaddress the common observation that thelabour market in Bosnia and Herzegovinais fragmented and segregated. Indeed, theexistence of so many legislative bodiesreinforces the notion of separateness and,at entity level, gives rise to very significantdifferences in the costs imposed onemployers. This is true across the entities,but especially so in the Federation ofBosnia and Herzegovina as a result of thecantonal structure. The position inRepulika Srpska is relativelystraightforward in that there is a singleintegrated employment service and nopolitical institution in between themunicipality and the entity government.

Areas for future work to address thechallenges identified above include thefollowing.

IMPROVING THEINSTITUTIONAL SETTING

In order to achieve policy coherence,reduce operational costs and overcome thenotion of separateness and fragmentationof the labour market, the institutionalarrangements need to be reviewed as earlyas possible in the context of broadergovernance considerations. This isparticularly true for the Federation ofBosnia and Herzegovina, where the federalauthorities could have a stronger role in thedevelopment and implementation of labourmarket policy across cantons.

INCREASING THEADAPTABILITY OFENTERPRISES

The following steps will be required.

� Barriers to SME establishment andgrowth must be removed in practicalterms. This requires simplification ofinstitutional complexities and strategicactions. However, immediateimprovements are also possible in theshort term, as demonstrated byexamples of good practice in a numberof municipalities in both RepublikaSrpska and the Federation of Bosniaand Herzegovina.

� Policies to reduce the level of non-wagecosts on individual companies(principally by increasing thetax/contribution base) and to limit thescope of the formal wage determinationsystem must be developed andimplemented.

� Economic restructuring of large formerstate enterprises should be facilitated.In particular, the policy of protecting(unproductive) jobs for three yearsfollowing the purchase of an enterprisemust be reviewed.

� There is a need to address remainingdeficiencies in the labour laws of theentities, namely (i) the overgenerousduration and level of maternity pay,which is in any case widely disregarded,and (ii) Article 143 of the labour law onwaiting lists, which is not applied inpractice because the costs involved aresimply unaffordable. Although these arenot central to the functioning of thelabour market, they do affect attitudestowards compliance with labour law andparticipation in the informal economy.

ATTRACTING MORE PEOPLETO ENTER AND REMAIN INTHE LABOUR MARKET:MAKING WORK A REALOPTION FOR ALL

The following actions will be necessary.

� There is an urgent need to develop acoherent strategy for levering jobs out ofthe informal and into the formal

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EXECUTIVE SUMMARY

economy, with a clear implementationstrategy including leadershiparrangements. The most importantelements of the strategy are the reformand strengthening of the labourinspectorate, the reduction of non-wagelabour costs and the effectiveness ofthe public employment service(s).

� Active labour market programmes mustbe rebalanced, with less resourcesallocated to grants and loans toemployers, and more to basicemployability training for unemployedpeople.

� The functioning of the employmentservices must be improved by:� clearly identifying their purpose and

priorities;� reducing/eliminating workloads

generated by the registration ofpeople seeking basic healthinsurance (an alternativearrangement needs to be found);

� improving the cost-efficiency of theemployment services in theFederation by re-examining theinstitutional arrangements;

� reviewing operational proceduresand processes;

� ensuring a better deployment ofresources, with a better balancebetween back-room and front-linestaff and a better management ofworkflow;

� improving the services tounemployed people through a higherquality of information, counsellingand guidance;

� improving relations with employers;� modernising IT systems.

INVESTING MORE AND MOREEFFECTIVELY IN HUMANCAPITAL

A number of actions are needed.

� Education and training reform initiativesaimed at the creation of a jointeducation and training space should becontinued. These include fasterprogress in the approval of the stateframework law on VET and the effectivefunctioning of the state agencies for(i) standards and assessment and(ii) curriculum development.

� Efforts must be continued to achievebetter cooperation between theeducation and training sectors and thelabour market at local level.

� There is a need to disseminate andimplement good practice on enhancingthe quality of education provision fromdonor projects to a large number ofschools.

� The issue of the permanent upgradingof the skills of the population throughshort-term measures (for example,promoting the participation of adults intraining within the framework of activelabour market measures) and thedevelopment of strategic approaches toadult learning (for example through thework on the development of a lifelonglearning strategy initiated by theOrganisation for Security andCooperation in Europe (OSCE)) shouldbe addressed.

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1. ECONOMIC SITUATIONAND BACKGROUND

1.1 MACROECONOMICSITUATION

The economy of Bosnia and Herzegovina isstill recovering from the 1992–95 war andfrom the transition from a socially planned toa market economy. Although the physicalinfrastructure has now largely beenreconstructed, the economic infrastructure isstill weak. The high GDP growth rates of thepost-war period (second half of 1990s)primarily reflected the inflow of internationalaid (around USD 5 million since the end ofthe war and the highest per capita support toany European transition economy). Since2000 the level of international assistance hasdiminished and growth rates have slowed toaround 5%; there are risks of a furtherreduction if domestically fuelled economicgrowth does not pick up. GDP per capita hasalso increased since the war, though itremains at half the pre-war levels (€1,600 in2003), making Bosnia and Herzegovina oneof the poorest countries of the region.

Increasing macroeconomic stability, lowinflation rates (below 1% in each of thepast three years) and fiscal consolidationhave had a positive impact, both in overallterms and on net foreign direct investment,which increased from €161.1 million (3.2%of GDP) in 2000 to €344.4 million (5.2% ofGDP) in 20041. However, two risk factorsfrom a macroeconomic point of viewremain to be addressed, namely the highlevel of public expenditure (reaching 46%of GDP in 2003) and external imbalances2.

Trade liberalisation, in particular with the(Southeast) European region, has openedup the economy but has resulted in a rapidgrowth in imports rather than exports. Infact, except for a few niche sectors, theexport performance of Bosnia andHerzegovina has largely failed to respondto the new market conditions.Consequently the trade deficit has risen toaround 35% of GDP during the past fouryears, mainly because of remittances,

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1

1 European Commission, ‘The Western Balkans in transition’, Directorate General for Economic and FinancialAffairs, December 2004.

2 Ibid.

donor funds and (declining) privatisationreceipts. Moreover, the massive flow ofimported items has consisted to a largeextent of consumption goods rather thancapital goods that might have supportedthe industrial sector growth. Furthermore,exports have been mainly based on rawmaterials (wood and low-value-addedwood products), energy (10% of totalexports), agriculture and products comingfrom ‘labour only’ (LON)3 contracts in thetextile and leather industry i.e. low addedvalue and skill-intensive exports.

1.2 ECONOMICRESTRUCTURING

The main pre-war sectors contributing toGDP were: the metal industry, electronics,processing equipment, the wood andfurniture industry, the chemical industry,agriculture and food processing and thetextile industry. Companies in theseindustries were located throughout Bosniaand Herzegovina. The bulk of industrialproduction took place in state-ownedcompanies, most of which stopped orsignificantly reduced their production andlost their markets during the war and thepost-war period. Some of these companieshave now been privatised and havereactivated their production chains, eitherthrough foreign direct investment (fromcompanies such as Coca Cola, Mittel SteelZenica, Aluminium Mostar and HeidelbergZement) or through national investment(from companies such as BosnalijekSarajevo and DITA dd Tuzla), but most ofthem are still on the road to privatisationand restructuring, often with internationaldonor support, have old technology andwork organisation, weak management andlow levels of efficiency, and are generallyovermanned. The most problematiccompanies are those with unclearownership structures, who exist but do notactually function, and who generateinternal debts in unpaid contributions forthe medical insurance and pensioncontributions of their ‘employees’. As aresult of the problems within thesecompanies, the contribution of industrial

production to GDP fell since the pre-warperiod to 22–23% in the first half of the2000s.

The contribution of agriculture to GDP hasalso decreased since 1995 (at least on thebasis of official statistics, which take noaccount of the informal sector), declining to11% by 2004. At the same time, since 1995there has been a constant increase intrading and service activities, amounting toa total contribution of 64% to GDP in 2004.The most rapidly developing sectors havebeen banking and financial services anddistribution, which were supported byforeign direct investment. Publicadministration and social services (such aseducation and health) also have animportant share.

The importance of the private sector hasincreased at a slow but constant paceduring the 2000s, from 38% of GDP in1999 to 50% in 2004. This increase ismainly a result of the privatisation ofexisting companies rather than green-fieldinvestment.

Privatisation process

The privatisation process started with‘quick and mass privatisation’4 (based onvoucher/certificate privatisation), whichfailed to have any significant impact oncompany performance. By the end of theprocess, the voucher/certificate privatisedcompanies had not obtained anyinvestment/investors or gained newmarkets, nor had they received anyimpetus in terms of innovation in productsand/or production methods. In practice theprivatisation processes led to a change inthe ownership structure of the companiesinvolved and redistributed around 50% ofstate ownership to the citizens of Bosniaand Herzegovina.

The second phase of privatisation involvedsmall and medium companies with only30% state-owned capital (the major shareof ownership was redistributed throughvouchers/certificates, and nowadaysmainly in the portfolios of privatisation

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3 A ‘labour only’ (LON) contract is a contract through which the (foreign) partner provides all raw materials anddesign for the production of the order.

4 Definition by Mr Zoran Dosen, Directory for Privatisation in Republika Srpska, 16 February 2005.

investment funds). Privatisation wascarried out by means of local tenders, andsome impact can be found on companieswho had actually been functional withpromising market prospects. As ofSeptember 2003, 76% of small-scalecompanies in the Federation of Bosnia andHerzegovina and 49% of those inRepublika Srpska had been sold5.

The privatisation of large state ‘strategic’companies that were over 50%state-owned (52 in Republika Srpska and56 in the Federation of Bosnia andHerzegovina) was carried out through aninternational tendering process. Althoughthe tender privatisation has attracted bothforeign and domestic investors – since theyare able to purchase from 51% to 100% ofthe enterprise capital, and gain control overthe future development of the enterprise6 –the process remains slow. This isdemonstrated by the fact that only 20 out ofthe 56 strategic enterprises have beenprivatised in the Federation of Bosnia andHerzegovina.

The development of the privatised largestate enterprises can be illustrated using anumber of positive examples. The ZenicaSteel Industry was recently reprivatisedfrom LNM Industry UK. New investmentwas made in an electro-arch furnace, butthe pre-war employment level of around24,000 workers will never be achievedagain: for the production of 2 million tons ofsteel the company will need around 4,000workers. The Birac Zvornik was privatisedby Uzdaroi Akcione Benderove, Lithuania,and they recently become a significantexporter of Bosnia and Herzegovina withthe reactivation of pre-war productioncapacity. A similar case is that of theKakanj cement factory privatized byHeidelberg Zement, Germany, and iron oreproducer Novi Rudnici Ljubija, Prijedor.The international technical assistancerestructuring project Post-PrivatisationEnterprise Restructuring Programme(PPERP)7, funded by the UK Department

for International Development (DFID),tackled around 30 large state-ownedcompanies and significantly contributed tomanagerial change, opening new marketsand in some cases supportingtechnological improvements.

SME8

development

Post-war small and medium-sizedenterprises (SME) started in 1995 withsmall-scale entrepreneurial activities. Theinternational donor community supportedthe expansion of the SME sector as themain vehicle for poverty reduction and localeconomic development. However, thedevelopment of the SME sector has beenmodest; its contribution to GDP remainslimited, and the number of SMEs is low inrelation to the population.

After 1995 most new SMEs in Bosnia andHerzegovina focused on trading (mainlythe distribution of imported goods) basedon delayed payment as a source offinancing. In the service sector, SMEs inBosnia and Herzegovina started with smallamounts of private capital and havedeveloped throughout the whole of thecountry during recent years. Unfortunately,many of them have remained small localcompanies with few employees. In additionto small and micro enterprises,development of SMEs has also occurredas a result of the privatisation of stateSMEs, where new investment is higher.

Some traditional production sectors mainlycomprise SMEs. Examples include theleather and textile sector, based on LONcontracts; the wood and furniture sector,based on local timber raw materials, basicsawmills and some new furnitureproduction companies satisfying localmarket needs; and the agro complex andfood production, based on few larger foodprocessors. More and more companies areapplying ISO standards of quality andcompeting on foreign markets.

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1. ECONOMIC SITUATION AND BACKGROUND

5 European Commission, ‘The Western Balkans in transition’, Directorate General for Economic and FinancialAffairs, December 2004.

6 Economic Policy Planning Unit (EPPU), ‘BiH The Economic Report 2004’, Chapter 6.2, 2004.

7 For more information see the website www.pperp.org

8 In Bosnia and Herzegovina the definition of SME does not follow the international classification standards.Any company up to 50 employees is considered an SME.

1.3 THE INFORMALECONOMY9

Like other transition economies, Bosniaand Herzegovina has experienced anincrease in the informal economy duringthe post-war period. The reasons for thedevelopment of the informal economy arevariable and complex. One is theincome-generation needs of individualswho have lost their jobs and/or cannot findemployment in the formal economy, andwho opt (or are obliged) to get involved insubsistence agriculture, petty trade orlow-value-added production activities.Other reasons are linked to savings onincome tax and social securitycontributions, compliance with health andsafety regulations and property rights.These are nurtured by the fact thattransitional economies such as Bosnia andHerzegovina generally have higher levelsof regulation, higher taxation on the formaleconomy, higher levels of bribery and aweak approach to the rule of law andenforcement. These features are evidentand acknowledged in Bosnia andHerzegovina. In the early stages of thetransition process, and in particularimmediately after the war (whichdismantled much of the formal economy),the unofficial activities helped people toavoid starvation and social upheaval.Attitudes remain ambivalent mainlybecause there is no social welfare safetynet, and the grey economy is often justifiedas being a rich source of businessstart-ups and job creation that willeventually lead to real jobs in the formaleconomy. However, in the medium andlonger term it has a negative impact on theeconomy and on economic and socialdevelopment, as formal businesses suffer

from unfair competition, public finances areundermined and individuals are sucked intoactivities that offer little security oropportunity for development, and in somecases are illegal.

Obtaining an indication of the scale of theinformal economy is not straightforward.Some attempts have been made, mostnotably by USAID/FSVC10. This piece ofresearch used internationally recognisedmethods of estimation – although all haveweaknesses – and defined thenon-observed economy as encompassingactivities unintentionally unrecorded, aswell as deliberate concealment ofproduction and informal production11, andcriminal production12. It concluded that in2003 the informal economy13 in Bosnia andHerzegovina was equal to one-third ofofficial GDP. Most underground activitytook place in transactions linked to realestate (equal to 12.4% of official GDP), inconstruction (equal to 7.5% of official GDP)and in agriculture (equal to 7% of officialGDP). The situation in the Federation ofBosnia and Herzegovina, where almost37% of GDP was in the informal sector,was significantly different from that inRepublika Srpska and Brčko District, wherethe informal economy accounted for almost21% of GDP. Overall the scale of theinformal economy in Bosnia andHerzegovina is around the average fortransition economies, and around twicethat of Western European countries. Itscurrent pervasiveness is incompatible inthe longer term with the development of asociety and economy based on principlesunderlying a modern market economy andthe rule of law. Since 2000 there havebeen signs that the size of the greyeconomy has reduced a little.

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9 For the purposes of this study the term ‘informal economy’ covers hidden production in registered enterprises,and production in unregistered and/or very small production units in all economic sectors.

10 Dell’Anno, R. and Piirisild, M., ‘Estimate of Non-Observed Economy in Bosnia and Herzegovina’, USAID,November 2004.

11 Informal production consists of sole proprietors, self-employed workers or small unincorporated enterprises.

12 Criminal production is the production of goods and provision of services, the sale, distribution or possessionof which is illegal.

13 The informal economy is called the shadow economy in the research report. Illegal activities (corruption andprostitution) accounted for around 4% and unrecorded (mainly failures in the statistical system) businessaround 15%.

2. TRENDS IN THE LABOURMARKET

2.1 POPULATION AND THESTRUCTURE OF THE LABOURFORCE

According to the 1991 Population Census,Bosnia and Herzegovina had a populationof 4.35 million. As a result of the war andinternal and external migration, thepopulation structure has changeddramatically. In 2003, the population ofBosnia and Herzegovina was around 3.8million14, 2.3 million in the Federation ofBosnia and Herzegovina and 1.5 million15

in Republika Srpska. However, nopopulation census has been carried outsince 1991, and population estimates in thetwo entities are uncertain, and to someextent politicised.

Bosnia and Herzegovina’s major ethnicgroups are Bosnian Muslims (or Bosniak),Serbs and Croats. According to thePopulation Census in 1991, Muslimsrepresented 44% of the population,

Serbs 31% and Croats 17%, with 6%defining themselves as Yugoslavs (peoplewith a mixed Muslim, Serb or Croatbackground). There were also a smallnumber of Roma in Bosnia andHerzegovina. Before the war, the differentethnic groups lived in concentrations thatwere very much scattered around theterritory of Bosnia and Herzegovina. Thelargest cities had mixed populations.

During the war approximately 2.2 millionpeople emigrated or were displaced. By theend of the war, most of the population inthe different areas controlled by the threeethnic groups belonged to that group.During the period 1996–2004,approximately 1.1 million people returnedto Bosnia and Herzegovina (from abroad)and/or returned to their former homes(550,000 have returned to areas wheretheir group is in the majority, and 450,000to areas where they are in theminority)16.

15

2

14 Statistics Agency of Bosnia and Herzegovina, ‘Demography’, Thematic Bulletin, 2005.

15 Republika Srpska Institute of Statistics, ‘Demographic Statistics’, Statistical Bulletin No 8, 2005.

16 UNHCR, ‘Update on Conditions for Return to Bosnia and Herzegovina’, 2005.

2.2 EMPLOYMENTDEVELOPMENTS ANDSTRUCTURAL SHIFTS ANDCHANGES

The process of change in Bosnia andHerzegovina has been slower and morepainful than in most other transitioncountries. As a result, several distortionshave been created. In the absence ofsignificant new opportunities, workers withformal employment contracts in oldenterprises cling to their workplaces, evenif the jobs are unpaid and offer nolong-term prospects. Many others havebeen caught in the middle of this slowtransition and are performing differenttemporary jobs when opportunities arise,often in the informal economy. Thistransitional labour market is difficult toanalyse using standard data sources.However, in Bosnia and Herzegovina theexistence of the Household Survey PanelSeries (HSPS), which includes informationon a large number of labour marketvariables for more than 3,000 householdsat different points of time in the period2001–04, gives an opportunity to betterunderstand the ongoing labour marketchanges.

