Yugoslavia - Employment strategy and manpower policies for the 1980's

Report No. 4519-YU zF C PY Yugoslavia: Employment Strategy and Manpower Policies for the 1980s September 16, 1983 Country Programs Department I Europe, Middle East and North Africa Region FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Currency Equivalents 1/ 1976 1 US Dollar = 18.19 Dinars 1 Dinar 0.055 US Dollar 1977 1 US Dollar = 18.30 Dinars 1 Dinar 0.055 US Dollar 1978 1 US Dollar = 18.64 Dinars 1 Dinzar 0.054 US Dollar 1979 1 US Dollar = 19.00 Dinars 1 Dinar 0.053 US Dollar 1980 1 US Dollar = 24.91 Dinars 1 Dinar 0.040 US Dollar 1981 1 US Dollar = 35.51 Dinars 1 Dinar 0.028 US Dollar 1982 1 US Dollar = 62.49 Dinars 1 Dirtar 0.016 US Dollar 1/ Period average exchange rates. The dinar has not been maintained within announced margins since July 12, 1973. On August 31, 1983, the rate stood at 102.99 Dinars per US Dollar. Glossary of Abbreviations BOAL Basic Organization of Associated Labor COAL Complex (or Composite) Organization of Associated Labor COI Community of Interest FEB Federal Employment Bureau GMP Gross Material Product LDR Less Developed Region (s) MDR More 'Developed Region (s) OAL Organization of Associated Labor SSE Small Scale Enterprise (s) Throughout thisreport, the term 'region' is used to refer to Yugoslavia's six republics and two autonomous provinces.  FOR OFFICIAL USE ONLY YUGOSLAVIA EMPLOYMENT STRATEGY AND MANPOWER POLICIES FOR THE 1980'S This report is based on the findings of a World Bank economic mission which visited Yugoslavia in June 1982. The mission consisted of the following: Frederick Kilby, Chief of mission Mukaila Ojelade (Demography) Andre Sapir (Labor Markets) ' This document has a restricted distribution and may be used by recipients only in the performance of their ofricial duties. Its contents may not otherwise be disclosed without World Bank authorization.  I  ABSTRACT This report examines the evolution of the employment situation during the seventies and reviews the range of policies available to the Yugoslav authorities for reducing unemployment. The incidence of unemployment is analyzed and the report suggests that youth unemployment and regional unemployment are linked to certain rigidities in the economy which inhibit the labor market equilibrium. The report makes a number of suggestions for resolving these difficulties by measures aimed at increasing labor demand and improving the efficiency of the labor market.  I  YUGOSLAVIA EMPLOYMENT STRATEGY AND MANPOWER POLICIES FOR THE 1980s Table of Contents Page No. COUNTRY DATA SUMMARY AND CONCLUSIONS i I. The Pattern of Employment and Unemployment in Yugoslavia ......... 1 A. Recent Macroeconomic Developments ........................... 1 B. The Institutional Setting...... . ...................... O-* 4 C. Employment and Unemployment in Yugoslavia*...... 7 D. Data LimitationsaadDeinitinss ......... 12 E. The Profile of the Unemployed ....... ....... . .... ..... . 13 F. Regional Development . .................... ......... * .......... 17 G. Recommendations for Data Collection and Procssing ..........es.s 22 II. Structural and Institutional Characteristics of Labor Market ..... 23 A. Introduction ....*...................... ........................ ............ 23 B. Rigidities in the Labor Market .............................. .. 25 C. Regional Distortions ..*.*.............. .. ... .*....... ......................... 38 D. Conclusions . .. ................. ........ . 47 III. Agricultural Employment and Income in Yugoslavia ................. 49 A. Introduction ........................................................... 49 B. The Agricultural Labor Force ........... .... ... ................ . 51 C. Agricultural Labor Requirements .... ......................s 58 IV. Trends in Labor Supply and Employment Prospects .................. 60 A. Introduction ...... .0.*... .............. ............... ........ 60 B. Population Growth and Its Sources ......ul.t.io G.ro t0.hats ou e.... 60 C. Economic Activity of the Population .. 65 D. Regional Demographic Trends.... ...........o .................. 69 E. Ex ternal Migrationospcts ..o..o .... ............................ . 76 F. Employment Prospects ..**............ .....O 79  Table of Contents-(Continued) Page No. V. Employment Policy and Stabiization....................,........ 91 A. Introduction ................ .. ............ 91 B. Measures to Increase the Demand for Labor..................... 92 (i) Investment Policy and Project Selection Techniques......*, 92 (ii) Changing the Relative Price of Capital and Labor ........... 95 (iii) Employment Subsidies......*.*.* ..... 97 (iv) Creation of an Employment Fund .................. . 99 (v) Small-Scale Industries....*.. ... es .... 101 C. Measures to Redistribute the Demand for Labor.. ........... 102 (i Shift Work ............................ ................... ......... 102 (ii) Decentralization*. ....... .o.........e eeeeeeee 105 (iii) Employment Flexibility ...................... 107 (iv) Reduction in Working Time...... ....... ....................... 108 (v) Traieei....... 109 D. Measures to Improve the EfEficiency of the Labor Mark et . 109 (i) Oriented Education . 109 (ii) Inter- and Intra-Firm Mobility ............................ 110 Ciii) Interregional Labor Mobility............. ... 1.1. .1...... 11l (siv) Joint Ventures .... .0.1........ l, 112 BIBLIOGRAPHY 115 STANDARD TABLESN. .................. 117 STATISTICAL APPENDIX ................. ....... 121  Table of Contents LIST OF TEXT TABLES Table No. Page No. Chapter I 1.1 Changes in the Structure of the Labor Force Selected Countries, 1971-79 8 1.2 Employment and Labor Force, 1978 08 1 10 1.3 Number of Job Seekers in Yugoslavia According to Length of Work Experience 19 70-81.-8* . .. .................... . 14 1.4 Nuiber of Unemployed in Relation to Total Domestic Labor Force and Social Sector Employment, 1970-81-....................-....... 14 1.5 Structure of Unemployed in Yugoslavia By Sex and Qualification Level .15 1.6 Structure of Job Seekers in Yugoslavia By length of Job Searche...... a........ . .... 16 1.7 Some International Comparisons of the Age Structure of the Unemployed, 1980 16 1.8 Some Indicators of Regional Unemployment 1973, 198 .....81..... oo..ooooo. 20 1.9 Social Sector Employment and Number of Unemployed in the Largest Cities in 1980, by Region.o.. 21 Chapter II 2.1 Institutional Structure of the Domestic Ltabor Market ................................................ 23 2.2 Average Monthly Turnover Rate 1971-80 ................ 28 2.3 Job Seekers with Work Experience by Duration of Experience ........... .......... . ...... .. . ........... . 29 2.4 Net Personal Incomes According to Age in 1976 ........ 34 2.5 International Comparison of the Sectoral Distribution of Employ m ent..................... 36 2.6 Unemployment Rates and Various Regional Socio- Economic Indicators.,.*..*. .s... 39 2.7 Deviations from the Average Social Sector Wage, 1970, 19043 2.8 Contribution of Federal Fund to Investment in Less Developed Regions, 1976-80 ........... ...... 44 2.9 Changes in the Structure of the Labor Force .......... 47  List of Text Tables (Continued) Table No. Page No. Chapter III 3.1 Distribution of Labor Force and Agricultural Land .. @ 7 @ * * - * * * * * @52 3.2 Distribution of Arable Land and Agricultural Labor Force b-y Region, 1980........................ 53 3.3 Land Holdings by Farm Size, 1971, 1979 .................... 54 3.4 Distribution of Agricultural Employment According to Farm Size, 1 97 9 55 3.5 Annual Incomes and Average Incoi.ie Per Worker in Agricultural Households -- 1971, 1979..7.9..0 56 3.6 Structure of Agricultural Incomes in Yugoslavia 3.7 Labor Requirements in Individual and Social Sectors .. ............... 59 Chapter IV 4.1 Age Structure of Population. ........................ 63 4.2 Percent Illiterate Population by Age (10-64) 1953. 1961 & 197o.. ....... 64 4.3 Educational Structure by Sex, 1953-1971.............. 65 4.4 Total and Economically Active Population 1961. 1971 & 1981 ................ ....................... 67 4.5 Age Specific Activity Rates by Sex, 1961-1980 ........ 68 4.6 Demographic Indicators, 1950-78...................... 70 4.7 Regional Demographic Trends, 1961-81.................. 71 4.8 Absorption of the Natural Increase in the Labor Force, 1976-800.... .......... 72 4.9 Agricultural Population as Percent of Total 1953_1981 ....... t...................... 73 4.10 Female Activity Rate by Region, 1953-1981 ............ 74 4.11 Percentage of Polpulation Over 10 Years With Elementary or 'Higher Education by Region 19 53-1981 ....... s.............. o..*....... ....... 75 4.12 External Migrants by Region of Origin, 1971 and 1981....o. ........o.. ......o. 77 4.13 Anticipated Changes in the Structure of the Labor Force, 1981-85.9.8.1.8.5 ................... 80 4.14 Projections of the Yugoslav Labor Fo-rce (And Activity Rtates) 1971-2000..o.2.....0.oo...o..o 82 4.15 Labor Force Balances 1985-90.,......* .......O ..... 90  List of Text Tables (continued) Table No. Page No. Chapter V 5.1 Trends in Social Sector Development in Yugoslavia and the Less Developed Regions 1970-80. ....... ....* . ..................... . 93 5.2 Extent of Shift Work; An International Comparison.osoo ..... o-o-oo ... 104 5.3 Urban Unemployment and Concentration of Social Sector Employment in Large Cities by Region, 1980-@... ...... 