In 2004 the employment rate was 44.3% inBosnia and Herzegovina. This is muchlower than in EU member states, but isalso significantly lower than in most otherformer Yugoslav republics. Totalemployment increased by almost4 percentage points between 2001 and2004 according to the HSPS. However, thispositive trend has occurred only in theFederation of Bosnia and Herzegovina,

where total employment increased by morethan 6 percentage points. In RepublikaSrpska, employment has increased onlyslightly.

Economic restructuring and the labour

market in Bosnia and Herzegovina

Formal employment, as recorded by thestatistical offices through regular surveys ofregistered enterprises and organisations(henceforth called the EstablishmentSurvey), has been stagnant during thepost-war period. In the Federation ofBosnia and Herzegovina, registeredemployment has decreased continuouslyduring the past five-year period. However,these data are sensitive to changes in datacollection methods and should beinterpreted with care. Nevertheless theygive a useful orientation of the respectiveshares and the employment trends indifferent sectors of economic activity.

According to the Establishment Survey, theshare of agriculture is low in both entities,and is decreasing. However, most of theemployment in the agricultural sector isinformal, and the real importance ofagriculture for employment is much greaterthan is suggested by the figures for formalemployment. According to the HSPS,which covers both formal and informalemployment, the share of employment inagriculture was around 20% in Bosnia andHerzegovina (16% in the Federation ofBosnia and Herzegovina and 34% inRepublika Srpska). Positive developmentsin formal employment can be seen only inthe services sector in Republika Srpska.

16


Table 1: Basic labour market indicators 2001–04 (based on the working-age

population 15–64 years)

Bosnia and

Herzegovina

Federation of

Bosnia and

Herzegovina

Republika

Srpska

2001 2002 2004 2001 2002 2004 2001 2002 2004

Activity rate 48.4 53.2 57.0 43.2 47.7 53.2 55.3 60.5 61.8

Employment rate 40.6 42.0 44.3 35.9 37.8 42.1 46.8 44.7 47.1

Unemployment rate 16.1 21.1 22.1 16.9 21.0 20.9 15.4 21.2 23.6

Source: Own calculations from Household Survey Panel Series data

The privatisation and restructuring processhas so far not led to a revival for most of theformer industrial base of Bosnia andHerzegovina. Many of the old largerenterprises are not functioning on anysignificant scale. Several have noproduction at all. However, the process oflaying off workers from these companieshas been slow. Many workers are clinging tothese enterprises even if they are notreceiving any salary, for fear of losingentitlement rights to pensions and othersocial benefits. In order to earn income,these individuals work in the informaleconomy. The existing management teamsare often weak and are not focusing theirefforts on reviving the enterprises. Theyoften accept this situation or do little tochange it. Some changes in labourlegislation in 2000 made it easier andcheaper to lay off redundant workers, andthe number remaining is decreasing.Nevertheless the total number of individualsin this situation is substantial and creates

problems in the labour market, as thoseaffected are reluctant to accept a newformal job in case they lose acquired rights(see Annex 1 for a case study on this issue).

Employment trends

Significant changes in the labour markettook place during the period 2001–04. Thisindicates that the static post-war labourmarket is about to change17. Unproductivejobs in old large-scale industries are beingphased out and new jobs are being createdin sectors such as agriculture, trade andservices. However, many of these new jobsare likely to be insecure jobs in the informalsector.

The employment rate for men issignificantly higher than for women (53.9%vs. 27.6%). In 2001 the employment rate inthe Federation of Bosnia and Herzegovinawas significantly lower than in RepublikaSrpska for both men and women. However,

17

2. TRENDS IN THE LABOUR MARKET

Table 2: Formal employment by sector of economic activity (000s)

1999 2000 2001 2002 2003 2004

Changes

1999–

2004 (%)

Bosnia and Herzegovina

Total 628 641 627 na 624 621 -1.1

Agriculture 21 21 21 na 21 20 -4.8

Manufacturing 255 255 247 na 234 227 -11.0

Services 351 365 359 na 369 375 6.8

Federation of Bosnia and Herzegovina

Total 408 413 407 394 387 385 -5.6

Agriculture 10 10 11 10 10 10 0.0

Manufacturing 161 161 156 151 145 142 -11.8

Services 237 241 241 231 231 232 2.1

Republika Srpska

Total 221 228 220 na 236 236 6.8

Agriculture 11 10 10 na 10 9 -18.2

Manufacturing 96 94 92 na 89 84 -12.5

Services 114 123 118 na 138 143 25.4

na: not available

Source: World Bank (2002); Federal Office of Statistics (2004); Republika Srpska Institute for Statistics

17 See World Bank (2002) for a discussion on worker flows in Bosnia and Herzegovina in the 1990s.

the employment rate for men in theFederation has been catching up between2001 and 2004, and by 2004 wasapproximately the same in the two entities.It is not clear why this should be the case;possible explanations include the morerapid increase in wages in the RepublikaSrpska over recent years and theconcentration of foreign consumers ofservices in Sarajevo18. The employmentrate for women is still much lower in theFederation of Bosnia and Herzegovina.The labour force participation rate ofwomen is 37.5% in the Federation19. Thisis very low compared to both EU memberstates (61.2%20) and Republika Srpska(47.5%21), though it has increasedmarkedly over the past five years, mainlyas a result of a substantial increase in theactivity rate for females in the 25–34 agegroup.

The creation of new jobs in the formalsector is slow, and this has a negativeimpact on labour market prospects foryoung labour market entrants. However,the employment rate for younger agegroups started to improve during the period2001–04, in particular in the Federation ofBosnia and Herzegovina. The employmentrate increased by more than 3 percentagepoints in both the Federation andRepublika Srpska for the age group 15–24years. In 2004 the overall employment ratefor this age group was 22.4%. This is stillmuch lower than the EU average(36.7%22), but higher than, for example, the

rate in Serbia (18%23). In the Federation ofBosnia and Herzegovina the employmentrate also increased significantly for the agegroup 25–34 years. The employmenttrends for individuals aged 30–64 years oldhave been less positive, indicating anincreased pace of restructuring.

Large differences exist in employmentrates for groups with different levels ofeducational attainment. The employmentrate is 31.0% for individuals with lowerlevels of education, 55.1% for those withmedium levels and 63.7% for those withhigher levels. Levels of education areimportant in the competition for jobs in theformal labour market in Bosnia andHerzegovina. In the period 2001–04, smalldifferences are seen in the employmenttrends for groups with different levels ofeducational attainment.

The proportion of employment that is in theinformal sector is high. According to theHSPS, informal employment is estimated tohave represented 39.5% of totalemployment in 200424. The share ofinformal employment is higher in RepublikaSrpska than in the Federation of Bosniaand Herzegovina (44.4% vs. 35.4%). In theFederation, the number of both formal(mainly in service industries) and informaljobs increased between 2001 and 2004,while in Republika Srpska the number offormal jobs decreased. Overall, a large partof the growth in employment is as a resultof an increase in informal employment.

18


18 According to estimates of the UNDP Information-Communication Technologies Forum, foreign consumers ofservices spend a total of around BAM 3 million daily in Sarajevo alone.

19 Own calculations from the Household Survey Panel Series.

20 European Commission, ‘Employment in Europe 2004’, Directorate General for Employment and SocialAffairs, 2004.

21 Own calculations from the Household Survey Panel Series.

22 European Commission, ‘Employment in Europe 2004’, Directorate General for Employment and SocialAffairs, 2004.

23 ETF (2005).

24 The definition of the informal sector used follows World Bank (2002) and includes all those working as unpaidfamily members, farmers on their own farms and in other activities (such as sales of agricultural and otherproducts) and all others who do not receive pension insurance from their employer, except those working inthe public sector or in international organisations.

19


Table 3: Employment rates (%) by different demographic groups 2001–04 in Bosnia

and Herzegovina (based on the working-age population 15–64 years)

2001 2002 2003 2004


Men 53.9 56.0 55.5 57.0

Women 27.6 28.3 31.1 31.7

15–24 19.1 18.3 22.0 22.4

25–34 47.8 48.2 51.7 54.4

35–44 58.5 61.2 58.6 57.3

45–54 54.0 56.9 57.3 56.6

55–64 22.0 26.7 25.2 31.4

Lower education 29.1 30.8 30.1 31.0

Medium education 49.1 51.6 53.7 55.1

Higher education 55.5 58.2 61.6 63.7


Men 48.8 54.5 54.3 57.5

Women 23.8 22.1 26.8 27.7

15–24 16.6 16.2 19.9 19.7

25–34 42.4 42.8 48.3 54.6

35–44 52.9 55.5 55.0 53.7

45–54 48.6 53.1 55.6 56.1

55–64 17.1 20.2 21.0 27.7




Republika Srpska

Men 60.7 58.0 57.1 56.5

Women 33.0 36.8 37.0 37.3

15–24 22.6 21.1 25.1 26.5

25–34 55.1 55.3 56.1 54.1

35–44 66.6 67.0 63.8 63.0

45–54 60.2 61.4 59.2 57.0

55–64 28.0 35.5 30.5 33.5




Source: Own calculations from Household Survey Panel Series

Labour mobility and attachment to the

labour market

The HSPS provides information on thelabour market activity of individuals in fourconsecutive years. A comparison of suchactivity at the four different points in timecreates a picture of the labour marketdynamics in Bosnia and Herzegovina andthe attachment to the labour market fordifferent individuals. Table 5 shows themobility between formal employment,informal employment, unemployment andnon-activity between 2001, 2002 and 2004.

The worker mobility rate out of and intoformal employment is still relatively low.Some 15% of all those in formalemployment in 2001 do not have a formaljob one year later, while 18% of all formalworkers in 2002 found their job in theyear25 (see Table 5)26.

However, the mobility rate out of and intoinformal employment is much higher.Around 50% of all workers in informalemployment leave or enter informalemployment in a year. In Republika

Srpska, 59.4% of those employedinformally in 2001 are also employedinformally in 2002. This is much higherthan in the Federation of Bosnia andHerzegovina, where 39.5% remaininformally employed in both years. Thus,jobs in the informal economy in RepublikaSrpska seem to be more permanent (orprevalent) than in the Federation. Flowsbetween employment, unemployment andnon-participation in Bosnia andHerzegovina are significant. According tothe HSPS, 30% of the working-agepopulation is in a different labour marketstate in 2002 than in 2001. This is higherthan in many transition economies, butlower than in most mature marketeconomies. The labour mobility is higher inRepublika Srpska than in the Federation(33% vs. 28%). However, in Bosnia andHerzegovina, relatively high labour mobilityis not an indication of a fully functioninglabour market. Instead, the main reason forthe high labour mobility is likely to be thescale and pervasiveness of the informaleconomy, which is characterised mainly byrepeated irregular jobs.

20


Table 4: Formal and informal employment in Bosnia and Herzegovina (% of

working-age population 15–64 years)

2001 2002 2003 2004


Formal employment 26.4 27.1 27.5 26.8

Informal employment 14.2 15.0 15.7 17.5

Share of informal employment 35.0 35.7 36.3 39.5





Republika Srpska





25 Some 15.1% of all formally employed in 2002 where either informally employed or unemployed or inactive in2001 but they found a job within the year. This implies that 18% of all employed in 2002 have found their jobwithin the year.

26 These numbers are not fully comparable with the numbers reported by World Bank (2002) as they do notinclude mobility between two different formal jobs.

As shown in Table 6, only 19.3% of theworking-age population had a formal job onall four survey occasions, while 28.9% ofthe working-age population had a job(formal or informal) on all four surveyoccasions. In other words, less thanone-third of the individuals working, at leastoccasionally, had a permanent formal joband less than half had a permanent job ofany sort (formal or informal). In addition,many of these are likely to be employed inenterprises that do not have any productionor that do not have any future. Thus, only asmall proportion of the workers in Bosniaand Herzegovina have a secure position onthe labour market. As shown in Table 6,62.4% of the working-age population hadsome kind of employment in at least one ofthe years 2001–04.

The total number of employed people isincreasing. However, of the jobs created in

the years 2001–04, 60% were in theinformal economy27; only 21% were in theprivate formal sector. No major differencesexist between the two entities. The informalsector does create employment, but it isoften of poor quality, seasonal, temporaryor occasional and low paid, withunregulated health and safety conditions.

2.3 INACTIVITY,UNEMPLOYMENT AND SOCIALEXCLUSION

Unemployment in the context of Bosniaand Herzegovina is a complex issue toanalyse. Given the difficult overalleconomic situation and the inadequacy ofthe existing public social safety net, mostpeople need to do something to earn aliving; few can afford to be openly andgenuinely unemployed. Still, according to

21


Table 5: Labour mobility between 2001, 2002 and 2004 in Bosnia and Herzegovina

Activity in 2002 Activity in 2004

FE IE U N FE IE U N


Formally employed 84.9 4.7 3.3 7.1 76.0 7.6 6.0 10.3

Informally employed 13.9 51.6 13.4 21.1 18.7 48.8 12.2 20.3

Unemployed 12.3 25.3 32.4 29.9 19.9 25.3 24.4 30.4

Non-participation 4.6 10.2 12.9 72.3 8.4 13.2 14.3 64.2




Unemployed 11.6 20.8 33.2 34.4 19.5 26.1 24.5 29.9


Republika Srpska



Unemployed 13.2 31.0 31.5 24.4 20.3 24.4 24.4 31.0


FE: Formally employed; IE: Informally employed; U: Unemployed; N: Non-participation


Note: The numbers in the boxes display the labour market activity in 2002 and 2004 by labour market activity in

2001, for the working-age population (15–64 years). This shows the share of the 2001 formally employed

population who are formally employed, informally employed, unemployed or non-participating in 2002 and 2004.

Act

ivity

2001

Act

ivity

2001

Act

ivity

2001

27 The creation of new jobs is calculated using the number of workers employed (formally or informally) in yeart+1 who were not employed (or in a different kind of job: formal or informal) in year t.

the HSPS, the unemployment rate was ashigh as 22.1% in 2004. This is a very largenumber for a transition country with only alimited public social safety net.

The unemployment rate increased by6 percentage points between 2001 and2004. Proportionately more women thanmen were unemployed (24.1% vs. 21.1%).Unemployment follows an expectedpattern with respect to educationalattainment. The unemployment rate ishigher for individuals with primary andsecondary education and lower forindividuals with higher education.Graduates from higher education have agreater chance of finding a job thansecondary education graduates.Sometimes they are competing for thesame jobs, and a higher education degree

might often be demanded for jobs thatcould be satisfactorily performed bypeople with lesser levels of education. Theunemployment rate is especially high forthe youngest age groups. In 2004 morethan 40% of the labour force between15–24 years old was unemployed.However, unemployment is alsosignificant for older age groups. It is notless than 14% of the labour force for anyage group between 15–54 years. Thus,unemployment is not exclusively a labourmarket entry problem, although it is mostsevere for entrants.

The number of people registered asunemployed with the employment servicesis much higher than the number of thoseunemployed according to the HSPS (seeTable 8).

22


Table 6: Participation in the labour market (% of the working-age population)

% of working-age population

Employed in 2001, 2002, 2003 or 2004 62.4

Employed in 2001, 2002, 2003 and 2004 28.9

Formally employed in 2001, 2002, 2003 and 2004 19.3

Unemployed in 2001, 2002 or 2004 24.8

Unemployed in 2001, 2002 and 2004 1.2


Table 7: Unemployment rates by different demographic groups from HSPS 2001–04

2001 2002 2004

Bosnia and Herzegovina 16.1 21.1 22.1

Federation of Bosnia and Herzegovina 16.9 21.0 20.9

Republika Srpska 15.4 21.2 23.6

Men 15.2 18.5 21.1

Women 17.9 25.6 24.1

15–24 38.4 47.4 42.4

25–34 19.0 27.3 26.5

35–44 11.1 14.9 19.2

45–54 9.9 10.8 14.5

55–64 5.8 7.8 7.8

Lower education 18.3 22.9 23.8

Medium education 16.9 25.9 23.1

Higher education 6.7 9.3 12.8

Source: Own calculation from HSPS using a question which asked respondents whether they were registered as

unemployed28

To be recorded as unemployed followingthe ILO standard definitions used in theHSPS, a person must fulfil three conditions:(i) to have not worked one hour for payduring a reference week; (ii) to havesearched actively for work during the pastmonth; and (iii) to be available for workduring the following two weeks. Many ofthose who are registered unemployedeither work in the informal sector or are notactively searching for a job and aretherefore not recorded as unemployed inthe HSPS. On the occasion of the 2004survey, 28% of those registered asunemployed were working in the informaleconomy. In addition, it is important to notethat not all those who are unemployedaccording to the HSPS actually registerwith the employment services. In 2004 onlyaround 70% of those unemployedaccording to the HSPS were alsoregistered as unemployed. The remaining30% are mostly young people. Thereasons for this are not altogether clear,but could include the absence of incentive:most young people would be covered forhealth insurance by an adult familymember.

The structure of the registered unemployedpopulation corresponds approximately tothe results from the HSPS. However, thenumber of those registered unemployed inthe medium-aged age groups 25–34 and35–44 years is higher than in the HSPSresults. A very large number of those whoare registered unemployed in these agegroups are either inactive or working in theinformal sector.

According to statistics from the publicemployment services, long-termunemployment is very high. However, asregistration as unemployed is oftencombined with work in the informal sector,movement between unemployment andinformal employment is not adequatelycaptured by these statistics. According tothe HSPS, a significant number of workersare occasionally unemployed; 24.8% of theworking-age population were unemployedin 2001, 2002 or 2004 (see Table 6)29.However, only 1.2% of the working-agepopulation were unemployed on all thesethree occasions, indicating that long-termcontinuous unemployment is rare. Some37.6% of all those unemployed in the 2001survey had a job (formal or informal) oneyear later.

2.4 QUALIFICATION LEVELSOF THE WORKFORCE ANDSKILL MISMATCHES

Before the war Bosnia and Herzegovinabenefited from a rather well-educatedpopulation and a qualified labour force thatresponded to the requirements of theeconomic structure of the country. However,during and after the war the displacement oflarge numbers of people and the destructionof the school infrastructure (around 70% ofthe school infrastructure was destroyed orrequisitioned) obliged a large number ofyoung people to discontinue their education,and lowered the educational attainmentlevels of the population who have enteredthe labour market over the past decade.

23


Table 8: Registered unemployment rate (%) 2001–04

2001 2002 2003 2004

Bosnia and Herzegovina 38.5 39.1 37.1 39.9

Federation of Bosnia and Herzegovina 41.0 42.9 39.6 40.6

Republika Srpska 36.1 35.3 34.5 39.2

28 These numbers are similar to the official numbers on unemployment as presented by the EmploymentService in Bosnia and Herzegovina, but have the advantage that several dimensions of the behaviour ofthose registered as unemployed can be analysed.

29 No information on unemployment is available for 2003 in the HSPS.

Furthermore, the war and the lack ofemployment opportunities led a largenumber of well-educated people to leavethe country, thus creating a bias in theremaining population towards lower levelsof education. On the basis of the LivingStandards Measurement Survey (LSMS)2002, the educational attainment levels ofthe population (Table 9) represented adisadvantage in relation to the EU average,as there is a higher percentage of peoplewith low levels of educational attainmentand a lower percentage with higher levels.The gender gap in educational attainmentis also obvious.

Apart from the educational attainmentlevels of the population, the quality ofactual skills and competences of the labourforce and their adequacy to support theeconomic development of the country isunknown, as no specific surveys areavailable. Nevertheless, we can assumethat there has been a relative deskilling ofthe labour force during the past decade aseconomic activity (even in previouslytechnologically well-advanced enterprisessuch as the military and textile industries)has been significantly downsized. Since alarge number of skilled people working inthese enterprises have had to takelow-value-added jobs, often in the informalsector or in agriculture, forincome-generation purposes, their previousskills have not been upgraded or updated.

With regard to skill mismatches, evidencefrom the first survey on labour market skillneeds undertaken by the EU-fundedCARDS VET reform programme in 2002

demonstrates that technical skill gaps arenot pronounced. On the other hand,employers underline the serious lack of softskills, such as team work and positiveattitudes to work. Similar results werereported by the Employment Service’slabour market survey in Republika Srpskaand the Federation of Bosnia andHerzegovina in 2004, namely that 31.5% ofthe enterprises interviewed requiredworkplace skills, and only 10% requiredspecific skills and knowledge. Thesefindings are quite common in countries atthe beginning of the economic transitionprocess. Findings from other countries inthe region are similar.

During the interviews with localstakeholders the lack of managerial skillswas often identified as a major impedimentto the improvement of the enterprises, eventhose that were privatised. An example ofthe importance of good managerial skillsfor enterprise development was theBosnalijek pharmaceutical company inSarajevo, which has been restructured andis developing. Another example is themanagement team of the aluminium profilecompany Alpro Vlasenica, who led theprocess of privatisation of the companythat was eventually purchased by ALUMILGreece in 2003.

Skill formation for young people: the

initial education and training system

Despite the fact that decisions about thestructure and content of the educationsystem are taken by the entities (RepublikaSrpska and Brčko District) and by each

24


Table 9: Educational attainment levels of the population aged 25–65 years for 2002 (%)

Low Medium High

Bosnia and Herzegovina – Total 41.8 47.4 10.8

� Men 30.6 56.8 12.6

� Women 53 38 9

EU-15 35 43 22

New member states 19 66 15

Low: accomplished primary education or less (ISCED levels 0–2)

Medium: accomplished secondary or post-secondary non-tertiary education (ISCED levels 3 or 4)

High: accomplished tertiary education (ISCED levels 5 or 6)

Source: LSMS, own calculations, Eurostat

canton in the Federation of Bosnia andHerzegovina, the education system inBosnia and Herzegovina has a commonstructure.

� Primary education consists of eightcompulsory years (until recently nineyears) organised in two stages of fouryears each for children 6/7–14 years old(plus one preparatory).

� High school (secondary) educationconsists of three to four years, split into(i) general education providing accessto university; (ii) four-year technicaleducation preparing individuals for thelabour market and providing anopportunity for access to university; and(iii) three-year vocational education.There has been an increase inparticipation in general education and inthe four-year technical education, whileparticipation in the three-year vocationaleducation is decreasing. In theacademic year 2004/05, 25% of thechildren in secondary educationparticipated in general education and45% in four-year technical education.

The actual youth education participationrates are not known, as the real referencepopulation is unclear. Estimates fromdifferent studies give different results (seeTable 10). However, all estimatesdemonstrate a gap between on the onehand the participation of children andyoung people in education, and on theother hand the EU standards for fullparticipation in primary education and thetarget of 80% of young people completingsecondary-level education. According toUNDP30, around 4% of children do notenrol in primary education, and around31% of primary school graduates do notcontinue their studies to secondaryeducation. These children come fromdisadvantaged socioeconomicbackgrounds, and hence are exposed tothe risk of social exclusion. According tothe LSMS data (ETF calculations), one ofthe main reasons for not continuing schoolis the financial one (32.3% of15–19-year-olds questioned in the surveystated that this was the reason why they

stopped attending school). However, thenon-attractiveness of schooling was thesecond most important reason (17.4% ofrespondents referred to this). On thepositive side, according to HSPS data (ETFcalculations) for the years 2001–04, theparticipation rate of 15–19-year-oldsincreased from 69% to 78.5%, and for20–24-year-olds from 27.5% to 30%.

On the other hand, a growing number ofyoung people are entering university (acommon trend in other countries of theregion); participation in higher education iscomparable with EU levels, and far abovelevels in other countries in the region. Thisdemonstrates a social demand for highereducation that can be explained by thebetter employment prospects that highereducation offers (see evidence on higheremployment rates and lowerunemployment rates in Section 2.2), orsimply by the fact that some young peopleprefer to continue their education ratherthan becoming unemployed.

Access to education and training in termsof school infrastructure availability andquality is considered to be satisfactory inBosnia and Herzegovina31. In fact, despitethe reduction in the absolute numbers ofpupils and students since the mid 1990s,the number of schools has increased,which may imply the need for somerationalisation of the school network. Onthe other hand, the quality of teaching andlearning is low, and consequently theeducational outcomes of the students arepoor at all levels and types of education(primary and secondary general, technicaland vocational). Both curricula andteachers are considered to be below thestandards of a modern European educationsystem. For vocational and technicaleducation in particular, parents, studentsand employers have a negative perceptionof the narrowness of the knowledge thatchildren acquire and the inadequacy andinappropriateness of the skills they developfor the labour market. The lack of practicaltraining during the studies (although this isforeseen as part of the curriculum, it eitherdoes not actually take place, or the

25


30 UNDP, ‘MDG Update report for Bosnia and Herzegovina – PRSP, Europe and Beyond’, 2004.

31 ‘Socio-economic audits and SWOT analyses of 5 economic regions in BiH’, prepared with the assistance ofthe EU funded Regional Economic Development Project (www.eured-bih.org).

conditions under which it takes place areinappropriate) is considered by severalactors (including the Ministry of Educationand employers’ organisation) as a gap inthe preparation of young people for thelabour market. However, more importantlyit seems that the real gap is the lack ofteaching and learning methodologies thatcan inculcate core competences (such asentrepreneurship, innovation, team workand problem solving) in young people andenable them to cope with an uncertainlabour market. Concerns about the qualityof education offered by universities arealso frequently expressed.

Skill formation for adults: continuing or

adult training

There is a multiplicity of training providersin Bosnia and Herzegovina, includingsecondary schools offering second-chancepart-time programmes for adults;universities providing courses inmanagement skills, or other services forenterprise development; a limited numberof ‘workers’ universities’ that have survivedand become NGOs; three training centres,one in Sarajevo for ICT, one in Goradze formetal workers, and one in Bihac forconstruction occupations; the Chamber ofCommerce, mainly providing policy-related

training to its members (i.e. training onapplying national and internationalregulations), but also training for othertypes of skills, mainly funded by donors;and private (profit and non-profit) providersoffering courses in entrepreneurial skills,ICT, foreign languages andoccupation-related training for specificpopulation groups (such as demobilisedsoldiers, and disadvantaged andvulnerable groups), mainly funded throughdonor projects. With the exception of somespecific cases of developing firms (forexample the pharmaceutical companyBosnalijek), enterprises on the whole donot provide training to their employees,since they generally lack any strategic orlong-term view of the skill development oftheir workforces and subsequent humanresource development (HRD) plans. Finallythe employment services fund trainingcourses as part of their active labourmarket measures, and subsidiseemployment for higher educationgraduates with the aim of making theirskills more adaptable to the needs ofenterprises (although the primary objectiveof this measure is employment supportrather than the training opportunity itself).

However, there is a serious lack of demandfor training and skills upgrading. Interviews

26


Table 10: Participation of young people in education and training in 2000/01

Source Estimate (%)

Net enrolment inprimary education

BiH Human Resource Development 2002 97.0

WB Poverty Assessment 2003 95.0

BiH From Donor Dependency to FiscalSustainability, ECSPE, 2002 92.8

LSMS 98.9

Enrolment rate insecondary education

BiH Human Resource Development 2002 56.8


LSMS 68.3

University enrolmentrate

BiH NHDR 2002 19.8


LSMS 23.0

Source: EPPU, ‘Bosnia and Herzegovina Medium Term Development Strategy (Poverty Reduction Strategy

Paper 2004–07)’, March 2004

with training providers and the chambershave demonstrated that demand fortraining on the part of enterprises is quitelimited, and is mostly policy related (forexample when a new regulation isintroduced). This is mainly because of(i) the state of the economy, which doesnot yet provide (high-level skill) jobs; (ii) thelack of recognition of the importance ofskills and training by both individuals andenterprises; and (iii) the lack of policy forskill development at government level.

In this situation there is a risk that Bosniaand Herzegovina will become trapped in avicious circle of low-skills–low-value-addedeconomy.

2.5 MAIN LABOUR MARKETCHALLENGES

As a result of the break-up of Yugoslavia,the war and economic reforms, the oldeconomic structure and patterns ofemployment in Bosnia and Herzegovinahave been challenged to their foundations.Since the Dayton agreement in 1995, themain focus of policy in Bosnia andHerzegovina has been on maintainingpeace and a stable political environment,and to initiate a process of nation-building.In this context, restructuring the economyand the development of more efficientgovernance have been secondary issues.The established governance system, withseveral different institutions at differentlevels, has remained intact, despite notbeing conducive to effective economicreforms.

New entrants and those who have lost theirformer jobs have great difficulty in findingnew employment in the formal economy.Many of those with employment contractsare without work or pay, or are under thethreat of redundancy (and sometimesunwilling to take a new job because theyfear they will lose pension and other socialinsurance rights); many work informally.Taken together, the weak attachment tothe labour market, the high number ofchanges in employment status revealed bythe HSPS, and the scale of the informaleconomy all point to a situation in which thenormal distinctions are blurred. The

substantial flows in the labour market areprimarily symptoms of financial insecurityfor many people of working age, regardlessof their employment status.

As a substantial number of largeenterprises are still in the restructuringphase, the pressure on the labour marketis likely to increase further. The destructionof old industrial jobs has not been offset byincreased job creation in growing andnewly created enterprises. So far theinformal economy, the agricultural sectorand to a certain extent the service sectorhave absorbed laid-off workers and labourmarket entrants.

Job destruction and insufficient job creationin the formal sector have increasedunemployment to high levels. However, thefocus on unemployment should not hidethe fact that an increasing proportion of thepopulation have no attachment to theformal labour market, and move in and outof different forms of temporaryemployment, unemployment and inactivity.Vulnerable population groups are mainlythose with low or medium levels ofqualification and outdated skills, with youngpeople being primarily exposed.

Although the lack of jobs is the greatestchallenge during transition, it is not the onlychallenge, since there are deficiencies inthe supply side of the labour market.Supply-side deficiencies are less apparentat this stage of development of theeconomy of Bosnia and Herzegovina, andare overshadowed by the aggregate lack ofjobs and unemployment. But they are noless real. Only a small proportion of theworking-age population, whether employed(in private or large public enterprises,SMEs or the informal sector) orunemployed, currently have an opportunityto upgrade, update or change their skillsand develop proper attitudes to work. Atthe same time young people are enteringthe labour market with inappropriatequalifications and are ill prepared to copesuccessfully with shifting demands for newand additional skills. Furthermore, thepopulation has experienced a significantdepletion of skills during recent decades.These issues need to be addressed. Avibrant and successful market economy

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with better and more jobs will notmaterialise in the absence of a flexible,adaptable, entrepreneurial and competitivelabour force. A well-trained and motivatedlabour force with the right skills andattitudes, and opportunities for individualsto make the best use of their skills andtalents are key ingredients for achievingthe modern, resilient economy that thegovernment of Bosnia and Herzegovinawants.

Taking the above into account it can beconcluded that Bosnia and Herzegovinacurrently faces three main kinds ofchallenge.

Increasing the adaptability of workers

and enterprises

The overall challenge for the country’seconomy and labour market is to establishthe conditions for faster economic andemployment growth through the creation ofa business-conductive environment, therapid restructuring of old industrialenterprises and the further development ofSMEs (including both start-ups and thegrowth of existing SMEs). Anotherchallenge is to promote a regulatory andpolicy framework that assists the efficientreallocation of labour from old enterprisesto new and growing businesses and to newforms of employment. This also includesthe challenge of finding the right balance interms of supporting workers affected by therestructuring process without impeding theoperation of the labour market ordisadvantaging others (i.e. young people orlong-term unemployed individuals). Finally,the adaptability of the labour force needs tobe further encouraged through theprovision of appropriate training, whileissues that discourage flexibility must beaddressed.

Attracting more people to enter and

remain in the labour market: making

work a real option for all

The labour market participation rates inBosnia and Herzegovina are much lowerthan the EU average, and even than the

rates for other countries in the region.Women and young people in particular arethe two groups who lag behind. Thisdeprives the country’s economy of humanresources that are essential for itseconomic development. Accordingly it isnecessary to remove barriers that impedethe entrance of those population groupsinto (formal) employment. Moreover, giventhe high level of workers who are in theinformal economy, or who have weakattachment to the formal labour market andmove between different kinds of job whenopportunities arise, the labour market inBosnia and Herzegovina needs to increaseformal employment levels and bring peoplefrom the informal sector into the formalsector through activation policies based ona proper balance between active andpassive measures alongside effectivelabour inspection and taxation policies.

Investing more and more effectively in

human capital and lifelong learning

The final challenge is to ensure theimprovement of the quality of the labourforce and the development of skills for thepresent and future labour market. Thisnecessitates the improvement of the qualityof the education system at all levels(including vocational education andtraining), and an increase in theparticipation of young people in educationand training, with particular emphasis onthe population groups who lag behind.Investment must also be made inmanagerial and entrepreneurial skills, inorder to better achieve the economicrestructuring of privatised enterprises.Finally, the population must be madeaware that skills matter for economicdevelopment. Proactive education andtraining policies, a lifelong learninginfrastructure and a better skilledpopulation are required for (foreign)investment, particularly in the current worldclimate.

The following chapter will review policiesdeveloped to address the challengesidentified above, and will identify gaps andrecommendations for further action.

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3. REVIEW OF POLICIES,AND LEGISLATIVE ANDINSTITUTIONALFRAMEWORKS FORADDRESSING LABOURMARKET CHALLENGES

3.1 EMPLOYMENT POLICIESAND GOVERNANCE

3.1.1 EMPLOYMENT POLICIESAS PART OF THE OVERALLPOLICY AGENDA

The most comprehensive encapsulation ofthe overall policy agenda is contained inthe Bosnia and Herzegovina Medium TermDevelopment Strategy (Poverty ReductionStrategy Paper 2004–07). The strategy iswide-ranging, and sets out priorities andgoals. Implementation of labour marketreform is a specific priority within thecontext of accelerating the growth of theprivate sector. Although not explicitlystated, such reform is necessary to supportthe establishment of a functioning marketeconomy, which is a strategic goal. Thestrategy recognises the need to speed up

the implementation of structural reformsand acknowledges that this may cause joblosses in the short term. It calls upon alllevels of government to take economicmeasures to prevent an increase in currentpoverty levels.

Specific issues relevant to the labourmarket have been placed within the widercontext of the development strategy. Theseissues include discrimination, labourmobility, institutional capacity andperformance, the right to health insurance,the informal economy and the developmentof the vocational education system. Thesetopics are regarded as integral to balanceddevelopment and to the process ofaccession to the EU.

The Education Reform Agenda ‘A messageto the people of Bosnia and Herzegovina’,which was agreed between the authorities

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3

of Bosnia and Herzegovina (the educationministries and the Ministry for HumanRights and Refugees) and the internationalcommunity on 21 November 2002, links thereform of education to economicdevelopment and labour market needs.The agenda also identifies the need toupdate curricula regularly to matchchanging market requirements identifiedand monitored through labour marketinformation systems.

The SME strategy has as one of its mainoutcomes an increase in employment, aswell as a reduction in the grey economy. Italso calls for the reform of the taxationsystem, which it regards as incoherent,poorly enforced and an invitation to join thegrey economy.

The privatisation programme has put jobprotection at the centre of its objectivesthroughout the process. This has meantthat new owners have been required tomaintain at least the same level ofemployment as at the point of privatisationfor a minimum period of three years. Thishas delayed restructuring and the creationof new sustainable jobs, and has put astrain on company solvency.