106  I  COUNTRY DATA - YUGOSLAVIA AREA POPULATION DENSITY 255,804 eq. km. 22.3 million (aid-1980) 86 persons per sq. km. - ~ ' hRate of Growtb: 0.9X (from 1970 to 1980) 154 persons per sq. km. of agricultural land POPULATION CHAhCTERISTICS (1980) HEALTH (1979) Crude Birth Rate (per 1,000) 16.9 Population per physician 1,795 Crude Death Rate (per 1,000) 8.8 Population per hospital bed 167 Infant Mortality (per 1000 live births) 32.6 INCOME DISTRIBUTION (1978) DISTRIBUTION OF LAND OWNERSHIP (1971) Z share of household income, lowest quintile 6.6 S owned by top 10X of owners highest quintile 38.7 (social sector Xombinats) 15.1 2 owned by smallest 101 of owners (private smallholders) 84.9 ACCESS TO PIPED WATER (1978) ACCESS TO ELECTRICITY Dwellings with piped water (S) 40.5 1 of all dwellings (1978) 89.0 rural (1971) 80.0 NUTRITION (1977) EDUCATION Per capita' Calorie Supply 3,445 Adult Literacy rate (2) 85 (1975) (1362 of requirement) Primary school enrollment (X) 100 (1977) Per capita protein supply (grams/day) 101 Secondary school enrollment (X) 79 (1977) GNP PER CAPITA IN 1981 1/: US$2790 GROSS DOMESTIC PRODUCT IN 1982 AVERAGE ANNUAL RATES OF GROWTH (Z. constant erices) US $ Mn. X 1970-75 1975-80 1981 GDP at Market Prices 61,705 100.0 6.5 5.8 2.2 Total Consumption 46,085 74.7 6.9 5.4 -1.0 Gross Domestic Investment 21,459 34.8 5.5 5.4 1.3 Gross National Savings 19,746 32.0 6.2 5.0 -12.2 Exports of Goods and Nonfactor 6.7 5.3 10.9 Services 15,051 24.4 6.7 3.2 -3.0 Imports of Goods and Nonfactor Services 16,246 26.3 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1980 GDP at Current Factor Cost (1980) Labor Force 4/ Value Added Per Active Resident Worker U0$ Mn. 2 Tin. Z USS (1980) ; Z Agriculture 2/ 8,516 13.7 2.50 30.6 3,261 43.2 industry 3/ 28,801 46.2 2.80 34.3 10,593 140.4 Other 24,993 40.1 2.87 35.1 8,309 110.1 Total 62,310 100.0 8.17 100.0 7,547 100.0 GOVERNMENT FINANCE, consolidated, 1980 USg Mn. Consolidated Public Sector Receipts 19,580 Expenditures 19,225 Surplus 355 Ratio of Current Receipts to GDP at Market Prices (Z) 31.7 MONEY, CREDIT AMD PRICES (in billions of dinars) 1976 1977 1978 1979 1980 1981 1982 Money Supply 5/ (end-year position) 206.4 251.1 315.3 375.2 461.6 584.3 739.8 Money Supply as Z of GDP at market prices 30.4 30.1 30.9 29.2 26.7 24.7 23.4 Bank Credit Total 6/ 569.1 699.3 959.2 1,217.7 1,568.3 1,927.8 2,369.2 Enterprises 440.4 535.8 728.7 943.0 1,225.1 - Government and other Social Sector 78.2 98.4 140.2 157.6 186.5 - households 50.5 65.1 90.3 117.1 156.7 207.8 Price Indices (Annual Percentage Change) Industrial Producer Prices 6 10 9 14 27 45 25 Agricultural Producer Prices 14 11 13 25 36 54 36 Retail Prices 10 13 14 22 30 47 30 1/ The per capita GNP estimate is at market prices, calculated by the same conversion technique as the World Bank Atlas. All other conversions to dollars in these tables are at the prevailing period average exchange rate. 2/ Includes irrigation snd forestry. 31 Manufacturing, mining, construction, electricity, gas and water. 41 Total active resident labor force, excluding unemployed. 5/ Currency in circulation, demand deposits and float. 6/ Short- and long-term credits.  BALANCE OF PAYMENMS, MERCHANDISE TRDE AND DEBT Annual Dcta at Current Prices 1/ (US$ Millions) 1977 1978 1979 1980 1981 1982 SU1M9UY OF BALANCE OF PAYMENTS EXTERNAL. DEBT, December 1, 1982 Exports (f.o.b.) 5,254 5,809 6,794 8,978 10,205 10,247 US$ Millions Ilports (c.i.f.) -9_,634 10,439 -141,019 -15 064 -14, 528 -_3 336 Trade Balance -4,380 -4,630 - 7,225 -6,086 -4,323 -3,08g Debt Outstanding and Disb.rped 16,287 Official (6,069) Monfactor Service Receipts 2,216 3,140 3,901 5,075 5,243 4,804 Private (10,218) Nonfactor Service Payments -888 -1,138 -1,414 -1,735 -1,954 -1,661 Nonfactor Ser,vices Net Balance 1,328 2,002 2,487 3,340 3,289 3,143 Debt Service Ratio 4/ (2) 19.3 Factor Services 6 Transfers Receipts 2,640 3,120 3,581 4,247 4,560 4,626 Factor Services & Transfers Payments -1.135 -1.775 -~2504 -3,792 -4.472 -5.144 Factor Services 4 Transfers Net Balance 1,505 1,345 1,077 455 85 -518 Current Account Balance -1,582 -1,283 -3,661 -2,291 -946 -464 Medium 4 Long-Term Loans IBRD LENDING, (as of March 31, 1983) (Million USW) Disbursements 2,665 3,146 3,154 4,151 2,731 2,020 Amortization -992 -1.440 -I1452 -2,006 -1,933 -1 914 Outstanding & Disbursed 1,718.5 Net Disbursements 1,673 1,706 1,702 2,145 793 106 Undisbursed 898.8 2,617.3 Export Credits Extended (net) -213 -106 -125 -221 -250 -200 Capital Transactions n.e.i. 2/ 172 -60 399 535 636 -454 Use of Reserves -50 -257 1,085 -168 -2381 1,012 MERChANDISE TRADE 3/ Imports Capital Coods 2,436 2,559 3,572 2,939 2,87:' 2,434 Intermediate Goods 5,989 6,325 8,135 10,630 11,98;' 10,199 Consumer Goods 1,208 1,099 1,512 1,496 893 701 Total Merchandise Imports (c.i.f.) 9,633 9,983 14,019 15.065 15,757 13,334 Exports Capital Waods 1,080 1,129 1,156 1,362 1,736 1,840 Intermediate Goods 2,667 2,809 3,627 4,581 5,361 4,932 Consumer Goods 1,509 1,730 2,t11 3,035 3,832 3,469 Total Merchandise Exports (f.o.b.) 5,256 5,668 6,794 8,978 10,929 :0,241 MERCHANUISE TRADE INDICES 19765100 Index of Export Dollar Unit Values 112 123 141 168 181 194 Index of Import Dollar Unit Values 114 120 :1.43 171 188 192 Terms of Trade Index 98 103 99 98 97 99 RATE OF EXCHAGE Annual Averages US$1.00 Dinar 18.30 18.64 19.0 24.91 35.51 51.323 Dinar - US 0.055 0.054 0.053 0.040 0.028 0.019 1/ Valued at statistical exchange rates. Z/ Includes errors and omissions, short-term loans, IMF account, and bilateral balnces. 3/ Merchandise trade figures for 1978 and 1981 are based on a different set of cross exchange rates from those in the Sumsary Balance of Payments. 4/ Medium- and long-term debt service as a percentage of gross current account receipts.  SUMMARY AND CONCLUSIONS (i). Although Yugoslavia has encountered increasing economic problems in recent years, its overall postwar development record is one of major achievement. Since its first development plan was launched in 1947 real per capita income has increased more than fivefold to stand at almost $2,800 by 1981. In the intervening period, a war-devastated country, where more than three quarters of the workforce was employed in agriculture, has been transformed into a largely urban industrial society. Concurrently, Yugoslavia has evolved its own unique system of economic management, which has helped foster a sense of unity in a multinational state where there are wide disparities in the level of regional economic development. These successes form the perspective against which any assessment of Yugoslavia's recent economic performance should be made. And they provide a benchmark for judging the ability of the economy to resolve its present difficulties. In this report we are concerned with the issue of unemployment in Yugoslavia and the prospects for resolving this problem in the eighties. But in analyzing this issue we have attempted to convey Yugoslavia's success in generating modern sector employment in the seventies, despite the rather turbulent conditions in the world economy and the challenges posed by its own structural economic problems. It is this performance which gives ground for optimism that policymakers will ultimately accomplish their employment objectives. (ii). In the field of employment the main challenge facing the economy is to provide a sufficient number of jobs outside of agriculture for young people as they leave the educational system and join the labor force. By and large most of Yugoslavia's young people are reluctant to enter agricultural occupations once they complete their formal education. The small size of individual sector holdings means that it would be difficult for someone entering farming to match the personal income of workers in the non-agricultural sector. In addition farm work is often considered to be more arduous and of lower status than most other types of employment. During the seventies Yugoslavia succeeded in generating non-agricultural employment at a rapid pace. This led to a significant structural change in the composition of its work force away from agriculture and into industrial and tertiary activites. Although differences in external migration and the quality and coverage of employment data make it difficult to establish precise comparisons, Yugoslavia appears to have undergone a more rapid structural transformation during this period than some of the other Southern European countries, such as Greece, Portugal, Spain and Turkey. (iii). The decline in the relative share of agriculture in total employment has been accompanied by profound improvements in the quality of rural life. Real incomes in individual sector agriculture have climbed sharply, and between 1971 and 1979 average incomes in agriculture rose from 38% to 73% of the average for the social sector. These changes have been made possible by a steady increase in labor productivity on the farm (as a result of greater mechanization) and a rise in off-farm employment. This change has been associated with a rapid expansion in the number of mixed households which  - ii - combine farming with the full-time employment of one or more family members in non-agricultural activities. Mixed households now account for about two-thirds of all agricultural households. As a result by 1979, 70% of Yugoslav agricultural household income was accounted for by non-agricultural earnings. The expansion of this type of arrangement has, however, brought with it new problems for Yugoslav policymakers. Firstly, since mixed households are able to supply a significant number of workers to the non-agricultural sector they have added to the pressure on unemployment created by rural-urban migration. Secondly, t'he spread of these households has meant that farm sizes have remained small and fragmented, so that increasingly agriculture is becoming a part-time activity. This development is likely to impede the emergence of larger size farms capable of meeting Yugoslavia's food requirements efficiently. (iv). Despite the rapid pace of structural change in the pattern of employment and the increases recorded in agricultural incomes, unemployment in Yugoslavia has risen significantly during the seventies. This rise in unemployment has been associated with a decline in the number of Yugoslav migrant workers since 1973, when more than 1.1 million Yugoslavs were employed abroad. By 1981, the number of migrant workers had declined to 0.8 million or 9% of the labor force. Estimates based on host country data place the number of Yugoslav migrant workers employed in Western Europe today at 0.7 million. It is difficult to miake a precise estimate of the degree of unemployment in Yugoslavia since the Yugoslav authorities do not collect data on unemployment. The only available data relate to registered job seekers. This category includes persons already employed, but seeking alternative employment, as well as persons not actively looking for employment, who register to obtain seniority in the job queue or certain social benefits. Consequently, the statistics on registered job seekers tend to overstate the extent of open unemployment in Yugoslavia. Analysis of the data on registered job seekers suggests that about two thirds of registered job seekers are in fact unemployed. lThis estimate places the level of unemployment in Yugoslavia in 1982 at about 0.5 million or 6% of the labor force. By comparison in 1982 unemiLployment in the OECD averaged 8%. (v). Although the lack of data limit analysis of the characteristics of the unemployed in Yugoslavia, the results assembled in the present report indicate that the incidence of unemployment is most severe amonigst young people, particularly those between the ages of 20 and 24. Almost 50% of registered job seekers are in this age category and 73% are under 30. However, less than 7% of registered job seekers are less than 19, because of the very high educational participation rates in Yugoslavia. Most Yugoslavs tend to enter the labor force for the first time at a much later age than, for example, in the OECD. Thus the age distribution of youth unemployment tends to be skewed upwards compared to OECD countries. In addition, the share of youth (up to 25 years of age) unemployment in total unemployment appears to be substantially higher than in the industrial countries. This phenomenon seems to be directly related to the system of guaranteed employment prevailing in the social sector. Workers in the social sector are very rarely dismissed. Consequently, unemployment in Yugoslavia is largely confined to those workers who are seeking employment for the first time.  - iii - (vi). A second important feature of the unemployment situation in Yugoslavia is that the regional incidence of unemployment varies markedly. In large measure this reflects the wide differences in the degree of regional development, and there is a strong negative correlation between regional unemployment rates and regional per capita Gross Material Product (GMP) levels. At the extremes, per capita GMP in Slovenia is about 6 times that of Kosovo. Similarly, the ratio of registered job seekers to the estimated labor force in 1981 varied from 1.4 percent in Slovenia to 17.4 percent in Kosovo. For the less developed regions (LDR) as a group, the ratio of registered job seekers to the labor force is approximately 50 percent higher than the national average. (vii). Given Yugoslavia's current macroeconomic outlook, social sector employment may be expected to increase at an annual rate of about 2 percent during the 1980's. Although this may appear sufficient to absorb the demographic increase in the labor force and to accommodate the expected outflow of workers from the agricultural sector,if female activity rates continue to rise, Yugoslavia would encounter a surge in the number of entrants to the labor market. Consequently, labor supply pressures which have been relatively mild in the past could add strain on the country's employment outlook. The number of migrant workers returning to Yugoslavia each year has declined substantially since 1977 and returning migrants are not expected to pose significant employment problems for Yugoslavia during the 1980's. However, it appears unlikely that Yugoslavia will succeed in reducing its unemployment rate significantly. Youth unemployment is therefore likely to remain at about its present level for the remainder of the decade. Regional unemployment will also pose difficult problems for Yugoslav policymakers, since without appropriate policies regional differences in unemployment conditions are likely to intensify. Increasingly, therefore, unemployment may become a regional policy issue, since the demographic characteristics of the LDR mean that in the future an increasing proportion of the young people entering the labor force will be from the LDR. At the same time, the economic structure of these regions, with their heavier reliance on capital intensive industries, will make it difficult for them to generate sufficient employment to prevent unemployment from increasing in these areas. In order to ensure that regional differences in unemployment do not increase further, the authorities need to develop policies which will stimulate faster than average employment growth in the LDR, or foster greater labor mobility, so as to enable people to move more easily to areas of higher labor demand. (viii). The Yugoslav authorities have recently conducted a review of their employment policy in the context of the work of a high level policy group, known as the Stabilization Commission. The present report provides an overview of some of the more important recommendations of the Commission's report on employment policy, and provides some additional suggestions which might contribute to the alleviation of unemployment. This policy discussion has been grouped into three broad themes: (i) policies which will increase the demand for labor in the economy; (ii) policies which will help redistribute the demand for labor in the economy; and finally (iii) policies which will assist in improving the efficiency of the labor market.  - iv - (ix). The aim of policies which will increase the demand for labor in the economy is to shift the pattern of production in favor of activities which use labor more intensively. This can be accomplisbed through cbanges in product mix and changes in choice of technique toward labor intensive technology. Yugoslavia has two sets of policy instruments to encourage sucb cbanges, planning instruments and price policy instruments. The direction of economic development in Yugoslavia is directed by a mixture of plan and market signals which interact with one another to determine the pattern of resource allocation in the economy. Thus an appropriate response to the problem of unemployment recuires policymakers to develop a policy mix which improves the efficiency of the planning mechanism and ensures that market signals appropriately reflect the cost of labor and capital resources. As far as planning instruments are concerned, there is need for muIch more stringent use of economic and financial analysis in the selection of investment projects and more realistic financial planning. The authorities have already begun to take steps in this area. Proposals are being developed for minimum uniform investment criteria for projects above approximately $0.5 million in value, wbich include economic rate of return analysis. In addition, new investment regulations have been passed raising the level of self-financing of investments and restricting the financing of cost overruns through bank credits. (x). For these measures to succeed it will 'be necessary to create an environment in which investors regard social capital as a scarce resource. The experience of the last plan sugjgests that t]he combination of the enthusiasm of Yugoslav enterprises to expand production, the absence of any serious risk of bankruptcy and the low level of interest rates in relation to price inflation created an unmanageable demand for investment resources. This situation also tended to lead to a bias in project selection in favor of capital intensive projects and cap:iLtal intensive sectors of the economy to the detriment of employment. As the Stabilization Commission bas pointed out, the choice of past investment projects has been influenced by a relative price structure that has made human labor relatively "expensive" and capital "cheap", when in fact labor is the relatively abundant resource. It may also be added tbat, as a result of the emphasis on providing regional development assistance in the form of low interest loans, this distortion has been greater in the LDR than in the more developed regions of the country. (xi). Recently Yugoslavia has been pursuing mnore active interest rate policies, botb as a means of mobilizing resources and allocating capital more efficiently. In the last twelve months, nominal interest rate Levels have been increased on three occasions. This contrasts markedly with the interest rate policy of the 1976-80 plan period, when nominal interest rate levels remained uncbanged despite wide fluctuations in the inflation rate. The authorities have also indicated their intention to move gradualLy in the direction of introducing positive real rates of interest on funds mobilized through the banking system. Although this cbange in policy is causing difficulties for some enterprises, ultimately it will be of benefit to the whole economy if enterprises operate in an environment which reflects the economic cost of capital. For this reason one of the long term goals of economic policy should be to introduce a fairly uniform positive real interest rate structure for both bank credits and social investment funds.  (xii). While monetary policy has a role to play in encouraging the use of labor by pricing capital appropriately, fiscal policy has an equally important role to play by reducing the cost of employing additional labor in the economy. At present fiscal policy in Yugoslavia lacks an employment focus. Indeed relatively little attention has been paid by policymakers to the impact of fiscal policy on resource allocation. This is a particularly surprising shortcoming in view of the ability of a flexible fiscal policy to influence the outcome of decentralized market decisions. In view of the seriousness of the employment situation, the authorities should give more explicit attention to reforming the fiscal system so as to encourage job creation. In Yugoslavia the bulk of the taxes and contributions collected through the fiscal system are levied on the gross personal incomes. Together these taxes and contributions increase the financial cost to an enterprise of hiring an additional worker by almost 45%. As with low capital charges, taxes on labor reduce the profitability of labor intensive activities and thereby discourage employment generation. Over the long term, the goal should be to shift the balance of taxation away from taxes on the use of labor toward a more neutral regime which encourages the appropriate use of capital and labor. This should be a long term goal rather than a short term policy change. Sudden changes in the pattern of fiscal policy would undoubtedly cause serious difficulties for some sections of the economy and might also tend to exacerbate the inflationary pressures already present. In addition, the complex structure of fiscal arrangements among the self-managed communities make it difficult to change-the basis for revenue collection and allocation. In the short term, however, a number of measures could be introduced which could encourage additional employment in the economy. One such measure which deserves particular consideration would be to reduce the level of contributions levied on new employees who have no previous work experience. At present enterprises are not required to pay contributions and taxes on the incomes of trainees. However, the trainee period in Yugoslavia lasts a maximum of one year. If enterprises were exempt from taxes for a period of perhaps two years, to be followed by a gradual increase in contributions over the next three years, the cost of hiring new workers would be considerably reduced. The additional advantage of such a policy is that it can be introduced with a considerable degree of flexibility, so that areas of particularly high unemployment can receive more favorable treatment. (xiii). The Stabilization Commission has suggested that, in view of the seriousness of the unemployment situation in Yugoslavia, the authorities should encourage investment in labor intensive production facilities through investment subsidies in the form of low cost loans. However, since it is capital equipment which is being subsidized, this policy still tends to lead to a bias in favor of capital intensive