Assessment

There is clear recognition of the importanceof employment in the wider economic anddevelopment strategy. Employment isrecognised in a number of importantdifferent contexts, namely SMEdevelopment, education reforms andpoverty strategy. The Poverty ReductionStrategy Paper (2002–04; 2004–07),signed by the Council of Ministers, clearlyalludes to the importance of labour marketreform in the fight against poverty. This isnot to say that labour market issues arebeing successfully addressed, nor thatrelevant employment policies have beendeveloped and translated into the kind ofoperational detail required forimplementation. Indeed, while there are anumber of themes (creating more jobs andreducing the grey economy), there is nooverarching employment strategy or policyat state or entity level with clear aims andobjectives that helps direct the priorities ofthe labour market institutions and informs

the plans of other relevant areas ofgovernment. These questions areexamined in the subsequent parts of thisreport.

3.1.2 THE INSTITUTIONAL ANDLEGISLATIVE SETTING

The institutional arrangements for thelabour market in Bosnia and Herzegovinaare complex. They mirror the generalgovernance arrangements, with the addedcomplication of parallel employmentbureaux. The state, the entities and thecantons all have involvement in aspects oflabour market regulation or provisionthrough labour ministries, and throughemployment agencies and services andlabour inspection. The main characteristicsof the arrangements are as follows.

� There are 12 separate organisationsresponsible for employment serviceoperations and another13 organisations responsible for labourmarket policy, although the distinctionbetween operations and policy is farfrom being clear-cut in practice.

� All levels of government (with theexception of the municipal level) arecompetent in some aspect of labourmarket matters.

� The role of the state institutions ismainly limited in law to internationalrelations and internal coordination; theyhave no role in policy or operationalissues.

� The entity arrangements are in sharpcontrast. The Republika Srpska has asingle ministry responsible foremployment policy and a conventionalunitary employment service with anetwork of regions and local offices. Inthe Federation of Bosnia andHerzegovina employment policy ismade both at cantonal and Federationlevel; each canton and the Federationhave their own separate and largelyautonomous employment services.

� Only the Republika Srpska EmploymentBureau and the cantonal employmentservices actually deliver servicesdirectly to the public.

� Tripartite arrangements exist throughthe Social and Economic Council, the

30


key function of which is to negotiate thenational collective agreement.

� Trade unions are rather betterorganised through the Confederation ofIndependent Trade Unions of Bosniaand Herzegovina than are employersthrough the Association of Employers.Chambers of commerce existthroughout Bosnia and Herzegovina.

� Labour inspectorates, which encourageand enforce compliance, existthroughout Bosnia and Herzegovina.They are currently organised along thesame lines as other labour marketinstitutions, though there are plans tochange this in the near future.

There is no doubt that the arrangementsoutlined above and described in moredetail in Annex 2 are at best suboptimal.This is widely recognised within Bosnia andHerzegovina, and is often quoted as one ofthe reasons that the labour market is notimproving, or not improving quicklyenough. However, the arrangementsshould be judged both against the effectiveideal and against the background of therecent civil war and the need for peace andstabilisation. The balance between theseconcerns is an issue for sensitivejudgement rather than hard forensicappraisal.

Two issues stand out concerning theinstitutional arrangements: the first is therole of the state in relation to the entities,and the second is the role of the cantons.Bosnia and Herzegovina is not a largecountry, and other considerations apartthere is no compelling justification for thelandscape of labour market policy to bedifferent between the entities. Indeed,except for a few significant differences,such as in the levels of social contributions,for the most part they are harmonious.

The role of the 10 cantons is significantboth in terms of the legal powers and in the

delivery of employment services to thepublic. While there is no doubt that theyhave considerable autonomy, they alsowork together on matters of mutualinterest, for example in the developmentand installation of compatible computersystems. Much of the encouragement andsupport for collaboration springs fromfederal level, and there is a growingrecognition amongst the cantons of thevalue of the coordinating, facilitating andpromotional role of the Federation.Certainly the Federation is helping todevelop and adopt arrangements32 whichremove some of the anomalies that exist asa result of the cantonal structure. Cantonsalso use common procedures and forms,and the same portfolio of active measures,though the mix may be somewhat differentfrom one canton to another.

With regard to the legislative setting, thereis a familiar twin-pillar framework of labourregulation that mirrors those of other EUand transition countries. The two mainareas of legislation are:

� the labour law(s), covering theemployment relationship betweenemployers and employees;

� the law(s) (frequently referred to as theemployment law), coveringunemployment compensation and thework of the public employment services.

Of course the situation is rathercomplicated in Bosnia and Herzegovinabecause of the special governmentalarrangements. However, the basic positionis that the key legislation for the labourmarket is at entity level (in line with theconstitution of Bosnia and Herzegovina). Ineach entity there are two laws (the labourlaw and the employment law) that form thelegal framework; hence, across Bosnia andHerzegovina four laws33 (two in eachentity) form the main legal framework onlabour issues.

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3. REVIEW OF POLICIES, AND LEGISLATIVE AND INSTITUTIONAL FRAMEWORKSFOR ADDRESSING LABOUR MARKET CHALLENGES

32 For example, if a person worked in one canton but resided in another, the rate of unemploymentcompensation would, previously, have been based on the average wage in the canton in which the personworked regardless of the budget position – or the average wage – in the ‘home’ canton.

33 In the Republika Srpska these are the Labour Law (Law No 777 entered into force on 8 November 2000, areplacement for the 1993 Law on Labour Market Relations) and the Law on Job-Placement and SocialSecurity of the Unemployed (Law No 778, 8 November 2000). In the Federation of Bosnia and Herzegovinathey are the Labour Law (October 1999, amended on 28 August 2000) and the Law on Job-Placement andSocial Security (28 December 2000).

As regards the labour laws the entitygovernments have gone a long waytowards harmonisation so that differencesbetween entities are mostly minor andthere are no significant inconsistencies.The position with the employment laws(which the Office of the HighRepresentative imposed34 on theFederation through the Law onJob-Placement and Social Security of theUnemployed in the Federation of Bosniaand Herzegovina in December 1999; asimilar law was subsequently enacted inthe Republika Srpska) is morecomplicated, with significant differencesexisting between the entities. This situationarises mainly because of the cantonaldimension, which adds considerablecomplexity to the arrangements in theFederation and to the efficient provision ofunemployment compensation and publicemployment services. Each canton haslegal authority for budgets and expenditure,the design and implementation ofprocedures and processes associated withunemployment compensation, job brokingand its active labour market measures. Atthe same time the Federation has aseparate budget and receives financialplans and reports from the cantons (forinformation purposes only, and not as partof a system of accountability), and haslegal authority for active measures.

The labour and employment laws aresupplemented by regulations coveringdetailed implementation provisions (for acomprehensive description of the mainprovisions see Annex 3). In addition thereare laws covering strikes, health funds andinsurance, pension funds, payroll tax,social contributions, labour inspections andworks councils.

Assessment

The institutional architecture is complexand makes awkward the development ofclear active labour market policies and theefficient delivery of employment services.The state plays little part in labour marketpolicy, although there are signs that theState Employment Agency is beginning toinvolve itself in aspects of operationalpolicy. Below state level there is anextraordinary number of institutionsinvolved in both policy and operations35.This has a significant cost in terms of theeffort needed to achieve reasonablecoherence across the institutions andlabour market(s); to service the manypolitical interfaces; to develop, install andmaintain common information systems andother operational processes; and todevelop sufficient expertise in any singleorganisation. This is the case across theentities, but especially within theFederation of Bosnia and Herzegovinabecause of its cantonal structure. Theposition in the Republika Srpska isrelatively straightforward in so far as thereis a single integrated employment serviceand no political institution between themunicipality and the entity government.

The key question is whether theinstitutional structure is detrimental to thedevelopment of a functioning labour marketin Bosnia and Herzegovina. There is nodoubt that it is inelegant, unwieldy andadministratively burdensome, but does anyof that matter to the operation of the labourmarket? In some respects it does not. Thevarious employment bureaux could play aneffective part in labour market facilitationregardless of their number, in the sameway that the huge number of private

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34 ‘Pursuant to, and as an integral part of my Decision herein, I require the appropriate authorities of theFederation of Bosnia and Herzegovina and of the Cantons to take all necessary steps to ensure that the lawsand regulations of the Federation of Bosnia and Herzegovina and of the Cantons respectively are and remainfully harmonized with the Law on Job-Placement and Social Security of the Unemployed and hereinafter setout. In the event that changes are required to be made to the laws and/or regulations of the Federation ofBosnia and Herzegovina and the Cantons in consequence thereof, such changes are to be effected no laterthan six months after the entry into force of the said Law on Job-Placement and Social Security of theUnemployed.’

35 ETF (2004): ‘The fragmentation of the labour market in BiH radically increases the number of actors, thuscreating a complicated multi-level institutional setting, consisting of the Agency for Labour and Employment(operational since 1 August 2003) at state level, the Ministries of Labour at entity level, the network of tencantonal employment offices in the Federation of Bosnia and Herzegovina, seven regional offices in theRepublika Srpska and one in the Brčko District as well as labour bureaux in each municipality, or147 bureaux in all. Not only is the weight of such a system too heavy, but the visibility and, hence, thecommunication and interaction amongst its 168 players are – by definition and in practice – very low.’

agencies do in some western Europeancountries. But the atomisation of theemployment service and the multiplicationof interfaces with political institutions affectthe efficiency and effectiveness of thesystem as a whole, not least in theresources that can be devoted to front-lineactivities, and hence the quality of serviceexperienced by users. Moreover, theinstitutional structure does little to addressthe common observation that the labourmarket in Bosnia and Herzegovina isfragmented and segregated. The existenceof so many legislative bodies reinforces thenotion of separateness and, at entity level,gives rise to a very significant difference inthe costs imposed on employers.

The institutional structures for labourmarket policies and services are of coursean image of those for governancegenerally, which were the product ofdifficult and long negotiations. That doesnot make them inviolate, nor aboveanalysis or criticism. But it does call forparticular caution in urging radical change.To the extent that changes to thearchitecture of government are feasible, itis the cantonal arrangements that need tobe addressed first.

The employment laws empower the entitiesand cantons to run public employmentservices covering the normal areas ofpublic employment service activity. There isconsiderable complexity in thearrangements for the provision of servicesin the Federation of Bosnia andHerzegovina. The Federation is developingand focusing its facilitation andcoordinating role on labour marketintelligence, IT and active measures.While this does not alter the legalcompetences, the de facto position is astep towards the pre-2000 situation, inwhich the cantons did not haveresponsibility for employment matters.Indeed there seems to be wideacknowledgement of the problemsassociated with the current framework ofemployment laws in the Federation ofBosnia and Herzegovina, in particular thelack of focus and authority at any singlepoint within the Federation for labourmarket employment policy or employment

services. The earlier observationsconcerning the institutional structure andthe difficulties arising from them,particularly in the Federation, stem in largemeasure from the employment laws, whichcreated many of the institutionalarrangements.

3.2 INCREASING THEADAPTABILITY OFENTERPRISES

3.2.1 IMPROVING THEBUSINESS ENVIRONMENT

Support to SMEs

Efforts have been made to facilitate thecreation of SMEs. Most of these effortshave been donor-driven, or at leastdonor-supported. Examples include thenetworks of Enterprises DevelopmentAgencies (EDAs), established with ILO36

support to provide advice and support fornew and existing enterprises; theestablishment of Sarajevo EconomicRegional Development Agency (SERDA);the Business Service Centre of Ze-DoCanton in Zenica, for direct assistance andsupport in company registration focusingon foreign investors (foreign directinvestment, FDI); and strong EU supportthrough various projects, such as theEURED (European Union RegionalEconomic Development) Project, and anumber of agencies that have beenestablished, such as ARDA (AccreditedRegional Development Agency) andBLERDA (Banja Luka Economic RegionalDevelopment Agency), both in Banja Luka,and PREDA (Prijedor EconomicDevelopment Association). Efforts havealso been made to improve the access tofunds by SMEs through the World Bankproject Local Initiatives (Microfinance)Projects, and the networks of commercialmicrofinance providers. However,according to the views of local actors theresults have not been very positive to datebecause of high interest rates andrequirements for collateral thatentrepreneurs do not have. Meanwhile,local ideas for establishing SMEs and the

33


36 See more at: http://www.ilo.org/public/english/employment/empframe/practice/entrep/bosnia.htm

SME Development Bank have not beensupported by international donors on thegrounds that allocation of financial supporton non-market criteria might be a negativestep, and could also be subject to corruption.

Local actions to improve the environmentfor SME development include theestablishment of the ‘Bulldozer Committee’to identify and remove barriers forenterprise development; the country’s lawon business registration; and the efforts todevelop an SME strategy, which has notyet been approved. One tangible positiveoutcome has been the reduction in the timenecessary for setting up a company, from59 days in 2003 to 48.6 in 2004. Moreover,some cantons, such as the Mostar Canton,do provide loans or subsidies for theestablishment of new SMEs or theexpansion of existing ones. The requestsfrom entrepreneurs exceed the fundsavailable.

In practical terms the number of barriersstill remains formidable. These barriersinclude the complex institutional setting; thehigh level of minimum verified capital in abank account needed for companyregistration (around €1,278) and anadditional similar amount for various costsand taxes; specific requirementsconcerning working space (such as theminimum height of working space, set at2.8 metres); the requirement that acompany must start with a minimum of twoemployees; and many other internal(hidden) issues and obstacles. In generalthe procedures, requirements and financialburden (minimum €3,000–5,000) forregistering a new company are heavy.

However, examples of good practice at themunicipal level do exist. The municipalitiesof Gračanica and Široki Brijeg in the

Federation of Bosnia and Herzegovina andLaktaši in Republika Srpska have a longhistory of entrepreneurial support activityzones. They have created a ‘soft’bureaucracy and provided technicalsupport to entrepreneurs, and they haveeasily adopted new ‘open market’conditions, expanding municipality potential(and budget) and creating many jobs. Inpractical terms, they provide all thenecessary information for companyregistration at the Municipal Hall; thepre-conditions for start-up related tobusiness space in the municipality areflexible; and the communal taxation andcontribution can be paid in stages. Thespecific needs of the entrepreneur can bediscussed with a municipal adviser, andsupport from local registration supportagencies is available. The municipalityofficers treat their clients with a high levelof respect and in a friendly manner.

Labour costs

Wages in Bosnia and Herzegovina haveincreased consistently since 1998 in boththe Federation of Bosnia and Herzegovinaand Republika Srpska (Table 11). The rateof increase in Republika Srpska was morethan twice that in the Federation. However,wages in the Federation are still 25%higher than those in Republika Srpska,though the gap is closing. Given the verylow level of inflation over the past two years(and a comparatively modest level beforethat), the wage changes represent realincreases in income. If not matched byproductivity gains the increase in realwages will adversely affect thecompetitiveness of Bosnia andHerzegovina.

The system of wage determination in theformal sector in Bosnia and Herzegovina is

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Table 11: Wages in Bosnia and Herzegovina (in BAM)

1998 1999 2000 2001 2002 2003 2004

Republika Srpska 170 216 275 309 347 379 422

Federation of Bosnia andHerzegovina 329 374 413 444 483 524 530

Source: Statistical Offices on Bosnia and Herzegovina, Federation of Bosnia and Herzegovina, and Republika

Srpska

institutionalised and rigid. The bargainingsystem associated with the GeneralCollective Agreement (GCA) is centralisedand retains most of its socialist-eracharacteristics37. The GCA determines thenational minimum wage – defined as theminimum wage for the simplest monthlywork (Table 12) – which may be exceededby the minima in branch agreements. Theeffects of the collective agreements are tocompress wages, to reduce themale/female wage gap, and to rewardlong-term job tenure. In the RepublikaSrpska the government defined a minimumwage for contributions to the Pension andInsurance Fund at the level of 45% of theaverage wage officially published by theInstitute of Statistics.

The non-wage labour costs for formalbusinesses are high in Bosnia andHerzegovina. The level of socialcontributions and taxes amounts to 69% ofthe net wage in the Federation of Bosniaand Herzegovina and 52% in RepublikaSrpska (Table 13).

The non-wage labour costs and taxes wereinherited from the previous socialist

system; contributions covered pension,health insurance and social protection butalso many different (mainly) budgetexpenditures such as railroad developmenttax (2%) and chamber of commercecontributions. Although lower (relative tothe past), wage contribution percentagesfor start-ups (with a minimum of twoemployees) in Bosnia and Herzegovina area significant burden for start-ups and forbusiness development in general.

At the beginning of 2000 the government inRepublika Srpska reduced non-wagelabour costs to 52% (from 80%) in order tostimulate new employment and net wageincreases. The results were positive, with asignificant rise in new employment (in 2000around 292,000 new workers) and inworkers’ motivation and participation incompanies, while wages rapidly increased.

Assessment

The progress made in macroeconomicstabilisation has been a positive factor forthe improvement of the businessenvironment. However, efforts to supportSME development have been piecemeal,

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Table 12: Minimum wages (in BAM)

1998 1999 2000 2001 2002 2003 2004

Republika Srpska 60 60 80 80 171 193 197

Federation of Bosnia andHerzegovina 85 200 200 220 251

Source: WB Report 2002, RS Quarterly Statistical Review and General/sectors Trade Agreement for 2003 and

2004

Table 13: Social contributions and taxes as a percentage of net wages

Federation Republika Srpska

Pension fund 35.3 24.0

Health insurance 25.0 15.0

Unemployment insurance 3.6 1.0

Child care 0.0 2.0

Wage tax 5.0 10.0

Total 68.9 52.0

37 World Bank, ‘Labour Market in Post-war Bosnia and Herzegovina – How to Encourage Businesses to CreateJobs and Increase Worker Mobility’, 2002.

and have not yet had an impact on SMEcreation or growth. Despite the reduction inthe registration time for new SMEs, majorinstitutional complexity and regulatorybarriers remain. Advisory support, businesscentres or similar supporting institutions forbusiness start-ups are not yet fullydeveloped. Access to funds is very limited,and new and existing SMEs have virtuallyno financial support to get them started(again), other than short loans at highinterest rates from commercialmicrofinance providers. Theseimpediments have an adverse impact onenterprise development and job creation,and indirectly perpetuate the informality ofvery small and microenterprises. This is asignificant issue for the economy, publicfinances and the labour market, sinceimpediments to the establishment oflegitimate businesses encourage unofficialactivities and informal employment.

The rigid system of wage determination in theformal economy and wage increases that arenot transparently linked to productivity gainsover recent years are negative factors for thecompetitiveness and growth of companies inBosnia and Herzegovina. The high levels ofsocial contributions and taxes (in particular inthe Federation of Bosnia and Herzegovina)overburden companies and encourageevasion through underrecording andparticipation in the grey economy. It isinteresting to note that wages in Bosnia andHerzegovina (as in other Western Balkancountries) are expressed in net terms.Employees do not receive a gross wage fromwhich deductions are made and explained.The effect is to isolate employees from, anddiminish their interest in, the cost of socialcontributions and taxation. Criticisms of theGCA and branch agreements are not drivenby ideological antagonism towards collectiveagreements. They are concerned with thelevels of detail in the agreements that overlyconstrain appropriate decision-making aboutthe deployment and reward of workers atcompany and plant levels, and that pay no

regard to operational performance and theability to meet the costs imposed by theagreements.

3.2.2 ASSISTING ENTERPRISERESTRUCTURING BYINTRODUCING FLEXIBILITY INTHE LABOUR MARKET

The provisions of the labour laws

The Labour Law of the Federation ofBosnia and Herzegovina and the LabourLaw of Republika Srpska, introduced in theearly 2000s, placed employmentrelationships on a contractual basis38. Inthe case of the Federation, contracts maybe ‘deemed’ and oral. The main provisionsof the legislation are not unduly onerous onemployers, in comparison with those in theEU or other countries of the region.

Various forms of employment status areadmissible within limits39 under the laws:permanent (no fixed duration), temporary,fixed duration, casual, seasonal, part-timeand probationary. Hours of work are limitedto 40 and the amount of overtime isregulated. Levels of maternity leave andpay40 are well beyond those available indeveloped economies and othertransitional countries. In reality the flexibilitypermitted under the labour laws is usedonly narrowly. The exception is in the useof temporary contracts, which iswidespread and appears to be adopted asa means of avoiding the full range ofcommitments associated with permanentcontracts. However, there is – at least inthe formal labour market – an absence offlexible patterns of employment, particularlypart-time employment.

Employers in both the Federation and theRepublika Srpska are allowed to terminateindividual employment for a variety ofreasons, including poor performance,misconduct, and on economic, technical or

36


38 ‘The Law shall regulate the conclusion of contracts of employment, working hours, salaries, termination ofcontracts of employment, exercise of entitlements and obligations deriving from an employment relationship,conclusion of collective agreements, settlement of collective labour disputes, and other issues deriving froman employment relationship, unless otherwise provided by other law.’, Federal Labour Law Article 108.

39 For example, in Republika Srpska work of a temporary nature should not exceed 60 days.

40 In the Federation of Bosnia and Herzegovina, the employee is entitled to 12 months at full pay. In RepublikaSrpska the entitlement is 12 months for the first child paid at the employee’s average salary in the precedingsix months.

organisational grounds41. Small companieswith fewer than 15 employees are notrequired to consult on dismissals, nor arethey required to have works councils.Larger employers have to consult with theirworks council42 or trade unions where fiveor more employees face dismissal43. In theevent of dismissal, severance equal toone-third of monthly salary for each year ofservice is payable. It is not unusual foremployers to avoid dismissing people andthe costs involved by keeping them asunpaid employees.

Of particular importance for the introductionof labour market flexibility is Article 143 ofthe Labour Law in Bosnia andHerzegovina. This article prescribed thatthe status of a ’waiting-list employee’44 wasto expire in May 2000 unless the employerinvited the individual concerned back towork. Employers who did not do so weredeemed to have made the waiting-listemployee redundant, and were obliged topay severance compensation of threetimes the average salary in Bosnia andHerzegovina. In practice this did nothappen, although the waiting-list problemwas in theory, and by law, removed.

The privatisation process

The slow pace and the weak managementof the privatisation process in Bosnia andHerzegovina has been a major impedimentin the effective restructuring of enterprises.

The result is that a number of large formerstate companies are not actuallyfunctioning, but are not officially closed orbankrupt. Workers in these companies arestill on waiting lists, notwithstandingArticle 143. Data from pension funds in bothentities have indicated that around 100,000workers in Bosnia and Herzegovina are onwaiting lists, and these workers contributeheavily to the informal sector.

In seeking to maintain pre-privatisationlevels of employment, the privatisation ruleseffectively impose on companies minimumemployee numbers, and thereforesometimes unaffordable labour costs forthree years following privatisation. However,there is no system of restructuringenterprises prior to privatisation, so that theeffect of the policy is to delay necessaryrestructuring, improvements in productivityand the creation of new jobs.

Assessment

The labour laws provide a reasonablebalance between worker protection andflexibility for employers and enterprises tobe competitive. The labour laws of bothentities allow employers to dismiss workerswithin prescribed limits. They also provideflexibility in employment status. The use ofthis flexibility by employers has more to dowith avoiding legal obligation than withoperational efficiency – hence theextensive use of temporary contracts45 and

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41 According to the Law on Labour Relations for the Federation of Bosnia and Herzegovina: an employer maycancel the employment contract of an employee with the prescribed period of notice of cancellation, whensuch cancellation is justified for economic, technical or organizational reasons; or the employee is no longerable to perform the job for which she/he was employed. The termination period may not be less than 14 daysif the employer cancels the employment contract. In the case that a court finds that the termination contract isunlawful, the court has the option of reinstating the employee or requiring the employer to pay damagesincluding salary, severance allowance and other benefits to which the employee may be entitled.

42 In companies with more than 15 regular employees, workers are entitled to establish a works council forrepresentation and the protection of employee interests deriving from the employment contract (Article 109 ofthe Labour Law in Republika Srpska). A similar provision exists in the Labour Law of the Federation(Article 108).

43 An employer employing over 15 employees who intends to cancel over a three-month period the employmentcontracts of more than 10% of employees but not less than five employees shall consult with the workscouncil in the enterprise or in the absence of a works council with all trade unions representing at least 10%of employees.

44 Individuals employed on 31 December 1991 and who reported back to their employer after the war were puton a waiting list if there was no work for them. Those who did not report to the employer were entitled byArticle 143 to write to the employer within three months of its promulgation to request that they be allowed toreturn to work with the proviso that they had not started a job elsewhere. If the employer could not employthem they were put on the waiting list. The article required that all waiting lists be extinguished within sixmonths through offering the employee work or through severance payment.

45 In Republika Srpska almost half of those leaving the unemployment register for employment in 2003 were ontemporary contracts.

the absence of flexible patterns of workand part-time employment. The absence ofpart-time employment is a phenomenoncommon to the Balkans (and otherMediterranean countries), and seems to bemainly cultural, though it is also reinforcedby pension regulations that make it verydifficult for part-time employees to qualifyeven for the minimum pension. Someaspects of the law are more aspirationalthan practical, and may be harmful, bothwithin the labour market and in terms ofregard for the law. The overgenerousduration and level of maternity pay may bea factor in the low employment rate forwomen, and in any event is widelydisregarded for financial reasons.

It is a common perception thatwaiting-listed workers are trapped in theirsituation because they cannot take upanother formal job until their back pensionand health insurance contributions are fullypaid up and their ‘workbooks’ released bytheir former employer. This is not the viewof the Pension Agency, which has statedthat it is entirely possible for these recordsto be released to the new employer withoutthat employer taking on liability for pastunderpayments of contributions. Such isthe widespread confusion about this issuethat the Pension Agency needs to promotean accurate understanding among all thelabour market institutions, trade unions andemployer associations.

Moreover, Article 143 (abolition of waitinglists) is not applied in practice becausemany companies can barely survive, letalone pay severance compensation todismissed employees. The cost of payingseverance to all those affected in theFederation of Bosnia and Herzegovina(52,500 individuals) is estimated46 at wellover BAM 100 million.

So, the labour laws are on the wholemodern and comparatively well balanced,though they have features that are plainlyunaffordable and, hence, impractical. Onthe other hand the arrangements for theprivatisation of enterprises, and theobligation on the buyers to maintainemployment levels at least at the level ofthe purchase for three years, introduce an

important impediment to both enterpriserestructuring and labour market flexibility.

3.3 ATTRACTING MOREPEOPLE TO ENTER ANDREMAIN IN THE LABOURMARKET: MAKING WORK AREAL OPTION FOR ALL

Legislation prohibits any form ofdiscrimination in the workplace, though fewin Bosnia and Herzegovina would arguethat discrimination does not exist. The ideathat more people should be encouraged toparticipate in the labour market may seemsomewhat perverse during a period of highunemployment. Indeed in suchcircumstances some countries havepreviously adopted measures to reducetheir labour supply by encouraging andsubsidising early retirement. But suchpolicies have lost most of their adherents,and today one of the main objectives ofemployment policies is to ensure the rightof participation for all the working-agepopulation. As demonstrated in Chapter 2,in the case of Bosnia and Herzegovinathere is scope for increasing theparticipation of women and young peoplein the labour market, as well attractingmore people into the formal economy.

There follows an assessment of passiveand active measures, and the mix of thetwo, for activating those who areunemployed and inactive, and of thecapacity of the public employment servicesto provide assistance to job seekers. Inorder to address the issue of informalemployment, the functioning of labourinspection is examined.

3.3.1. IMPROVING PASSIVEAND ACTIVE LABOURMARKET POLICIES FOR THEUNEMPLOYED PEOPLE

Passive measures

Passive measures compriseunemployment compensation and healthand social insurance. New unemploymentinsurance systems were introduced by both

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46 World Bank, ‘Specific Aspects of Labour Market in the Federation of Bosnia and Herzegovina’, 2003.

entities in 2000. They are comparatively‘modest, affordable systems of incomesupport to the unemployed’47. Only a smallproportion – less than 2% – of peopleregistered as unemployed qualify forunemployment compensation. The longestduration for receipt of the benefit is12 months, and the replacement rate isbetween 30 and 40%.

The current design of the unemploymentbenefit system is unlikely to add distortion tothe labour market. In any event it reachessuch a small proportion of those registeredas unemployed that it is largely irrelevant tothe labour market, although it clearly helpsthose who do get it to avoid destitution. Theadministrative costs of running a system forsuch comparatively low numbers must bedisproportionately high. The relatively smallnumbers claiming unemploymentcompensation are very variable – inRepublika Srpska they fell from 3,701 inDecember 2004 to 2,760 in July 2005 aspeople exhausted their entitlement. Unlesscoverage increases markedly in the future,other forms of social protection forunemployed people of working age need tobe considered. Since for most people

registration as unemployed does nothing torelieve their financial distress, work in theinformal economy is commonplace.

Although as many as two-thirds of thosewho are registered unemployed receivebasic health insurance, this is amisrepresentation of the actual position.Many people who want basic healthinsurance register as unemployedregardless of their employment status.Employment bureau staff believe thataround 50% of those on the unemployedregister do not fulfil all the legal conditionsfor being regarded as unemployed. This isalso evidenced in the findings from theLSMS. Plainly, the level of registeredunemployment is a reflection ofadministrative procedures and theineffectiveness of the employment bureauxrather than the state of the labour market.

Centres for Social Work (CSW) providehelp for the most vulnerable people, mainlyunemployed individuals and their families.The centres are financed mainly frommunicipal income and the coverage ofbenefits is extremely variable, dependingon the wealth of individual municipalities.

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Table 14: Number of passive programme recipients (000s)

2000 2001 2002 2003 2004

Registered unemployed (December)

Bosnia and Herzegovina 421.2 423.5 432.0 443.2 na

Federation of Bosnia and Herzegovina 267.9 275.8 287.2 296.6 na

Republika Srpska 153.3 147.7 144.8 146.6 142.5

Unemployment recipients (December)

Bosnia and Herzegovina 4.2 4.9 na 6.7 na

Federation of Bosnia and Herzegovina 2.9 3.3 na 4.8 na

Republika Srpska 1.3 1.6 1.3 1.9 3.7

Average amount of unemployment benefit (BAM)

Federation of Bosnia and Herzegovina 144.3 155.1 na na na

Republika Srpska 193.6 152.3 na na na

Health insurance beneficiaries (December)

Federation of Bosnia and Herzegovina 154.4 159.8 na 175.2 na

Republika Srpska na na 75.2 90.1 96.0

na: not available

Source: Republika Srpska and Federation of Bosnia and Herzegovina Employment Bureaux

47 World Bank, ‘Bosnia and Herzegovina – Labour Market in Post-war Bosnia and Herzegovina’, 2002.

Assessment of passive measures

There is no serious attempt to providesocial protection for those who are out ofwork. The unemployment benefit systemscover a tiny proportion – less than 2% – ofthose who are registered unemployed, andthe CSW provision is limited and patchy.Even on the assumption that only 50% ofthose registered are genuinelyunemployed, these observations remainvalid and consistent with a tradition inwhich social transfers have not played alarge part in employment policy or indeedin poverty relief. This is in sharp distinctionto the treatment of veterans and theirfamilies, who receive non-means-testedbenefits. Given the difficulties of publicfinance and the already high levels ofsocial contributions, there is only limitedroom for manoeuvre in the short term. Infact, given the lack of financial support forunemployed people from the government, itis not surprising that most parties have asomewhat benign view of the unofficialeconomy – it provides a kind of unofficialwelfare/workfare arrangement.

This is a difficult issue, but one that mustbe tackled if Bosnia and Herzegovina is tobecome a candidate for EU membership.The breakthrough will come when

businesses operating in the informaleconomy face the threat of seriouspenalties, when the probability of beingcaught is far greater, and when the costand bureaucratic advantage to companiesof operating in the grey economy is muchreduced. This should help to shift informaljobs into the formal economy; but just asimportant as an increase in the number offormal jobs – perhaps even more so – isincreased turnover among employees tocreate job openings for others, especiallyfor first-time job seekers. Currently theformal labour market(s) in Bosnia andHerzegovina are too static, andemployment policy needs to be rebalancedto encourage mobility.

Active measures

The range and scale of active labourmarket measures is modest. This is mostlyas a result of a lack of funds and the factthat the money for active measures is theresidual after all other forms of expenditure(unemployment benefit and administration)have been financed from payroll tax. Thismakes budgeting for active measuresrather uncertain and variable.

In 2004 the ratio of expenditure on activecompared to passive measures in

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Table 15: Expenditure on labour market programmes (in BAM)

2002 2003 2004

RepublikaSrpska

Passive 2,812,496 2,635,006 6,244,366

Administration 2,714,104 3,378,773 3,865,212

Active 2,384,758 3,351,915 2,320,334

Total 7,911,358 9,365,694 12,429,912

Federation ofBosnia andHerzegovina

Passive 20,514,489 na 28,884,276

Administration 12,238,888 na 17,962,540

Active* 32,042,276 na 37,495,994

Total 64,795,653 na 84,342,810

Bosnia andHerzegovina

Passive 23,326,985 na 35,128,642

Administration 14,952,992 na 21,827,752

Active 34,427,034 na 39,816,328

Total 72,707,011 na 96,772,722

*Includes loans to finance employment; na: not available

Source: Republika Srpska and Federal Employment Bureaux

Republika Srpska was 1: 2.748. This is animpressive though wholly misleadingmeasure of the scale of active measuresbecause of the tiny coverage ofunemployment compensation. A moremeaningful measure is the amount ofmoney spent on active measures perregistered unemployed person. In 2004 thiswas BAM 16 or €8. But even this ismisleading, since a large proportion of thefunds for active measures were directedtowards companies to ‘create preconditionsfor employment’, and it is unclear howmany unemployed people actuallybenefited as a result.

In the Federation of Bosnia andHerzegovina over BAM 19 million wasallocated to employment programmes in2004 and a further BAM 18.4 million foremployment loans. Employment loans areintended to help to create new jobs forunemployed people but also to secure thelonger-term future of existing jobs. It wouldtherefore be inappropriate to relate thewhole of the non-passive expenditure tothe number of unemployed people. Thatsaid, even excluding the employment loansthe active programme budget in theFederation of Bosnia and Herzegovina in2004 represented around BAM 63 for everyunemployed person.

In 2004 there were six main activeemployment programmes in the Federationof Bosnia and Herzegovina, besides theloans to employers:

� subventions to employers to recruitadditional workers;

� grants for employment in agriculture;� activities to help resettle demobilised

members of the armed forces;� activities to assist people over 45 years

of age;� subventions to employers to recruit able

young people;� training and education to improve job

prospects.

In the Republika Srpska there was a rathermore restricted range of measures:

� creating preconditions for employment;� preparing workers for employment;

� cofinancing apprentice wages;� cofinancing wages of talented people;� self-employment;� retraining and additional training.

Employer subsidies

There is heavy emphasis in the mix ofmeasures on subsidies of one kind oranother to employers, and onself-employment. In a labour market wherethere is a heavy aggregate deficiency offormal jobs, the idea of helping employersto absorb more workers (create more jobs)is appealing. But most internationalevidence suggests that such measuresshould be carefully targeted on groups whoare at particular disadvantage. Moreover,there is something of a paradox in thesituation where labour costs arecomparatively high as a result of socialcosts and collective agreements, and arethen reduced through active labourmeasures for some groups of workers.Implicit in the situation is the recognitionthat employers would recruit more people iflabour costs were lower.

Well-qualified people

As in other countries in the Balkans there isa bias in the range of active measurestowards assisting well-qualified people.The rationale is simply that these are thefuture key workers who will help togenerate profit and jobs, and in whomsubstantial investment has already beenmade through the education system. Butagain there are questions about the overalleffectiveness of such programmes.Employers benefit from havingwell-educated young people – it is in theirinterests to recruit them. These youngpeople are some of the most competitiveworkers on the market, so there is noequity argument for giving them specialtreatment: the reverse is the case.

These factors point towards a programmewith heavy deadweight – that is to say thatmany of these young people would havebeen employed without the subsidies. Ifthey are not recruited in the absence ofsubsidy it is because labour costs are toohigh, and/or that existing employees (the

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48 That is to say that for every BAM 1 spent on active measures, BAM 2.7 were spent on passive measures.

insiders) have taken long-term ownershipof most jobs. To the extent that some ofthese young people are finishing theireducation through practical experience, thecosts should be borne through theeducation system and their income shouldreflect their student status. Subsidies tohelp with the training of people undergoingapprenticeships or training for recruitmentare more likely to have a significant netgain. Both may help to maintain trainingcapacity and to increase the quality of theworkforce.