investments. A more effective strategy might be to introduce employment subsidies which would directly lower the cost of employing new workers and thereby meet the goal of encouraging the greater use of labor in production. Therefore, the authorities should give serious consideration to establishing an employment fund to finance employment siubsidies. For example, a special general tax on the social product of all economic organizations could be levied. The resources of the fund could then be used to provide grants to any organization, which for example increased the size of its labor force beyond a specified growth target. The grant might take the form of a specific monthly subsidy or a specified portion of the average gross monthly incomes of social sector workers. Although such a tax might have some effects on  - vi - relative prices, in principle it need not be inflationary, since it would simply be a device for transferring incomes within the social sector in ways which are likely to stimulate additional output. In practice, it would amount to an income transfer from organizations whicb do not generate sufficient employment to meet the growth target to those organizations wbich expand employment faster than the target rate. Such a scheme would be preferable to extending the system of compulsory hiring of trainees or introducing rigid hiring targets, since these policies are likely to lead to increased inefficiency in the use of labor. (xiv). In addition, the authorities should give particular thought to earmarking a portion of the Federal Fund for the Accelerated Development of the Less Developed Republics and ithe Autonomous Province of Kosovo for employment subsidies in these regions. The use of such subsidies could create a more powerful incentive for domestic joint ventures than the present arrangements. Such a change is called for because the LDR have now passed beyond the process of basic industrialization (where capital subsidies may have been needed to assist the LDR in building up their resource based industries). They now need to develop their processing capacities and their tertiary sectors, in order to engage a higher proportion of their potential work force in productive activities in these fields. In these circumstances, and given the more severe magnitucde of the unemployment situation in the LDR, the authorities need to develop a regional policy framework that focusses more directly on the need to generate employment in the LDR. It would obviously be difficult to arrange for such a transfer of the Fund's resources and a concommitant shift in its purposes during the present 1931-85 plan period. Nevertheless, it would be appropriate to examine the feasibility and implications of such a shift, so that a decision can be reached in good time for the next five year plan (1986-90). (xv). Small scale industry offers significant opportunities for relatively low-cost employment creation in both the individual and social sectors of the economy. There appears to be a strong latent demand for the types of goods and services which can be efficiently produced in small-scale enterprises (SSEs) and the experience of a number of new enterprises attests to the fact that income and productivity levels in SSE's can attain or even surpass the performance of larger social sector enterprises. Nevertheless, the productive sector in Yugoslavia, outside of agriculture, is dominated by large-scale enterprises. The problems facing SSEs are well known in Yugoslavia and include: the previous lack of interest on the part of the authorities in promoting SSE development; the bias toward large projects in investment decisionmaking; and institutional features of the self-management system which favor large-scale enterprises. As a result, SSEs find it harder to obtain credit, space and raw materials than large enterprises. Yugoslavia has developed an elaborate policy framework-for resolving these difficulties. Social compacts have been signed at the Federal, Regional and Communal level outlining measures to assist-small enterprises. In practice, however, the success of these measures has been uneven. Wbere local policymakers are committed and enthbusiastic in their support of small scale  - vii - enterprises a number of new enterprises have been founded. In other areas, where there is less support for this policy, it is more difficult to see tangible progress. According to many observers, one of the biggest handicaps to the growth of the individual sector is the attitude of local officials toward these firms. The Stabilization Commission recognizes this problem and calls for a cbange in the social climate toward small businesses. It seems that the communal autborities, in particular, will bave to take more energetic steps to win the confidence of and cater to the needs of small enterprises. Much could be done if the communes simplify their procedures for granting permits to potential investors. Similarly, the banks could contribute to the growth of this secto2 if they were to make credit more easily and readily available. There are grounds for optimism that more can be acbieved in this area, once both businesses and the authorities become more familiar witb the implementation of these new policies. Certainly, there is a significant potential for employment growtb in this area, botb from the formation of new businesses, and more especially tbrough the expansion of existing enterprises. (xvi). Within the broad range of options available to the Yugoslavs to tackle the problem of unemployment are a group of policies which may be termed measures to redistribute the demand for labor. These are measures which are likely to increase the number of people employed, but will not necessarily lead to increases in output or the demand for labor, at least in the sbort run. The benefits of increasing the number of people employed are in some sense paid for by reductions in income and productivity of the existing work force. In short these measures amount to forms of work sharing. In some cases the proposal to share work is explicit, such as in the suggestions to reduce the number of working hours or the amount of overtime allowed. In other cases the fact that the proposal involves some form of work sharing is less obvious. One important thing that policymakers have to bear in mind is that most of these arrangements increase the cost of labor to the enterprise. For example, if two people share a job this will involve additional organizational and administrative expenses for a firm and would, for example, double the cost of training. There is an unfortunate paradox with such arrangements. Insofar as these policies make labor more expensive they tend to lower the demand for labor, even though they may result in additional employment. As a result the efficiency of the economy declines. The difficulty for policymakers is to ensure that the trade off between increased employment and economic efficiency that these policies may entail is both recognized and remains within acceptable bounds. From a longer term point of view there is an additional challenge for policymakers. That is to ensure that the people absorbed by these programs acquire useful skills so that they can become fully productive when Yugoslavia returns to its more normal growth path. (xvii). One of the employment policies mentioned most frequently by officials in Yugoslavia is the introduction of increased shift work. It is frequently asserted that shift working would lower production costs and increase the competetiveness of the economy. The available evidence on shift  - viii - work is rather limited, but it appears that there already is a significant amount of shift working in Yugoslavia. In any event, the first step is to carefully review the evidence on shift work in Yugoslavia. Only then will it be possible to judge whether or not it is too Limited, and if so why. It might very well be that such a review will indicate that there may not be much scope for increasing shift work at present. The suggestion of the Stabilization Commission that a thorough professional study be undertaken to examine the possibility and profitability of increasing shift work seems to us to be the best approach. In some plants which can lower their costs sufficiently there may be opportunities to expand shift work. In other cases increased shift work may enable enterprises to defer investments in new capacity. Nevertheless, the authorities should recognize that the call for increased shift work is unlikely to result in very much new employment creation, unless it is accompanied by concrete incentives to increase the demand for labor. If it were attractive for enterprises to engage in shift work without changes in policy they would already be doing so. (xviii). The third set of measures discussed in this report are policies to improve the efficiency of the labor market. The aim of these policies is to increase employment and output by overcoming rigidities in the economy that impinge on the efficient allocation of labor. They are of particular importance because of their potential for increasing employment among those groups in society most affected by unemployment. Consecuently, they are of special relevance to regional unemployment and youth unemployment. These policies include increasing labor nobility, improving training and adjustments to incomes policy. (xix). Traditionally regional lalbor mobility has not played a very significant role in the alleviation of regional disparities in unemployment, but there are signs that regional 'labor mobility has increased in recent years. As the more developed regions move toward (or as in the case of Slovenia attain) full employment, it has become easier for workers from areas of high unemploympent to find jobs in these regions. So far, however, these movements are mostly spontaneous and the policy instruments to support labor mobility are poorly developed. Much more could be done in terms of promoting labor mobility and the report of the Stabilization Commission makes a promising start by giving the issue of regional labor mobility some prominence in its discussions. The policy of moving jobs to people rather than the other way around has much to commend it, both on social and economic grounds, but there are also strong arguments for encouraging greater labor mobility. Generating employment in less developed regions and areas can be costly, particularly where they are remote or suffer from other geographical disadvantages. At the same time the process can be a rather slow one. The mission was informed that there are a large number of unfilled vacancies, particularly for unskilled workers, in some of the more developed centers of Yugoslavia. Although there are relocation costs involved in helping people move and settle in these areas, in some cases the benefits of putting more people to work are likely to outweigh these relocation costs. Similarly, the economic benefits of encouraging new investment in areas of high unemployment have to be balanced against the additional economic costs which may be incurred in relocating production to these areas, on a case by case basis.  - ix - (xx). One of the most noteworthy aspects of Yugoslavia's overall employment strategy has been the decision to reform its education system so as to prepare young people better for the transition from school to working life. This reform was only begun in 1977 and its progress has been somewhat uneven. This experiment in building closer links between the worlds of school and work is commendable. While many features of employment policy are specific to Yugoslavia's unique social system, there may be valuable lessons for other countries contemplating the introduction of more vocationally oriented education curricula. In some areas well designed local educational programs are helping enterprises in recruiting young workers with relevant skills; nevertheless much of the economic burden of training young people still falls to enterprises. This situation discourages enterprises from hiring as many young people as they might otherwise. Several enterprise managers made the point to the mission that the authorities could provide more help to them in training new workers. This could be accomplished through proposals to provide tax relief or employment subsidies as suggested above. (xxi). Overall it seems that the cost of training new workers is somewbat unevenly distributed between society, enterprises and new employees. This is due to the narrowness of income differentials witbin social sector enterprises. On completion of a short period of training (whicb lasts a maximum of one year) new workers receive approximately the same level of income as much more senior members of the firm, who through their past labor have made an obvious contribution to the capital stock of the enterprise and society at large. Most unemployed young people would probably be willing to work for a lower salary and with a more prolonged period of apprenticeship if this improved their employment prospects. This would reduce the cost of training new workers to the enterprises and make it easier for them to provide young people with the opportunity to acquire the necessary skills to make a full contribution to the economic life of the country. Such a change in incomes policy could be accomplished with due regard to equity, and in keeping with the spirit of the Yugoslav system. (xxii). There is a growing recognition in Yugoslavia of the need to examine the employment implications of the structure of personal incomes. A number of initiatives in this area are being contemplated. For example, the mission was informed that the trade unions had proposed increasing incomes or sbortening working bours in some of the more arduous occupations such as construction, forestry and mining, where there are reportedly large numbers of unfilled vacancies. Similarly, the level of real incomes of workers in administrative positions has been reduced relative to those of production workers and furtber moves in this direction are being contemplated. By and large the thrust of these changes seem to be along the right lines. However, policymakers should not lose sight of the need for a modern economy to promote knowledge-intensive information industries, such as researcb and development or professional technical occupations. Nevertheless, the willingness to undertake such a fundamental review of incomes policy is both a positive step and a signal of the commitment of the authorities to resolve the problem of unemployment.   CHAPTER I; ThE PATTERN OF EMPLOYMENT AND UNEMPLOYMENT IN YUGOSLAVIA A. Recent Macroeconomic Developments 1.01 There has been a marked reversal in Yugoslavia's economic fortunes since 1979 which has an important bearing on the employment outlook for the country. The domestic and international repercussions of the 1979 oil price shock are still being felt by the economy. Yugoslavia is confronted with an adverse external environment which requires it to develop new export markets in bighly competitive conditions. In order to meet the challenge of competing on these markets, Yugoslavia will have to improve productivity and the efficiency of resource use in its economy. At the same time, Yugoslavia is grappling with a serious inflationary situation. The problems of domestic inflation and external adjustment both call for vigorous action on the part of policymakers and the economy faces a period of protracted and difficult adjustment . What makes this situation particularly challenging and difficult from the point of view of economic policy is Yugoslavia's concern to ensure that the brunt of the country's stabilization effort is not borne by the unemployed. In the Yugoslav context this means providing young, new entrants to the work force witb meaningful employment opportunities which will enable them to contribute to the economic and social life of the country. The remaining sections of the report attempt to elaborate further on these themes and indicate the range of policies available to the Yugoslav authorities for resolving these difficult problems. This is done on the basis of a shared perception with the Yugoslavs that the solution of the unemployment problem is a necessary part of the future economic development of the country. 1.02 The macroeconomic background to Yugoslavia's current economic difficulties has been extensively analyzed in a recent Bank report 1/ and will therefore not be elaborated in detail here. Nevertheless, it is important to give a brief overview of these developments, since Yugoslavia's employment problems cannot be viewed in isolation from these broader concerns. They form the context and the constraints within whicb the country's employment policies must operate. More fundamentally since labor is a basic requirement factor of production, a country's employment policy touches on every aspect of economic life. In this respect it may be argued that, ultimately, Yugoslavia's prospects for resolving its overall economic problems will be determined by its ability to utilize the talents of its workforce effectively. Thus, there is an intimate link between the success of its employment policies and its other long term economic goals. The employment of Yugoslavia's young people is at once an end and a means of further economic development. 1.03 Yugoslavia's current economic difficulties should of course be viewed against the broader perspective of its post-war economic achievements. At the time of launching its first five year development plan in 1947, Yugoslavia's GNP per capita in current prices was less 1/ Yugoslavia: Adjustment Policies and Development Perspectives (Report No. 3954-YU).  - 2 - than $100. It was a society where more than half of the people were illiterate and three quarters of the workforce were employed in traditional agriculture. Much of its capital stock had been destroyed in World War II when 1.7 million people or 11% of the pre-War population lost their lives. Progress since that time has been remarkable. Per capita income in 1981 stood at almost $2,800, a more than fivefold increase in real terms, and Yugoslavia is considered one of the higher middle income developing countries. This rise has been accompanied by a dramatic social and economic transformation of the country. The literacy rate has risen to 95% and life expectancy has increased from 45 to 69 years. Modern industrial and tertiary activities have developed and spread throughout the country. Society is largely urbanized an,d less than one quarter of the workforce remain in agriculture. Despite the magnitude of these achievements, the process of economic development is far from complete. Per capita income is only one third of the level in 'Yugoslavia's neighboring European countries. And Yugoslavia still faces important structural problems in making the transition from an agricultural society to a modern industrial state, particularly in the Less Developed Regions (LDR). But the magnitude of its past achievements give rise to optimism that the economy is capable of resolving these problems. 1.04 Although any starting point would be arbitrary, the roots of Yugoslavia's present economic diLfficulties may perhaps be best traced back to the 1974 oil crisis. The subsequent slowdown in the world economy gave rise to a number of problems for the Yugoslav economy. It became more difficult to sell in its export markets, Western Europe's demand for Yugoslav migrant workers fell sharply, and its oil bill quadrupled. Yugoslavia responded to these diLfficulties with an ambitious development program launched during the 1976-80 plan. The plan aimed to establish a new range of export industries and develop domestic energy amd raw materials. However, these goals were not translated into an appropriate investment program. New investment was not simply confined to projects which would help the balance of trade. Additional resources were also channeled into a huge number of individual projects, many of which proved to be of questionable economic value. Yugoslavia's investment rate, which in 1975 at 33% of GDP was already high, climbed to 36% by 1979, as the economy entered into an unprecedented inveatmlent boom. Following a brief contraction in 1976, the rate of growth accelerated to between 7 and 8%. 1.05 However, Yugoslavia's expansionary macroeconomic policies could not be sustained, as they produced increasing strains on the balance of payments. Faced with a buoyant domestic market and a sluggish world market Yugoslav enterprises concentrated their efforts on meeting domestic demand. Yugoslavia 's exports stagnated in real terms and there was a significant decline in its market share of OECD and EEC manufactured imports.l/ The consequences of these weaknesses in domestic policy were exacerbated by the 1979 oil price increases. In that year the combination of Yugoslavia's slow export growth on the one hand and the steep climb in 1/ See Yugoslavia, OECD Economic Survey, May 1981.  -3- oil prices and international interest rates on the other produced a record $3.7 billion deficit in the country's balance of payments. This prompted the government to introduce, beginning in 1980 a series of stabilization measures aimed at improving the country's balance of payments position and paving the way for a return to a more durable pattern of economic growth. 