Agriculture

There has been considerable interest in theinnovative programme for employment inagriculture in the Federation of Bosnia andHerzegovina. The project targetsunemployed people, refugees anddisplaced persons, and has multiagencysupport. It is a particularly valuableprogramme because it providesopportunities in non-urban areas for peoplewho are among the most disadvantaged,and offers help to people turning to farmingin the absence of other opportunities. Thegovernment of the Federation Bosnia andHerzegovina, in cooperation with theFederation Ministry for Agriculture, Waterand Forestry, Federation Ministry forDisplaced and Refugees and FederationEmployment Bureau, proposed a project ofincentives for employment in agriculture,aimed at purchasing and sharingagricultural machinery, irrigation systems,greenhouses, cattle and other domesticanimals, for unemployed people, returneesand social welfare beneficiaries. Theproject was implemented during 2004, inboth the Federation of Bosnia andHerzegovina and Republika Srpska. Over2,000 candidates applied for assistanceunder the programme.

Employability and job-search skills

The portfolio of active measures does littleto help unemployed people to improve theirbasic employability and job-search skills.This is particularly the case in theFederation of Bosnia and Herzegovina; inRepublika Srpska a number of the productsof the employment bureau address theseneeds and there is an impressive range of

leaflets and multimedia materials to helpunemployed people. The Pilot EmergencyLabour Redeployment Project (PELRP),supported by the World Bank, has featuresthat address some of these issues. Theproject is targeted on ex-soldiers registeredas unemployed who were dismissed in theperiod 1997–2002.

Targeting

There is a considerable amount oftargeting in the portfolio of programmes inboth entities. As discussed earlier, some ofthis targeting is on people who alreadyappear to be at an advantage in thecompetition for jobs. But there are othertargets too – disabled people, olderworkers, ex-soldiers and refugees fromgroups who are at most disadvantage.

Loans for employment

In 2003 loans to employers amounted toalmost BAM 28 million for the employmentof 2,461 new workers and the training of1,408 individuals. In the event there was asignificant shortfall in the number of newworkers who were actually recruited(1,583), but an increase in peopleundergoing training (1,939). Approvedirrecoverable loans totalled BAM 679,000,or 2.4% of loans in 2003. There has beensome criticism of the writing off of loans,but the overall level of write-off is modest.Provided that there is no sharpdeterioration in failure rates, the loanscheme appears to offer a morecost-effective way of increasing jobopportunities than the employer grantprogrammes. However, it is very difficult tomonitor and does not provide the sameopportunity for targeting.

Monitoring and evaluation

The monitoring of active programmes inthe Federation is barely adequate forstatistical or auditing purposes. This hasbeen recognised, and monitoring activitieswill be intensified. There is virtually noevaluation of active programmes to assesstheir net impact. So it is impossible to makewell-informed judgements about the valueof each programme.

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Assessment of active measures

The balance in the current portfolio ofactive measures is towards encouragingemployers to create more jobs and torecruit unemployed people through grantsand loans. Given the heavy emphasis onthis approach, early and thoroughevaluation is needed in order to assess itsnet effects. There is a wide inconsistencybetween on the one hand, high institutionalcosts imposed on employers in the formalmarket, and on the other hand, the use ofactive measures to reduce employmentcosts. There is little attempt to integrateactive measures with other aspects ofemployment service work, nor to use activemeasures as part of a strategy to improveemployability and reduce the scale of thegrey economy. Significant amounts ofmoney are being used on active measures.In many other countries these funds wouldgo to help unemployed people and those atmost disadvantage. In Bosnia andHerzegovina they are returned to selectedemployers – these funds come mostly fromemployees and employers in the formaleconomy – through a levy/grant systemmediated by the employment services andlocal politicians. An alternative to this wouldbe to stop the grant and loan systems andreduce the levy on all formal employees.

The approach to the design andimplementation of active measures needsto become more structured and scientific.Different kinds of measures should betested through practical trials that arecarefully evaluated before the widespreadintroduction of the measures.Implementation should be phased to allowfor learning from early experience.Evaluation should be directed towardsassessing net impact rather thanparticipation levels.

3.3.2 IMPROVING THEEFFECTIVENESS ANDEFFICIENCY OF THE PUBLICEMPLOYMENT SERVICES

The public employment services have beencriticised in a number of reports. Thesecriticisms have been mainly directedtowards the failure of the services to help

to create a single labour market. Whilethere is some validity in the criticisms, theemployment services have to work within aframework of laws and structures (alreadydescribed and assessed in Section 3.1.2above) that are unhelpful to their collectiveperformance.

The position of the public employment

services

The public employment services are in adifficult position for many reasons. Theeconomic context and gross imbalances inthe labour market affect all aspects of theiroperation. Add to this the wider civil andpolitical considerations, the lack of finance,the wide distrust of public institutions, andthe size and pervasiveness of the informaleconomy, and it is clear that even awell-organised and efficiently runemployment service would be severelystretched. Moreover, the publicemployment services are instruments oflabour market policy. But as policy is notyet coherently expressed it is very difficultto position the public employment services.Part of the problem lies in the somewhatambivalent attitude of officials andpoliticians towards people registering asunemployed for non-labour-marketreasons; part of it is to do with a benign(dis)regard for the informal economy; andpart of it is the lack of a social protectionsystem for unemployed people of workingage.

The ambiguities in official attitudes, therigidities and imbalances in the labourmarket, and the lifestyle issues lead to atendency towards passivity on the part oflabour market institutions. There is noattempt to impose the rule that in order tobe registered as unemployed, peopleshould be actively seeking work. As aresult the registers are grossly inflated bypeople who are not unemployed or who areinactive. In the Republika Srpska aroundtwo-thirds (86,556) of registrants receivedhealth insurance from the governmentbudget. Employment offices are cloggedwith people who should not be registered.But – and this is the key point – the positionis justified, rather than addressed, on thegrounds that people would otherwise bewithout basic medical insurance. The logic

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of this position is that the government doesnot wish to deny people basic medicalcover; in which case the requirement toregister as jobless with the employmentservices should be removed andalternative arrangements put in place. Thetoleration of the practice of peopleregistering as unemployed for no otherreason than to get medical insuranceinvites individuals to misrepresent theircircumstances, and the staff of theemployment services to go along with it: itdamages the integrity of all parties and theability of the public employment services togive attention to genuine job seekers.

Improving the performance of the

employment services

The public employment services in Bosniaand Herzegovina will not become effectiveand efficient until there is clarity of purposeand priority. Even then, it will take anumber of years to change the currentsituation of resources being used tosupport costly institutional arrangementsand bureaucratic and low-value activities.There are four main areas in whichcost-efficiency can be markedly improved.

The first relates to the institutionalarrangements in the Federation of Bosniaand Herzegovina. One indicator of theheavy cost of these arrangements is thatexpenditure on administration for everyregistered unemployed person is five timeshigher in the Federation than in theRepublika Srpska.

The second area is that of operationalprocedures and processes. In many officesthere are parallel computer and paper filesof registrants. Some staff keep their paperfiles up to date by reference to thecomputer files. Others do not, and regard itas a waste of time – they are right. A greatdeal of information is collected andrecorded about every individual thatregisters. Work processes are not yetdesigned to make the best use of ITsupport, so staff are required to input andintervene far more than is necessary.

Furthermore, computer systems are out ofdate. Both the Federation and RepublikaSrpska are planning new systems.

The third area is the deployment ofresources and workflow management.Without a thorough analysis of all offices itis not possible to offer precise figures, butthere is a general tendency to have acomparatively generous number ofback-room staff (involved in finance,information and statistics) and heavilyoverloaded front-line staff dealing directlywith the public49. Furthermore, virtually noattention is given to matching staffingarrangements and workflows. All staff workfull time, but workflows are uneven duringthe week and during each day.

Fourth, the management of workflows israrely addressed, with the result thatunemployed people visit offices when theychose to within two months of theirprevious visit to confirm that they are stillunemployed. As well as making it easy forpeople to work in the grey economy andmaintain their registration, thisarrangement makes it virtually impossiblefor front-line staff to plan their work. Theconsequences for clients are long queuesat certain times and a perfunctory fewminutes at best with employment servicecounsellors. The result for staff is that theymight see 150 people in a day and beunable to do anything for any of them.

In addition to increasing its cost-efficiency,the employment service needs help toimprove its effectiveness. There are anumber of key measures that need to betaken.

Remove people who only register for

basic health insurance

The most pressing issue is that of peoplewho register in order to receive basichealth insurance. In other countries50 thissituation has been resolved by removingthe requirement that non-employed peopleneed to register as unemployed in order toreceive health insurance. Perhaps as many

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49 In some cantons 35–40% of the canton employment service staff worked in the cantonal office on finance,information and statistics.

50 In 2003 legislation was promulgated in Croatia to remove the requirement to register as unemployed in orderto receive basic health insurance.

as one-third of those registered asunemployed would no longer do so, thusreleasing employment service staff formore productive activities.

Address the grey economy

The role of the employment services inrelation to the grey economy is confusedby the absence of social welfarearrangements for most unemployedpeople. But the employment servicesshould not make it easy for employers touse unregistered workers; such employersshould find that the employment servicerequires more51 from registrants, andshould have their activities disrupted to agreater extent.

Develop core services

In addition to reducing the level ofregistered unemployment and helping todiscourage employers in the informaleconomy, the public employment servicesneed to develop their core services ofcounselling and mediation, and activitiesthat help people to improve their basicemployability and job searching.Counsellors in the public employmentservices have very heavy caseloads (theratio of counsellors to unemployed peopleis 1 to more than 1,800). In order to reducecaseloads the number of counsellorsshould be increased through betterdisposition of resources, and the number ofregistrants decreased through the removalof those not seeking formal work.Counsellors need to be supported withprofessional training and moderninformation systems.

Improve information

In Republika Srpska information forunemployed people is mainly providedthrough direct contact. All interestedpersons are given information onvacancies, on employers’ requirementsand on all conditions and employmentopportunities. Vacancies are alsoannounced in the Glas Srpske newspaperand in other media if demanded byemployers. The Employment Service

Bulletin has contributed to the informationsystems. In 2003 contracts were signedwith the Srna, Glas Srpske and RTRS(Radio-television of Republika Srpska)news agencies to foster the informationsystem and presentation of theEmployment Service of Republika Srpskaand its results. In the Federation of Bosniaand Herzegovina, information is providedto job seekers through job advertisementsin the bureau and through newspaperadvertisements about active measures.The range of information disseminatedthrough publicity leaflets and othermaterials is less well developed than inRepublika Srpska, mainly as aconsequence of the institutional structure.The website of the Employment Service ofthe Republika Sprska is in the final stage ofits development, and this should facilitatedirect cooperation with employees andunemployed people.

Target better

Given the very high numbers ofunemployed people registered with thepublic employment services and theworkload that this presents, there is notmuch scope for additional targetedactivities. The remedy for this lies in thefirst instance in a more rigorous approachto allowing people onto the unemploymentregister and to removing all those who failto attend the employment office within theagreed periods to confirm theirunemployed status. Currently there areconsiderable delays in removing peoplefrom the unemployment register – in somecases delays of more than four months.

Cooperate with other stakeholders

The position of the public employmentsservice is unique in that it deals directlywith the main actors in the labour market. Itshould therefore have a deeperunderstanding of the realities of the labourmarket than any other institution and manyvaluable insights. Contacts with employersare still weak, despite improvements notedthrough the support of external donorprojects (the World Bank and the DanishMinistry of Foreign Affairs with the EU VET

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51 Examples include more frequent attendance at the employment office, attendance at times determined by thepublic employment services, and participation in active measures.

Programme)52. An improvement of thisrelationship is not a matter of placing moredemands for information on employers.Rather, it is about being in closer touchwith labour market trends and changes sothat counsellors are better able to adviseclients and to help design appropriateactive policies for the people they see. Thepublic employment service shares many ofthe same clients as the CSW, but there isnot yet a regular dialogue between theorganisations, still less shared informationand processes for those people on theunemployed register who are receivingwelfare payments. Improved dialogue hasbeen developed with the ministries ofeducation as a result of capacity buildingthrough the EU VET programmes.

Improve statistics and evaluation

There is a range of basic administrativestatistics and analyses, by characteristic,about registered unemployed people. Forvarious reasons these data should betreated with considerable caution. Thegross inflation of the unemploymentregister has been described elsewhere inthis report; this inflation affects all thedifferent analyses of registeredunemployment, both stocks and flows.Information on active measures is patchy,partly as a result of inadequate monitoring,and the range of management statisticsfalls well short of what is needed to makethe public employment service an effectiveand efficient organisation. For example,there is no information on workflows or onstaff productivity. One of the futurechallenges for the employment services inBosnia and Herzegovina is to develop acommon, modern information system, forwhich there is already an expressedagreement between the employmentservices of Republika Srpska and theFederation of Bosnia and Herzegovina.With regard to the evaluation of theperformance of the public employmentservice and active labour market

programmes, little or nothing is currentlycarried out. There is some monitoring ofoutputs, but no attempt as yet to introduceevaluation techniques that provide anestimation of outcomes.

Assessment

The employment services are hardpressed, and are not viewed in a veryfavourable light. They are hampered by theinstitutional arrangements and byambiguity about what is expected of them.There is great scope for improvement intheir performance, but this will only comeabout when non-labour-market incentivesfor registering as unemployed are removedand workloads are drastically reduced as aresult. There are a number of areas whereefficiency can be improved and the qualityof service raised. IT needs to bemodernised and to support processimprovements. Crucially, the inadequacy ofmanagement, and other, statistics needs tobe addressed. Of course not allemployment services are at the same level,so all these observations will not apply toall with equal force. Employment serviceshave little or no impact on the scale of thegrey economy at the moment, but theycould have an effect, especially if they workin concert with the reformed labourinspectorate.

Counsellor workloads should bereassessed on the basis of the frequencyand nature of the interventions expectedfrom counsellors in relation to particularclient groups, for example, people underthe age of 25 years who are in danger ofentering long-term unemployment. Butsuch targeting should not be left toindividual counsellors or individualemployment offices – it should be policydriven in the light of entity and cantonallabour market conditions. The sameconsiderations apply in relation to activelabour market programmes. The EuropeanEmployment Strategy calls for the early

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52 The Danish Ministry of Foreign Affairs, with the EU VET Programme, has organised a training programme foremployment service staff which is in line with ongoing VET reform and the labour market in Bosnia andHerzegovina. The main objective of the programme is ‘to assist the Employment Service in BiH to initiate andconsolidate the development and implementation of a methodology for conducting regional quantitativelabour market surveys’. Nine key actors in employment services have been trained on how to monitor andanalyse labour market trends at local level, thus strengthening their competences, skills and knowledge onlabour market survey methods. They have also been given individual assignments in training otheremployment service staff how to conduct labour market surveys.

profiling of people joining the unemployedregister, as well as the provision ofopportunities for those who cross thethreshold into long-term unemployment.The employment services in Bosnia andHerzegovina would be overwhelmed bysuch an approach, and instead need to bemore selective about the groups they targetfor special assistance.

3.3.3 THE LABOURINSPECTORATE

The organisational structure of the labourinspectorate is much like that of theemployment bureaux, with a canton-basedservice in the Federation of Bosnia andHerzegovina, and an entity-based servicein the Republika Srpska. There are twobranches to the independentlyadministered inspectorate – Health andSafety, and Employment Relationships.There has been some confusion about therole of the inspectorate in relation topolicing compliance with the GCA. TheOfficial Gazette indicated such a role forthe inspectorate, but the Supreme FederalCourt ruled against this.

Usually there are rather more inspectorsfor law protection than for health andsafety, but in any event the numbers arecomparatively small53. A new law onlabour inspection was passed in theFederation of Bosnia and Herzegovina in2005 that seeks to strengthen andstreamline employer inspections and togive the labour inspectorate powers tofollow up non-payment of pensioncontributions. Around a quarter of theinspectorate’s work is generated byreferrals from people who believe theirrights have been ignored by employers. Inmany of these cases the inspectors act ina conciliation role rather than aninspectoral one. Individuals who wish toseek redress from employers formistreatment under the labour law may doso through the judicial system, but it is aslow process and the penalties are small.

During their inspection of businesses theinspectors identify people who are regularlyemployed but not registered, peopleemployed but who receive no salary orsocial contributions, and companiesoperating without the appropriate licences.A significant number of illegally employedworkers are identified54.

There is no database of registeredbusinesses available to the inspectorate,nor any systematic means of identifyingunregistered enterprises. Inspections areconducted on a regular basis and priornotice is not required. Labour inspectorscan levy fines and even close downoperations in the event of severe violations.But as a rule companies are given anopportunity to regularise the situation andto register the workers. This approach isusually successful. In any event thepenalties for employing unregisteredworkers are comparatively small (maximumBAM 15,000). The sanctions process ishandled at federal level and the procedurefor collecting fines is slow, although this isbeing changed and improved (the currentperiod is around six months). As a resultthe incentives to operate entirely in theformal economy are weak. Many of thepeople working on building sites are foundto be working unofficially, and somerespectable building companies have beendiscovered to have 150 illegally employedworkers. The greatest gain to the employerfrom illegal workers comes from unpaid taxand social contributions.

Assessment

A great deal of discretion exists within thesystem, and individual inspectors haveconsiderable authority, which is notmatched by sufficient accountability.However, given the very modest scale ofthe sanctions on employers there is littleincentive for collusion. Notwithstandingtheir recorded achievements, the labourinspectorates do not yet appear to havebeen successful in reducing significantlythe scope of the informal economy.

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53 In Tuzla there are six heath and safety inspectors and seven covering employment relationships. In Zenecathe respective figures are four and six.

54 In Tuzla 1,500 illegally employed workers were identified in the first eight months of 2005. In Zeneca 1,250were identified in 2004.