1.06 The main elements of the stabilization program introduced tbus far have been restrictive monetary and fiscal policies to curb investment and reduce inflationary pressure, and the more active use of exchange rate policy as a means of encouraging exports. In addition, import purcbases have been scaled back in line witb the revenues accruing from export earnings and more limited foreign borrowing. Since 1980 these stabilization measures have been supported by a 3 year standby arrangement with the IMF. These measures have been costly in terms of economic growth. Output increased by only 2.3% in 1980 and slowed to 1.5% in 1981. Yugoslavia's real social product increased by only 0.3% in 1982. These necessary measures have, however, led to a noteworthy improvement in the country's balance of payments. In 1980 the deficit was reduced to $2.3 billion and in 1981 and 1982 the deficit was further reduced to $0.9 and $0.5 million, respectively, or only 0.1% of GNP. 1.07 Despite these accomplishments, Yugoslavia is still confronted with a difficult balance of payments situation. Much of the growth of Yugoslavia's exports since 1979 has been to the non-convertible currency area, and Yugoslavia has continued to run a significant balance of payments deficit with the convertible currency area (estimated at $1.3 billion in 1982). Convertible currency export growth has fallen below target, obliging the autborities to run down reserves and impose much stricter limits on convertible currency imports than originally intended. Inevitably these cutbacks have led to shortages of certain necessary inputs, such as raw materials, intermediate products and spare parts. This is having a disruptive effect on production flows in the economy, particularly in industry. During the past three years Yugoslavia has found itself in a vicious circle. Lower than planned export growth has required further reductions in imports which have in turn led to further losses in potential output and exports. 1.08 One possible explanation of the export shortfall is that, even with the slowdown in the growth of real domestic demand, the home market is still more profitable for domestic producers. This is evidenced by Yugoslavia's high rate of price inflation. Yugoslavia has experienced persistent intlationary pressure over the last few years. Retail prices increased by 30% during 1980 and by 39% in 1981. Altbough there has been a decline in the inflation rate since then prices rose by 32% in 1982. Part of the reason for Yugoslavia's high inflation rate has been the rapid depreciation of the dinar wbich was devalued by more than 30% per year between 1980 and 1982. As the repercussions of these exchange rate cbanges  - 4 - have worked their way through the economy there has been additional pressure on the domestic price Level. The authorities have also been easing certain price controls, such as on agricultural products and energy, to encourage the production of important commodities. Even when these factors are taken into account, however, it appears that enterprises have found it surprisingly easy to increase the price of their products under the existing arrangements. Enterprises still seem to be facing a sellers market within Yugoslavia, whereas overseas selling conditions are far more competitive. Therefore, Yugoslavia's domestic inflation is not only of concern for the domestic distort:ions that rates of inflation of this magnitude create, but also because it is eroding the incentive for economic enterprises to build new market:; abroad. 1.09 In addition, Yugoslavia has been confronted by adverse developments in the international capital markets. Since 1979, Yugoslavia has found that its external borrowing has been both more costly and more difficult to arrange. Interest rates have risen sharply and commercial banks have become more reluctant to extend further credits to developing countries. The commercial banks experience with the events in Poland in 1980 and 1981 discouraged them from extending new credits to eastern Europe and Yugoslavia. In Yugoslavia's case the unexpectedly high deficit in 1979, the low rate of export growth to the convertible currency area, the tenuous balance of payments situation and its higb inflation have also been factors causing concern. Consequently despite the hard won improvement in the current account, which most observers in the international capital market credit as a significant achievement, Yugoslavia has been unable to borrow medium and long term credits on the scale it had originally planned. Yugoslavia has been able to offset some of this pressure by tapping non-commercial sources (through, for example, the use of IMF resources and bilateral loans). But the unfavorable capital market situation, has been one of the factors which has obliged the country to sharply reduce its growth targets. While the original 5 year plan target aimed for an average rate of growth of 4.5% during 1981-85, the annual plan resolution for 1983 sets a more modest target of 0.9%. B. The Institutional Setting 1.10 The Yugoslav system of economic organization is based on the concept of "self-management". The guiding principle of the self-management system is that the workers in an enterprise -- be it a factory, a botel or a school -- should exercise equal power and authority in its operations. This principle was first enunciated in 1947, wben the decision was made to hand the management of factories and other enterprises over to work collectives. Since then Yugoslavia has introduced a series cf economic and institutional reforms, to put the ideas of self management into effect. The most recent changes came in 1974 when Yugoslavia introduced a new constitution. Consequently, most of the legislation and virtually all of the institutional arrangements which govern the workings of the economy have only been in operation for a limited period, and the economic system  - 5 - is still very much in the process of evolution. Yugoslavia is continually experimenting with new methods and approaches to bring the day to day practice of self-management closer to its theoretical premises. 1.11 One of the most important features of the 1974 constitution was that it created new organizational units within enterprises, known as Basic Organizations of Associated Labor (BOALs). The BOAL, which may range in size from less than 50 to more than 500 workers, is the fundamental building block from which the edifice of self management is formed. The organizing principle of the BOAL is that it should be based on a productive process. It is generally the smallest, technical unit within the enterprise capable of producing a marketable output. The BOALs are legally autonomous entities within an enterprise and no major decision within the enterprise can be made without the unanimous consent of its constituent BOALs. ln the case of major disagreement, BOALs have the legal right, if they so wish, to split away from the parent enterprise, although in practice this right has seldom been exercised. 1.12 The BOALs were created in order to enable the workers in an enterprise to participate more actively in the process of decisionmaking. In small enterprises making simple products with straightforward technologies it is relatively easy to introduce participatory democracy into the workplace. But in large enterprises producing complex products with sophisticated technologies, a worker cannot be expected to be familiar with the details of business operations. Moreover, some authority must inevitably be delegated, since it would be impossible to consult all of the workers on every issue without bringing the process of production to a halt. The ideal of the BOAL is that it should be small enough to be accountable to its members, while being at the same time an effective voice for its members in the wider process of decisionmaking within the firm. They are, therefore, meant to check the potential for bureaucractic abuse and the rise of technocratic elites who might otherwise abrogate power from the individual workers. 1.13 The aims of the 1974 constitutional reforms, however, go beyond strengthening the participation of the workers in intra-enterprise decisionmaking. The 1974 reforms also provided for the introduction of new institutional arrangements which would carry the concept of self-management into broader policymaking areas. These new arrangements allow the workers -- through their elected delegates -- to participate in the formulation of policies at the communal, regional (republican or provincial) and even federal level. Economic enterprises within a given branch of the economy, for example, are responsible for reaching agreement on the long-term development of their industry througb a non-hierarchial planning system which is coordinated through the regional planning institutes and the chambers of the economy.l/ 1/ An association of enterprises which represents the business community within Yugoslavia.  -6- 1.14 In addition to these microeconomic or sectoral concerns, the scope of workers' self-management bas also been extended to cover the full range of economic policy matters. New bodies have been created known as "Communities of Interest". These bodies, which are also organized on geographical lines, bring together producers and users of a given commodity or service, in order to regulate its supply and distribution.l/ As these bodies grow and increase in influence, the state along with its "administrative interventions" in the economy is supposed to gradually diminisb in importance and power. Thus, the Community of Interest for Employment is responsible for bringing together representatives of employers, trade unions, persons seeking jobs and other concerned groups in order to resolve the problems of unemployment. In the case of the Community of Interest for Employment, it does not act simply as an employment bureau, although this is certainly one of its functions; it also serves as a body for planning t]he employment requirements of the economy and as a forum for articulating local employment policies. Once these policies have been agreed, the 'Community of Interest, togetber with other relevant bodies, such as the chamber of economy, the socio-political communities, the socio-political organizations and the organization of trade unions sign a Social Compact. The Social Compact binds the signatories to undertake the agreed upon measures and therefore constitutes an important economic policy inistrument. 1.15 It should be noted that the Yugoslav economy is founded on the basis of "market socialism". Prices play an important role in allocation decisions, particularly in the market for goods and services. But prices are not necessarily left to be determined freely on the basis of supply and demand. This is regarded as undesirable, since it might open up the possibility for individual groups of producers to artificially raise their incomes by exploiting their market power through increasing the price of their output. Similarly it is considered necessary to control or subsidize the prices of certain commoditites which have a major bearing on living standards or a strategic significance for the economy. Thus the social control of prices is an important feature of economic life. 1.16 The situation with regard to the primary factors of production is even more complex. The workers within an enterprise do not "own" its capital stock, but they are responsible for managing this socially owned capital on behalf of society. 130ALs nevertheless retain permanent control over all financial assets created out of their income. Investable resources are allocated on the basis of social planning rather than being rationed through a system of uniform capital charges. The long range aim is to replace Yugoslavia's rather limited financial market with a system of 1/ Communities of Interest have been formed covering such broad macroeconomic areas as prices, foreign economic relations and employment as well as sectoral areas suclh as housing, transportation and various community services.  7- "pooling of resources", under which BOALs will combine their investable resources in projects of mutual interest and share the income generated according to some previously agreed formula. In terms of Yugoslav ideological concepts, a market for labor does not exist, since labor cannot be considered a commodity. In this report the expression "labor market" is used from time to time as a useful shorthand for the "supply and demand for labor services". Similarly, it must be remembered that workers are not considered to be hired in the conventional sense that the capitalist firm hires a worker.l/ Workers join a BOAL on the basis of the "free association of labor" and share in a coequal relationship with the other members of the BOAL. 1.17 From the point of view of employment policy, an important related development has been the reform of the educational system, which has been designed to enable the schools to prepare young people better for the transition from education to working life.2/ The reform was only begun in 1977 and its progress has been uneven in different parts of the country, but it will undoubtedly eventually lead to significant changes in the educational characteristics of young people seeking jobs for the first time. Basically the school curriculum has been divided into two parts: (i) elementary education (which lasts for the first 8 years of schooling; and (ii) vocational or "guided" education (which covers years 9 through 12). The object of guided education is to prepare 16-19 year old students for employment directly after school, or after a further period of higher education. Thus, in addition to their academic studies, students receive theoretical and practical training in one to three occupational categories such as metallurgy, agriculture or commerce. 1.18 Under the new system every attempt is made to provide students with practical experience in an enterprise prior to completion of their studies. In the final year students may spend as much as 30% of their school time in local enterprises. The educational system is, therefore, based on the idea of establishing strong links with the requirements of the local economy for particular skills. Given that the reform is so recent it would be premature to pass judgment on these changes. But Yugoslavia's experiment with building closer links between the worlds of school and work will be followed with keen interest by the international community. International experience has revealed that it is young people who lack the skills required by their economies that have suffered most from unemployment. C. Employment and Unemployment in Yugoslavia 1.19 In the field of employment the main challenge facing the economy is to provide a sufficient number of jobs outside of agriculture for young 17 See Schrenk Managerial Structures and Practices in Manufacturing Enterprises: A Yugoslav Case Study, 1981. 2/ See Reviews of National Policies for Education, Yugoslavia OECD 1981.  - 8 - people as they leave the educational system and join the labor force. By and large Yugoslavia's young people are reluctant to enter agricultural occupations once they complete their formal education. This is a perfectly understandable attitude, since agricultural work is more arducus than most other professions. In addition, given the small size of private sector agricultural boldings it would be difficult for someone entering farming to match the personal income levels available in the non-agricultural sectors of the economy.l/ Also, workers in the socialized sector of the economy receive other important benefits, such as holiday and sick leave, as well as pension rights, which further increase the attractiveness of non- agricultural employment. These perceptions are strongly reinforced by the aspirations of Yugoslav parents. Most parents prefer to see their children enter "white collar professions" rather than manual work. Simply put, the economy has been hard pressed to provide the type and quantity of new jobs necessary to meet the expectations of young people entering the workforce for the first time. It is this mismatch betwe,en the capacity of the economy to provide employment and the expectations of young people whicb is the main source of Yugoslavia's unemployment problems. 1.20 Looking back over the past decade, however, it should be noted that the most striking feature of Yugoslavia's economic development is the pace of structural change recorded in the composition of the labor force. Table 1.1 provides some international comparisons which shed some light on the magnitude of Yugoslavia's achievement in this area. Table 1.1: CHANGES IN THE STRUCTURE OF THE LABOR FORCE SELECTED COUNTRIES, 1971-79 (Percent of Total Labor Force) Greece Portugal Spain Turkey Yugoslavia 1971 1979 1971L 1979 197L 1979 1971 1979 1971 1979 Agriculture 1/ 38.9 30.8 29.2 30.6 28.4 19.5 68.3 60.7 46.0 28.8 Industry 2/ 26.3 30.0 33.2' 35.C 37.3 36.4 14.4 16.3 24.1 32.8 Others 3/ 34.8 39.2 37.6 34.4 34.3 44.1 19.4 23.1 29.9 38.4 1/ ISIC, 1 2/ ISIC, 2-5 3/ ISIC, 6-0 Source: OECD Labor Force Statistics 1968-79, Paris 1981 Figures for Yugoslavia 1971 Census and 1978 Bank Estimates. 1/ There is a small social sector agricultural workforce wherie employment conditions are similar to the rest of the social sector.  - 9 - During 1970-79 these five Southern European economies all achieved high rates of GDP growth, ranging between 4.4% (Spain) and 6.6% (Turkey).l/ Yugoslavia's GDP growth rate during this period was 5.9%. But as Table 1.1 indicates Yugoslavia was relatively more successful in reducing the share of agriculture in total employment. Thus while in 1971 the share of agriculture in total employment was considerably higher than in Greece and Portugal, by 1979 Yugoslavia's labor force was less dependent on agricultural employment than in either of these countries. Spain and Yugoslavia did about equally well in expanding the share of tertiary employment in the economy but Yugoslavia was more successful in increasing the share of industrial employment (which actually declined slightly in Spain during this period). Although Turkey had the highest growth rate of all these countries, its growth path was quite different from that of Yugoslavia; the expansion in the share of industrial and tertiary employment was quite modest in relation to its rate of economic growth. Of course some care needs to be taken in the evaluation of these statistics. The quality of labor force statistics varies significantly from one country the next and there are also differences in coverage and definitions. In the case of Yugoslavia the agricultural labor force in 1979 is an estimated figure. In addition the results for all of these countries were significantly influenced by various trends in the pattern of external migration. Nevertheless, Yugoslavia's performance during this period attests to the ability of the economy to respond to the desire of the workforre for non-agricultural employment. 1.21 Table 1.2 provides some further information on the pattern of growth of the Yugoslav labor force during the past 10 years. As this table shows, in 1971 the social sector finally overtook private sector agriculture as the dominant source of employment within Yugoslavia. Since then social sector employment has risen continuously. In the period 1970-79 social sector employment increased by an average annual rate of 4.2%, recently the rate of social sector employment growth has tapered off slightly; it increased by 3.2% in 1980 and 2.9% in 1981. As a result of this growth, over the course of the decade the share of the social sector in total domestic employment has risen from 48 to 71%. The industrial sector has been the single most important source of new jobs during this period the number of industrial workers increased by 1.1 million or 54%. This expansion of industrial employment was broadly based. In mining and manufacturing there were sizeable employment gains in: light consumer goods industries such as textiles and electrical products; engineering industries, such as machinery and metal fabrication; and heavy industries, such as chemicals, public utilities and basic metallurgy. Employment also increased significantly in the construction subsector. There was also a rapid increase in employment in the service sectors (trade, financial institutions and transport) reflecting the increasing importance of these activities for economic development. The increase in employment in these fields was matched by a similar expansion in the so-called "non-productive 1/ World Development Report, 1981, Table 2.  - 10 - Table 1.2: EMPLOYMENT AND LABOR FORCE, 1970-81 (In Thousands) 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 Social Sector Employment /1 3,756 3,966 4,115 4,213 4,423 4,667 4,833 5,052 5,280 5,506 5,681 5,846 Private Agriculture /2 3,847 3,536 3,367 3,158 2,991 2,828 2,740 2,542 2,338 2,104 1,991 1,962 Private Non- Agriculture 300 319 333 343 354 363 366 373 381 391 405 415 Total Domestic Employment 7,9037821 7,815 7 7L4 7t768 7 858 7,939 7t967 79998006 8,077 8,223 (Registered Job (I2) (291)(1)(332) (449) (0)(635) (70) 735)(7) (78) (580) Seekers) Unemployed /3 148 146 179 220 284 349 397 450 487 528 538 569 Total Domestic Labor Force 13,051 7,967 7,994 7,934 8,052 8 207 8,336 8,417 8,486 8,534 8,615 8,792 Migrant Workers /4 783 923 1,020 1,100 1,035 940 870 825 800 790 770 770 Total Labor Force /5 8,834 8,890 9,014 9,0:34 9,087 9,147 9,206 9,242 9,286 9,324 9,385 9,562 2~~~~~~, I ,2 _ = a . 