To be more effective the number ofinspections needs to be increased andheavier sanctions introduced. Both thesemoves are planned.

3.4 INVESTING MORE ANDMORE EFFECTIVELY INHUMAN CAPITAL

Under the terms of the Dayton Agreement,responsibility for education is devolved toentity and cantonal levels. Educationmatters in the Republika Srpska areassigned to the centralised Ministry ofEducation and Culture. In the Federation ofBosnia and Herzegovina the Ministry ofEducation and Sciences has a limitedcoordination role, with each canton havingits own Ministry of Education. Thestate-level competences in the educationsector are the responsibility of the Ministryof Civil Affairs. In summary, in Bosnia andHerzegovina there are 12 ministriesinvolved in the education sector. Duringrecent years discussions on education andtraining have also been opened up withstakeholders from the labour market,including ministries of labour and socialpartners, in particular in vocationaleducation and training reform and throughthe establishment of tripartite committeesat state level. Any initiative for a commonreform is therefore conditional upon theagreement of a large number of politicaldecision-makers.

Education and training is an agreed priorityof the authorities in Bosnia andHerzegovina, as expressed in theEducation Reform Agenda ‘A message tothe people of Bosnia and Herzegovina’,which was agreed between the authoritiesof Bosnia and Herzegovina (the educationministries and the Ministry for HumanRights and Refugees) and the internationalcommunity on 21 November 2002. In 2003a national policy for education reform wasadopted (Education Reform StrategyPaper) by the entity ministers of education;this provides a framework for educationreform until 2010, from pre-school to highereducation. The EC Country Strategy Paper(2000–06) for Bosnia and Herzegovina

defines ‘improvements in vocationaleducation and training (VET)55, which willlead in time to a better qualified workforceand reduced unemployment’ as a priority.Recommendations for a short- tomedium-term strategy plan for VET reformin Bosnia and Herzegovina (2015), toinclude a continuing vocational training(CVT) strategy for Bosnia andHerzegovina, will be designed in 2005–06to enable the country to align its owndevelopment gradually with the EU’sstrategic goals.

In general these policy documents aim toovercome fragmentation and promote acommon education and training space inBosnia and Herzegovina and institutions atstate level, while contributing to economicdevelopment. In this context a StateAgency for Standards and Assessmentwas set up in 2000 and a State Agency forCurriculum Development is planned.

Complementary to these policies, theBosnia and Herzegovina Medium TermDevelopment Strategy (2004–07), signedby the Council of Ministers, defines‘education and training as a key link in thechain of development strategy and povertyreduction in BiH’, while accelerating EUintegration. In addition, the SME draftdevelopment strategy and the five regionaldevelopment plans developed bystakeholders in Bosnia and Herzegovinaemphasise HRD to support economicregeneration and regional development.

In institutional terms the OSCE has since2002 been responsible for coordinating theeducation and training efforts of the variouspartner organisations and agencies, bothlocal and international, and for ensuringthat these efforts are consistent with thoseof the education ministers in Bosnia andHerzegovina, and targeted on agreedstrategic goals. The Education Issue SetSteering Group is a coordinating bodyinvolving the heads of the maininternational partners in the reform (Officeof the High Representative, OSCE, EC,Council of Europe, UNICEF, UNHCR,United Nations Mission in Bosnia andHerzegovina, World Bank).

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55 Vocational education and training includes initial and continuing vocational education and training in a lifelonglearning context.

The coordination structure includes sixworking groups. Additionally, the OSCEhas established working groups at regionallevel in the four OSCE Regional Centres(Banja Luka, Tuzla, Sarajevo and Mostar)with the aim of improving regionalcoordination. Regular monthly meetings ofthe education ministers are organised. TheOSCE is currently preparing an adultlearning strategy for Bosnia andHerzegovina.

While these policies have not beenfollowed by laws (except the stateframework law on primary and secondaryeducation adopted in June 2003 by theHouse of Peoples) or implementationplans, data on education financing givesome indication of the increasedinvestment in education. Education ismainly financed by the entities and therespective cantons in the Federation ofBosnia and Herzegovina and it is thereforedifficult to gain an overall picture of thesituation (as data are neither collected norstored centrally). However, the EUeducation sector review in 2004 showedthat between 2002 and 2004 the totalexpenditure on education increasedslightly. It also showed that education aspart of overall expenditure varied betweencantons, constituting from a third to almosta half of the total budget, depending on therichness of the canton. A third ofinstitutions received donor funding, somewere supported by local communities andsome by parents. According to the PovertyReduction Strategy Paper the total share ofGDP spent on education in Bosnia andHerzegovina is 6.4%. Although this figureseems high, the financial position ofinstitutions is often very poor, given the lowGDP and the economic situation in Bosniaand Herzegovina. There are no dataavailable for investment in CVT/HRD or inresearch.

Vocational education and training

The green and white papers on VET policywere adopted by the educationalauthorities in spring 2000 and autumn 2001respectively. Based on therecommendations of these documents aframework law for VET was submitted toparliament in July 2005, but has not yet

been approved. VET legislation at entityand cantonal level is also underpreparation.

Recommendations for a short- tomedium-term strategy plan for VET reformin Bosnia and Herzegovina (2015),including also an adult learning strategy,will be designed in 2005–06 to enable thecountry to gradually align its owndevelopment with the EU’s strategic goals.The strategy must take into account therecommendations and the original fourpillars of the European EmploymentStrategy. It will also refer to theCopenhagen Declaration, which providespolicy guidance on the strengthening of theEuropean dimension of VET and thepromotion of mobility of the VET graduatelabour force.

To this end Bosnia and Herzegovinastrives for a modern initial and continuousVET system, as promoted by theCopenhagen Declaration, which providespathways for the vertical and horizontalmobility of students and tools for the fastand efficient training and retraining ofadults, thus directly contributing to povertyreduction. Such a flexible system willprovide students and graduates in Bosniaand Herzegovina with wider choice interms of their career development and willenhance the employability of the labourforce.

Reforms include the classification ofoccupations, teacher training, theupgrading of equipment and theestablishment of better linkages betweenthe VET system, post-secondaryeducation, higher education, adulteducation and labour market actors.

The strategy will address the lack of acommon educational area and the stilllimited local institutional capacity of VETand the labour market for reforms within alifelong learning context.

CVT in a lifelong learning context

In April 2005 the OSCE started a debate ona draft lifelong learning strategy and on theneed for institution building for adultlearning. This should foster coordination

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and cooperation among all expert groupsdealing with VET and CVT in Bosnia andHerzegovina, with the aim of achieving acommon understanding of the basicdefinitions (lifelong learning, adulteducation and CVT) and encouraging jointdevelopments.

The results of the ETF peer review on CVTin a lifelong learning context in 2003 havebeen used as input for the discussion. TheETF peer review team has used the term'continuing vocational training in a lifelonglearning context' in its wider EU sense asany learning activity undertaken throughoutlife, with any aim of improving vocationalknowledge, skills and competences, withparticular reference to employability andsocial inclusion.

The strategy will place special emphasis onVET and CVT for adults and their links withthe initial VET system. This will include aproposal for the development of systems ofassessment and recognition of knowledge,skills and competences gained innon-formal and informal settings.

Modernised curricula and teachers and

trainers

VET reforms have so far focused onincreased cooperation between VETschools and labour market institutions, andhave included labour market needsanalysis, curriculum reform, and pilotingVET standards and assessment activities.In 2003–04 a labour market analysis wascarried out in 25 locations in Bosnia andHerzegovina, and a labour market analysishandbook was developed anddisseminated all over the country tofacilitate the understanding of labourmarket developments and to feed intodecisions for the modernisation of VETprovision.

In 2004, through a joint initiative of theministries of education in the RepublikaSrpska and the Federation of Bosnia andHerzegovina, 400 occupations werereduced to 100 and regrouped in13 occupational families. Currently a totalnumber of 42 VET schools (33%) in theFederation are implementing one or moreof the modernised curricula, and all VET

schools (69) in Republika Srpska started toimplement the modernised curricula inSeptember 2004.

Sectors for modernisation andrationalisation of occupations wereidentified on the basis of the labour marketanalysis; these included food processingand agriculture. Teachers from schools,together with representatives from facultiesand the labour market, prepared newcurricula using the modular curriculamethodology. This was complemented by amentor training programme in which 60mentors were involved in further training ofteachers in new curriculum developmentand teaching methodologies, includinginitial vocational education and training,and CVT.

It is expected that approximately 65% of allVET schools (out of a total of 201 VETschools in Bosnia and Herzegovina) willhave implemented one or more of the newcurricula in 2005.

By the end of 2006 a minimum of 45% ofall VET occupations in Bosnia andHerzegovina will have been modernisedand a minimum of 1,900 full-time teachersfrom at least 55% of the VET schools willhave been trained in modern teachingmethodologies.

The interactive teaching methods havechanged the relationship between teachersand students, and have given students anopportunity to express their attitudes,opinions and creativity. The new curriculaare more flexible, and combine practicaland theoretical training well. However, thedivision of general subjects and practicalskills development will need furtherinvestigation. Furthermore, mostequipment is out-dated, and the number ofteachers trained in new methodologies isstill limited. Many teachers feel that theyhave become overburdened, taking intoaccount the salary they receive and theirneed for more training.

With regard to CVT courses, some pilotcourses were developed by VET schools in2004 and further courses were to bedeveloped in 2005 for adults in agricultureand food processing.

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A pilot department for VET has beenestablished within the existing Standardsand Assessment Agency (SAA). A pilotproject on final external examinationswithin the occupations for which the newcurricula had been fully implemented wascompleted as a first activity. The objectiveswere to prepare external exams combiningtheory and practice, to involve teachers inindependent evaluations, and to providethe possibility of comparing levels ofeducation among students who follow thesame curricula. Recommendations for thescope of work of a VET department in theexisting SAA have also been prepared,including initial vocational education andtraining, and CVT.

Assessment

While the importance of human resourcesfor economic development and the needfor reform of the education sector havebeen recognised in recent years in policypapers and (inter)national agreements, theoverall progress of reform has been slow.Up to now most efforts have been centredon developing a mutual understanding andconsensus among an extremely largenumber of stakeholders at cantonal, entityand state levels. This has been anessential process which has also led to therecognition of a need for the creation of acommon education and training space. Onthe other hand, after many years the policypapers have not yet been translated intonew laws, with the exception of thestate-level framework law for primary andsecondary education, adopted in 2003.Moreover, the development of a stateframework law on VET and highereducation was started some years ago, buthas not yet been approved because ofpolitical constraints. Neither have

implementation plans, including detailedroles and responsibilities and budgets forreform, yet been defined. Althoughcoordination structures have been set up,actual coordination between the differentinitiatives in the education and trainingsector is still weak. This is mainly becauseof the complex administrative structure inBosnia and Herzegovina and the variety ofstakeholders involved. Some of thepositives developments in terms of theimplementation of the strategies developedinclude (i) the setting up of a Rectors’Conference; and (ii) the establishment ofthe state-level SAA and Curriculum Agencywhich, despite their slow developmentbecause of political and financialconstraints, are expected to foster acommon education and training space.While educational expenditure as apercentage of GDP exceeds the averagefor EU countries, this gives an inaccurateimpression, as in general the GDP inBosnia and Herzegovina is very low. Thissuggests that a remapping of institutions isnecessary, as proposed by the functionalreview of the education sector in Bosniaand Herzegovina.

As a result of the factors described above,modernisation of the education and trainingprovision has not yet taken place, at leaston a large scale. Donor-funded pilotactivities have certainly been beneficial inincreasing the capacity of education andtraining experts and practitioners toconceptualise, develop and implement newcurricula and teaching and learningmethods. But the number of individualswho have actually benefited from this newknowledge is still limited to thoseparticipating in the pilot programmes, asmodernisation has not yet beengeneralised.

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4. CONCLUSIONS ANDRECOMMENDATIONS

The analysis of labour market challengesand the assessment of policies set in placeto address those challenges lead to thefollowing conclusions andrecommendations.

IMPROVING THEINSTITUTIONAL SETTING

There is a general recognition that theoverall governance system in Bosnia andHerzegovina is extremely complex, with avery large number of institutions involved inpolicy and operations. Bosnia andHerzegovina is a small country, and labourmarket problems across entities aresimilar. In order to achieve policycoherence, reduce operational costs andovercome the notion of separateness andfragmentation of the labour market, theinstitutional arrangements need to bereviewed as soon as possible in thecontext of broader governanceconsiderations. This is particularly true forthe Federation of Bosnia and Herzegovina,where the federal authorities could have astronger role in the development and

implementation of labour market policyacross cantons.

INCREASING THEADAPTABILITY OFENTERPRISES

Apart from achievements inmacroeconomic stability, measuresintended to create a business-conduciveenvironment have not been effective,leading to very low levels of job creation inthe formal economy. Further efforts need tobe focused in the following areas.

� Barriers to SME establishment andgrowth need to be removed. Thisrequires simplification of the institutionalcomplexities and strategic actions.However, in the short term quick fixesare also possible, as demonstrated byexamples of good practice in a numberof municipalities in both RepublikaSrpska and the Federation of Bosniaand Herzegovina.

� An overarching strategy should be putin place to reduce the level of non-wage

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4

costs for individual companies,principally by increasing thetax/contribution base and limiting thescope of the formal wage determinationsystem.

� The economic restructuring of largeex-state enterprises should befacilitated. In particular the policy ofprotecting (unproductive) jobs for threeyears after the purchase of anenterprise needs to be reviewed.

� Remaining deficiencies in the labourlaws of the entities need to beaddressed, namely (i) the overgenerousduration and level of maternity pay –which in any case are widelydisregarded – and (ii) Article 143 onwaiting lists – which is not applied inpractice because the costs involved aresimply unaffordable. Although these arenot central to the functioning of thelabour market, they affect attitudes tocompliance with labour law andparticipation in the informal economy.

ATTRACTING MORE PEOPLETO ENTER AND REMAIN INTHE LABOUR MARKET:MAKING WORK A REALOPTION FOR ALL

Participation and employment rates areextremely low compared to those in the EUand in other countries in the region.Females and young people present thebiggest deficits. Employment in the informaleconomy is very high and increasing,accounting for all the growth inemployment during the past few years.Specific areas of work in addressing thosechallenges include the following.

� There is a need for urgent developmentof a coherent strategy for levering jobsout of the informal and into the formaleconomy with a clear implementationstrategy, including leadershiparrangements. The most importantelements of the strategy are the reformand strengthening of the labourinspectorate, the reduction of non-wagelabour costs and the effectiveness ofthe public employment services.

� A more structured and scientificapproach to the design andimplementation of active employment

measures needs to be adopted. Themix of the active labour marketprogrammes needs to be rebalanced,with less going on grants and loans toemployers and more on basicemployability training for unemployedpeople.

� Improvements are needed in thefunctioning of the employment servicesthrough:� clearly identifying their purpose and

priority;� reducing workload in relation to the

issue of people who registerreceiving basic health insurance: analternative arrangement needs to befound;

� improving the cost-efficiency of theemployment services in theFederation of Bosnia andHerzegovina by re-examining theinstitutional arrangements;

� reviewing operational proceduresand processes;

� ensuring a better deployment ofresources with a rebalance betweenback-room and front-line staff and abetter management of workflow;

� improving the services tounemployed people through a higherquality of information, counsellingand guidance;

� improving relations with employers;� modernising the IT system.

INVESTING MORE AND MOREEFFECTIVELY IN HUMANCAPITAL

The low participation rates in primary andsecondary education that existed in thesecond half of the 1990s are increasing,but they still present a deficit in relation torates in the EU. However, the quality of theeducation system at all education levels isstill contested. Strategic documents for themodernisation of the education system,developed in recent years through broadparticipation of stakeholders, have notbeen translated into actions because ofpolitical constraints and the complexadministrative structure in the country.Training for skill upgrading is not seen asattractive by adults, and the traininginfrastructure is weak.

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Future work needs to focus on a number ofareas.

� Education and training reform initiativesaimed at the creation of a jointeducation and training space need tocontinue. These include faster progressin the approval of the state frameworklaw on VET, and the effectivefunctioning of the state agencies for(i) standards and assessment and(ii) curriculum development.

� Efforts to achieve better cooperationbetween education and training and thelabour market at local level should bemaintained.

� There is a need for specific actions todisseminate and implement goodpractice on enhancing the quality of theeducation provision from donor projectsto a large number of schools.

� The issue of permanently upgrading theskills of the population should beaddressed through short-termmeasures (such as promoting theparticipation of adults in training in theframework of active labour marketmeasures) and the development ofstrategic approaches to adult learning(for example through work on thedevelopment of a lifelong learningstrategy initiated by OSCE).

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4. CONCLUSIONS AND RECOMMENDATIONS

ANNEXES

ANNEX 1: CASE STUDY – THELEATHER/SHOE INDUSTRY INDERVENTA MUNICIPALITY

After the war in Bosnia and Herzegovina,the DEMOS company planned to restartwith the production of around 30,000 pairsof shoes, and qualified for a restart creditfrom the government of Republika Srpskain December 1997. However, difficultieswith the market and with out-of-dateequipment caused problems for the factory.The privatisation process caused someadditional difficulties. In July 2001,600 workers at the company went on striketo protest about the uncertaintiessurrounding the privatisation process. Afterthree unsuccessful tendering procedures,the state capital was finally offered on theBanja Luka stock market (quotation No 478from 17 April 2003) and sold. Today thecompany is undertaking low-levelproduction with 100 workers and with anadditional 400 workers on a waiting list.

In the meantime, Mr Mile Tadic, a returneefrom Hungary, decided to start productionof the upper parts of shoes, under thename Baja. He employed some engineersand a few workers who were formerly

employed at DEMOS. Today this companyemploys up to 200 workers in theproduction of its own shoe collection and ofshoe parts for export to EU countries. Thecompany turnover is around €7.2 million,and total production is around 200,000pairs of modern shoes. A number of othersmaller enterprises were also established,such as the Sanino Company. They havefocused on the upper parts of shoes, andhave a turnover of around €1 million.

These two companies have createdvacancies for more than 300 skilledworkers with experience in shoe production(such as workers from DEMOS). However,workers from DEMOS have been reluctantto accept these job offers. If these workerswant to take a job with Baja or Saninolegally, they have to collect their personal‘workbooks’ from DEMOS without a largepart of their pension and insurance historyregistered; this might cover a period fromas long ago as 1977 (pension history wasdealt with by the government of RepublikaSrpska until 1977), or from the moment thatDEMOS stopped paying their contributions.The situation is similar for workers at manyother former state-owned companies inBosnia and Herzegovina.

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ANNEX 2: THE LABOURMARKET INSTITUTIONALSETTING

State Ministry of Civil Affairs

This ministry has state-level responsibilityfor labour market policy, though there areno staff allocated to this area.

State Employment Agency

The agency was established in 2003 withresponsibility for international relations,signing international agreements,monitoring the employment agencies atentity level in the implementation of ILOconventions adopted by Bosnia andHerzegovina, and research into workingabroad. The agency has 16 staff and agoverning board, though this is nottripartite, as are the federal and cantonalemployment services and those inRepublika Srpska. The agency prepares areport for the Ministry of Civil Affairs.

Ministry of Labour in Republika Srpska

Relationships with state level (Ministry ofCivil Affairs) are constructive, and arenormally related to international affairs. Theministry is responsible for labour marketpolicy in Republika Srpska.

Employment Bureau in Republika Srpska

There are six regions, 56 local branch officesand a total of 227 staff – the smallestemployment service in the Balkans. Around88 of the staff are employment counsellors.The bureau provides much the same rangeof functions as public employment services inother countries, and tries to respond to localneeds through active measures, though itsfunds are very limited. Its income (aroundBAM 80–90 million) comes from a 1% payrolltax on net salary. The Republika Srpskabureau works well with the bureau in theFederation of Bosnia and Herzegovina. It isseeking to create a single labour market, andsupports the further development of the StateEmployment Agency.

Ministry for Labour and Social Policy in

the Federation of Bosnia and Herzegovina

There are only three staff in the labourdepartment of the federal Ministry for

Labour and Social Policy. Relationshipswith the state are constructive and arenormally related to international affairs. Thestate concentrates on coordination andinformation. However, the StateEmployment Agency is establishing anagency for unemployed people, eventhough most work is carried out at entityand cantonal levels. The managementboard of the federal employment bureau iselected by federal parliament, and themanagement boards of the employmentbureaux in the cantons are elected by thecantonal equivalent. The department iscurrently working on four laws: health andsafety, labour inspection, professionalrehabilitation for people with disabilities,and waiting lists. Cooperation withRepublika Srpska is good: currently theyare working together to harmonise payrolltax and the treatment of foreigners.

Federal employment bureau

The federal employment bureau is fundedthrough its 30% share of the income fromthe payroll tax of 2% of gross wages in theFederation of Bosnia and Herzegovina.The bureau plays a supporting role incooperation across cantons, and directlyfunds active labour market measures.

Cantonal ministries of labour

The cantonal ministries of labour are partof the cantonal government arrangements.Cantons supervise the legality of theoperation of the cantonal employmentbureaux, which have their ownmanagement board, director and budget.There is a canton law on mediation andsocial security for unemployment. Cantonalgovernments approve the budget andexpenditure plans of the cantonalemployment services. Although thecantonal employment bureaux reporteverything to the federal employmentbureau, they are accountable to thecantonal parliaments.

Cantonal employment services

The cantonal employment bureaux receivetheir funding from the payroll tax. There is aspecial fund at federal level to assistcantons in difficulty. Each canton hasoffices in each of municipalities andoperates within the legal framework at

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federal level. The Federation of Bosnia andHerzegovina provides guidance on activelabour market measures, but theprogrammes are approved by the cantonalemployment bureau management boards.

Confederation of Independent Trade

Unions of Bosnia and Herzegovina

The confederation comprises 22 branchunions with around 270,000 members. It ismore active in the Federation of Bosnia andHerzegovina than in Republika Srpska. InRepublika Srpska there is a partner union,the Trade Union of Republika Srpska, andrecently the two have agreed to merge. Theorganisation participates in the SocialEconomic Council at both the state leveland the entity level. High-level collectiveagreements dating from 2000 exist in thetwo entities (with the aim being to achieve ahigh-level agreement at state level), signedby the government and the Chamber ofCommerce. The high-level agreementsinclude national minimum wages and someminimum rights for workers. A newagreement has just been negotiated with thegovernment and the Association ofEmployers. A new minimum wage will beset using the gross hourly wage. In theFederation of Bosnia and Herzegovina it willbe BAM 307 per week in net terms.

Social and Economic Councils

Social and Economic Councils exist atentity level. They bring together worker andemployer representatives with governmentand other public institutions to discussissues of social policy. The entity-levelcollective agreements are negotiatedthrough the Social and Economic Councils.

Chambers of Commerce

The Republika Srpska Chamber has fiveregional offices and 1,000 members.Membership has been voluntary since2004. The chamber organises a largenumber of training opportunities for itsmembers, on topics such as management,public relations, human resourcedevelopment, standards and certification.

It has a joint project with Austrian andGerman partners that covers the training oftrainers, the training of consultants for SMEdevelopment, and training on ISOstandards. There is a Foreign TradeChamber of Commerce based in Sarajevowhich covers only export/importcompanies. It was established byparliament and is an umbrella organisationcovering cantonal chambers and membersfrom both the Federation of Bosnia andHerzegovina and to a much lesser extentfrom the Republika Srpska. Membership iscompulsory. There are 20,000 members.The chamber provides a range of services,including economic information andanalysis, import/export officialdocumentation, and policy-led training.

ANNEX 3: MAIN PROVISIONSOF LABOUR LAWS ANDEMPLOYMENT LAWS IN THEENTITIES

The Labour Law of the Federation ofBosnia and Herzegovina was promulgatedin 1999 and amended substantively thefollowing year; in Republika Srpska theLabour Law was introduced in 2000.

Employment status

Various forms of employment status areadmissible within limits56 under the laws:permanent (no fixed duration), temporary,fixed duration, casual, seasonal, part-timeand probationary. Hours of work are limitedto 40, and the amount of overtime isregulated. Levels of maternity leave andpay57 are well beyond those available indeveloped economies and othertransitional countries. In reality the flexibilitypermitted under the labour law is used onlynarrowly. The use of temporary contracts iswidespread and appears to be a means ofavoiding the full range of commitmentsassociated with permanent contracts.However, there is – at least in the formallabour market – an absence of flexiblepatterns of employment, particularlypart-time employment.

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ANNEXES

56 For example, in the Republika Srpska work of a temporary nature should not exceed 60 days.

57 In the Federation of Bosnia and Herzegovina, the entitlement is 12 months at full pay. In the RepublikaSrpska it is 12 months for the first child, paid at the mother’s average salary in the preceding six months.

Dismissals

Employers in both the Federation of Bosniaand Herzegovina and Republika Srpskaare allowed to terminate individualemployment for a variety of reasons,including poor performance, misconduct,and on economic, technical ororganisational grounds58. Small companieswith fewer than 15 employees are notrequired to consult about dismissals, nor tohave works councils. Larger employershave to consult with their works council59 ortrade unions where five or more employeesface dismissal60. In the event of dismissal,severance is payable equal to one-third ofmonthly salary for each year of service. It isnot unusual for employers to avoiddismissing people and the costs involvedby keeping them as unpaid employees.

Rule book and consultation

Under Article 107 of the Labour Law in theFederation of Bosnia and Herzegovina, anemployer of more than 15 workers mustpublish a rule book on salaries, workorganisation, discipline and other employeeregulations. The employer is obliged toconsult with the works council or the tradeunion before finalising the rule book. TheLabour Law in the Republika Srpska issimilar61. For companies that have asupervisory board, 20–50% of the boardmust be employee representatives,depending on the size of the company.

Holidays and pensions

The Labour Law of the Republika Srpskaallows agreement between employer andemployee regarding the taking of holidaysin two segments, provided that one part isa continuous two weeks. Provisions forannual leave are the same in the LabourLaw of the Federation (Article 42), exceptfor the segmented use of the vacationentitlement. Employees with more than20 years of service are eligible for fullpensions at the age of 65, regardless ofgender. Pensions are based on averagesalaries of the most recent 15-year periodand adjustments are allowed for currenteconomic conditions.

Article 143 and waiting lists

This article of the Labour Law of Bosniaand Herzegovina prescribed that the statusof ‘waiting-list employee’62 was to expire inMay 2000 unless the employer invitedthose concerned back to work. Employerswho did not do so were deemed to havemade the waiting-list employee redundantand were obliged to pay severancecompensation of three times the averagesalary in Bosnia and Herzegovina. Inpractice this did not happen, although thewaiting-list problem was in theory, and inlaw, removed.

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58 According to the Law on Labour Relations for the Federation of Bosnia and Herzegovina, an employer maycancel the employment contract of an employee with the prescribed period of notice of cancellation, whensuch cancellation is justified for economic, technical or organizational reasons; or the employee is no longerable to perform the job for which she/he was employed. The termination period may not be less than 14 daysif the employer cancels the employment contract. In the case that a court finds that the contract termination isunlawful, the court has the option of reinstating the employee or requiring the employer to pay damagesincluding salary, severance allowance and other benefits to which the employee may be entitled.

59 In companies with more than 15 regular employees, workers are entitled to establish a works council forrepresentation and protection of employee interests deriving from the employment contract (Article 109 ofRepublika Srpska’s labour law). A similar provision exists in the labour law of the Federation of Bosnia andHerzegovina (Article 108).

60 An employer employing over 15 employees who intends to cancel over a three-month period the employmentcontracts of more than 10% of employees but not less than five employees shall consult with the workscouncil in the enterprise or in the absence of a works council with all trade unions representing at least 10%of employees.

61 Article 162 of the law in Republika Srpska. However, this law does not include provisions for obligatoryconsultations with the works council or trade unions.

62 Persons employed on 31 December 1991 and who reported back to their employer after the war were put onwaiting list if there was no work for them. Those who did not report to the employer were entitled byArticle 143 to write to the employer within three months of its promulgation to request that they be allowed toreturn to work with the proviso that they had not started a job elsewhere. If the employer could not employthem they were put on the waiting list. The article required that all waiting lists be extinguished within sixmonths through the employee being offered work or through severance payment.

The main provisions of the employment

laws (Law on Job-Placement and Social

Security of the Unemployed)

General and federal

The Decision of the High Representativeon the Law on Job-Placement and SocialSecurity of the Unemployed sets out therole of the Federation of Bosnia andHerzegovina and the public employmentservices of the cantons. The law defines anunemployed person and includes theconditions that they should be capable,available and actively seeking work. Itrequires the federal bureau, inter alia, topropose and provide for theimplementation of measures to promoteemployment and social security forunemployed people, to maintain collectiverecords and to develop proposals for asingle information system63.

Cantons

The same law gives the cantonsresponsibility for employment serviceoperations, and in particular thedetermination of individual unemploymentrights, mediation, the implementation ofactive measures covering vocationalguidance, training and redeployment, andthe issue of work licenses to foreigners andpeople without citizenship, as requested bythe federal bureau. The law places on thecantonal employment services arequirement to work together andcooperate with the federal bureau in themanagement of information and periodiclabour market assessments.

Unemployment registration and active

measures

The law sets out the conditions for beingregistered as unemployed, including therequirement that job seekers (registered asunemployed) should be available for andactively seek work. The law allows thecompetent federal and/or cantonalauthority to offer incentives to employers to

generate new jobs and employ morepeople in order to facilitate restructuringand the introduction of new methods,reduce the duration of unemployment,meet skill shortages, improve workermobility and help people with disabilities. Atthe same time the cantons regulate, andthe employment services provide,vocational guidance and training measuresto stimulate employment.

Private agencies

Private agencies (regulated by thegovernment of the Federation of Bosniaand Herzegovina) may provide job brokingand counselling as well as employmentservices. There are no private agencies inthe Federation of Bosnia and Herzegovina,and only one, Spektar, in RepublikaSrpska. This agency started in 2001; itstates that it has 6,500 registered jobseekers and contact with 300 enterprises.Job seekers pay a small fee forregistration, and employers pay forrecruitment. Interviews are held with jobseekers and in some cases the companyorganises training (free or fee-based).

Of the job seekers on Spektar’s database14% have university education, 7% VisaSkola (higher school) education, 66%secondary education, and 13% primaryeducation. Spektar claim to place all kindsof worker, and would like to compete intenders within the framework of foreignassistance from which they are currentlyexcluded because they are a privatecompany. The company has no directcooperation with the employment services.

Unemployment insurance

The law sets out unemployment insurancearrangements. The length of time for whichbenefit is paid is related to the number ofunemployed insurance years; and the levelof payment depends both on the number ofunemployment insurance years and theaverage salary in the canton (nowFederation) earned in the previous

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ANNEXES

63 The act also requires that the federal bureau: proposes measures to help disabled people and ensure theyare met; assists in the implementation of active labour market programmes covering vocational guidance,training and redeployment; approves the employment of foreign citizens and assists the return of Federationcitizens working abroad as guest workers; represents the cantonal employment services; deals with ILOconventions and submits consolidated annual financial plans of the bureau and the employment services tothe federal ministry; and submits an annual work report to the federal parliament.

quarter64. The form and manner ofregistering as unemployed and claimingunemployment benefit is regulated by thecantons.

Health insurance, pension and disability

pension contributions

Health insurance of unemployed people isprovided for under the regulations of theHealth Insurance Law. People who areregistered as officially unemployed areentitled to basic health insurance, which iscovered from the social contribution in theFederation of Bosnia and Herzegovina andfrom the budget in Republika Srpska.People who need a maximum of threeyears’ contributions to qualify for pensionsare also covered.

Funding arrangements

Funding for the federal employment bureauand the cantonal employment servicescomes from contributions in respect ofeach employee, with the federal bureaureceiving 30% and the employmentservices 70%. The contribution level iscurrently 2% of gross wages – equivalentto 3.75% of net salary. At cantonal level thefunds cover administrative expenses, thecost of the unemployment system, healthinsurance, and retirement and disabilitypension contributions65. In the event of asurplus, active labour market measurescan be funded by cantons. If there is ashortfall, a request can be made to thefederal bureau for financial assistance. Thefederal bureau provides cantons with funds

to cover such shortfalls. In the event of ageneral shortfall the federal bureau rationsits contributions to the cantons on the basisof the proportionate size of their shortfall. Inrecent years the Federation of Bosnia andHerzegovina has been in a surplusposition, and uses its funds to financelabour market programmes through thecantons and to support IT infrastructuraldevelopment and labour market research.The Federation has taken the lead in thedevelopment, procurement and installationof a new IT system, which should beoperational in all cantons in 2006.

Republika Srpska

The employment law in Republika Srpskaparallels that of the Federation of Bosniaand Herzegovina, though without thecomplication of the cantonal role. Thepayroll tax is just 1% of net wages. Theunemployment benefit rules66 are much thesame as in the Federation. In RepublikaSrpska the level of contribution fromemployees is only 1% of gross wages. Thehealth insurance is paid separately fromRepublika Srpska’s budget funds and doesnot go through the employment bureau ofRepublika Srpska. Republika Srpska hassucceeded in managing its finances so asto meet the costs of unemployment benefitand support active programmes. Thisposition will become more difficult if theredundancies that are forecast take place,leading to increases in unemploymentcompensation payments and decreases inthe contributing employee base.

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64 The unemployment benefit is dispersed at the following rates and periods:a) six months at the rate of 30% for the unemployment insurance period of 8 months to 10 years;b) nine months at the rate of 35% for the unemployment insurance period of 10 to 25 years;c) twelve months at the rate of 40% for the unemployment insurance period of over 25 years.

65 Law on Job Placement and Social Security of the Unemployed, Article 49:‘In the event that the funds available to the Employment Service are estimated to be sufficient to meet theneeds for the material and social security of the unemployed for the forthcoming month and the administrativecosts, the Employment Service shall use the exceeding funds for the fulfilment of the measures providedunder Articles 21 and 25. In the event that the funds available to the Employment Service are estimated to beinsufficient to meet the needs for the material and social security of the unemployed for the forthcomingmonth and the administrative costs, the Employment Service shall submit, with the monthly report referred tounder Article 52, a request for the allocation of missing funds from the Federal Bureau.’

66 The right to compensation is regulated by the employment law in Republika Srpska, and persons with at least8 months of permanent employment or with 12 months’ interrupted employment within a period of 18 months,provided that their working status was not caused by their own will or fault and that social beneficiaries werepaid for that period. During the right to compensation they are also eligible to social and health insurance.Other unemployed persons have the right to health insurance by the Law on health insurance.’ (OfficialGazette RS, No 70/01). Financial resources are provided by government of Republika Srpska for thesepersons.

ACRONYMS

BAM Bosnia and Herzegovina convertible mark

BiH Bosnia and Herzegovina

CARDS Community assistance for Reconstruction, Development and Stabilisation

CVT continuing vocational training

EPPU Economic Policy Planning Unit

ETF European Training Foundation

EU European Union

FSVC Financial Services Volunteer Corps

GCA General Collective Agreement

GDP gross domestic product

HRD human resource development

HSPS Household Survey Panel Series

ICT information and communication technology

ILO International Labour Organisation

ISCED International Standard Classification of Education

IT information technology

LON labour only

LSMS Living Standards Measurement Survey

MDG Millennium Development Goals

OSCE Organisation for Security and Cooperation in Europe

PRSP Poverty Reduction Strategy Paper

SAA Standards and Assessment Agency

SME small and medium-sized enterprise

UNDP United Nations Development Programme

UNHCR Office of the United Nations High Commissioner for Refugees

UNICEF United Nations Children’s Fund

USAID United States Agency for International Development

VET vocational education and training

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Documents

LABOUR MARKET REVIEW OF BOSNIA AND HERZEGOVINA · CONTENTS PREFACE 5 EXECUTIVE SUMMARY 7 1. ECONOMIC SITUATION AND BACKGROUND 11 1.1 Macroeconomic situation 11 1.2 Economic restructuring