52 L _ . /1 Statistical Yearbook of Yugoslavia, 1981, Table 105.3. /2 Calculated residually. /3 First-time job seekers. /4 Federal Institute of Planning. /5 Sentic and Breznik, "Projections of the Total and Active Population of Yugoslavia, including Migration," Stanovnistvo, 1972-3 Vol. 10, nos. 3-4, Belgrade Institute of Social Sciences,, Demographic Research Center.  - 11 - sectors" -- mainly health, education and public administration -- as a result of increases in expenditures on social programs and the rise in tbe demand for administrative staff created by decentralization and the growth of self-management institutions. 1.22 Employment in the private non-agricultural sector also increased steadily during the 1971-81 period rising by an average annual rate of 3%. Nevertheless the contribution of this sector to overall employment growth has remained modest. This sector accounts for only 5% of total employment and new jobs created in the economy over the period. Private non-agricultural employment is concentrated in the areas of construction, road baulage, tourism and handicrafts. The handicrafts sector also includes some modern small scale enterprises producing intermediate and finished goods. In general, private individuals are not permitted to operate retail establishments except in conjunction with a specific productive activity such as tailoring, shoe repair or the sale of bandicrafts. Many of the mission's interlocutors felt that there was a considerable unsatisfied demand for more sophisticated service activities such as electrical goods repair and motor vehicle servicing facilities in the urban areas. Although the official policy is to encourage the development of these activities, in practice it appears local officials bave tended to be cool or even obstructive to the expansion of individual sector small scale enterprises. Nevertheless, the potential of this sector to create employment and supply needed goods and services to the economy is clearly recognized by the authorities. 1.23 External migration has played an important role in alleviating unemployment in Yugoslavia and absorbing the pressure created by the outflow of the agricultural labor force. Yugoslavs began to move abroad in search of temporary employment in significant numbers in 1965 and by 1973 the migrant workforce had reached 1.1 million workers or approximately 12% of the country's total labor force. Following the 1974 oil price increases, there was a sharp contraction in the demand for Yugoslav migrant workers. By the end of 1977 more than a quarter of a million migrants returned to Yugoslavia. These returning migrants created acute pressures on the domestic labor market, particularly in the less developed agricultural areas of the country which bad previously experienced the greatest rates of outward migration. Since then the number of net returnees has gradually declined each year and in 1981 there was a small net increase in the number of such workers. The Center for Migration Studies estimate that the number of migrants abroad is likely to stabilize at the current level of 0.8 million or 8% of the labor force. Thus, while the Yugoslav labor force is likely to be characterized a fairly bigb proportion of external migrants, the number of migrants is unlikely to change significantly in the medium term. For the future then Yugoslavia is faced witb the necessity to generate employment for its workers through its own efforts.  - 12 - D. Data Limiitations and Definitions 1.24 Yugoslavia does not collect information on unemployment per se. The only existing data deals witb job seeking. Job seekers are defined as persons seeking employment and having registered witb the communities of interest for employment. Despite the rapid pace of employment creation in the non-agricultural sectors, tlhere bas been a significant rise in the number of registered job seekers in Yugoslavia since 1973. In that year, there were less than 0.4 million registered job seekers, equivalent to 5% of estimated domestic employment or 9% of the social sector labor force. By 1981 the number of registered job seekers climbed to 0.8 million, equivalent to almost 10% of estimated domestic employment or 14% of the social sector labor force. This has been a worrisome development for Yugoslav policymakers wbo had planned for the level of registered job seekers to decline to 0.4 million by the end of the 1976-80 plan period. These figures, however, do not necessarily mean that unemployment has increased to a similar extent. There are several reasons why the number of job seekers provides a poor approximation for the number of unemployed persons. First, in some cases, registered job seekers may be engaged in private sector agriculture; yet others are already employed in the social sector and are seeking transfers to more skilled or renumerative occupations in otber parts of the economy. Second there are some advantages to registering for employment in 'Yugoslavia, even if one is not actively looking for work. Students, for example, pay lower fees if they are classified as unemployed. Registered job seekers also receive other benefits such as health coverage and other social services. Some students also register as job seekers so as to gain seniority rights in the job queue. Third, not all unemployed persons register, some seek jobs on their own.l/ Of these three factors, only the first one is really specific to Yugoslavia and to the fact that it only records job seekers. One solution is to use the number of registered job seekers as a proxy for unemployment. Some Yugoslav experts believe that at least at the aggregate level there is a reasonably constant relationship between thle number of registered job seekers and the number of unemployed. One connonly held view is that approximately 60% of all registered job seekers are actually unemployed. 1.25 The problem of using thiis relationship is that it iS unlikely to be true for all categories of registered job seekers. The relationsbip between job seeking and unemployment may well be quite different for men 1/ There seem to be conflicting opinions in Yugoslavia about this phenomenon. The Federal Employment Bureau estimates that in 1982, there were about 10,000 unregistered unemployecl (i.e. only about 2 % of the registered unemployed). However, it seems that in regions with high unemployment many of the unemployed do not-bother to register. Thus the reliability of registered jcb seekers as a measure of unemployment may be subject to question both across regions and over time.  - 13 - and women, for example. Similarly this relationship is likely to vary between different occupations, skill groups, different regions of the country and over time. Consequently, we have adopted a different estimation procedure wbich is based upon the Yugoslav institutional setting. Except in special cases, the Law on Associated Labor stipulates that workers cannot be fired. Therefore, it seems reasonable to assume that job seekers who have some work experience are not in fact unemployed, but simply seeking transfer to more desirable activities.l/ Hence, it is assumed in this report that the number of unemployed persons in Yugoslavia is best approximated by the number of job seekers witb no work experience. This would put the level of unemployment in Yugoslavia at about 0.5 million or 6% of the domestic labor force. Thus on balance the unemployment picture appears less bleak in Yugoslavia than in the OECD as a wbole, where the level of unemployment is projected to be 8% for 1982.2/ Nevertheless, as far as Yugoslavia is concerned its overall unemployment level is far too high. Moreover, as shown below, the incidence and regional distribution of unemployment in Yugoslavia affects different groups in society unevenly, so that for some segments of the labor force the burden of unemployment is particularly onerous. E. The Profile of the Unemployed 1.26 Table 1.3 gives the total number of job seekers as well as their structure according to the length of work experience.3/ As Table 1.3 shows: (a) The share of unemployed (i.e. job seekers with no work experience) has been steadily rising from 51% of all job seekers in 1970 to 68% in 1981.4/ (b) Nearly 80% of the increase in job seekers registered between 1970 and 1981 is accounted for by persons without work experience. 1/ However, there is one category of job seekers with experience which should be considered as bona fide unemployed: apprentices who have been dismissed after the traditional 6-month trial period. 2/ This section is based upon World Bank (1981b), pp. 57-8. 3/ According to the Federal Employment Bureau, there were 850 thousand job seekers in May 1982. This would translate into about 580 thousand actual unemployed. Some job seekers with up to 1 year of work experience are likely to be actually unemployed. However, they probably account for only a small fraction of the persons in this class of job seekers and a much smaller proportion of the job seekers with no experience at all. 4/ According to one of the experts of the Federal Committee for Labor, in 1982, 75% of the job seekers are actually unemployed. A similar view was expressed by a representative from the Belgrade Community of Interest for Employment.  - 14 - Table 1.3: NUMBER OF JOB SEEKERS IN YUGOSLAVIA ACCORDING TO LENGTEI OF WORK EXPERIENCE, 1970-81 (In. Thousands) --- - Length of work experience -- Year Total tione U Ito 1 year More than 1 year No. (x).-- No. %) No. (M) 1970 290 148 (51) 36 (12) 106 (37) 1971 290 146 (50) 41 (14) 103 (36) 1972 334 179 (54) 46 (14) 109 (32) 1973 399 220 (55) 55 (14) 124 (31) 1974 478 284 (59) 65 (14) 129 (27) 1975 584 349 (60) 80 (14) 155 (26) 1976 665 397 (60) 95 (14) 173 (26) 1977 717 450 (63) 98 (14) 169 (23) 1978 738 487 (66) 94 (13) 157 (21) 1979 775 528 (68) 71 (9) 176 (23) 1980 789 538 (68) 91 (12) 160 (20) 1981 833 569 (68) 83 (10) 181 (22) Source: Statistical Yearbook of Yugoslavia, 1982 Table 105-14. 1.27 In Table 1.4, computed unemployment rates are expressedl relative to both domestic labor force and social sector employment. Both sets of calculations indicate a substantial, increase in the incidence of unemployment since 1974-75. Table 1.4; NUMBER OF UNEMPLOYED IN RELATION TO TOIAL DOMESTIC LABOR FORCE AND SOCIAL SECTOR EMPLOYMENT, 1970-81 (Irn. Thousands) Unemployment Total Domestic 'Social Sector Rates Unemployment Labor Force Employment (percent) Year (1) (2) (3) (1)/(2) (1)/(3) 1970 148 8,051 3,756 1.8 3.9 1971 146 7,967 3,966 1.8 3.7 1972 179 7,994 4,115 2.2 4.3 1973 220 7,934 4,213 2.8 5.2 1974 284 8,052 4,423 3.4 6.2 1975 349 8,207 4,667 4.3 7.5 1976 397 8,336 4,833 4.8 8.2 1977 450 8,417 - 5,052 5.3 8.9 1978 487 8,486 5,280 5.7 9.2 1979 528 8,534 5,506 6.2 9.6 1980 538 8,615 5,681 6.2 9.5 1981 569 8,792 5,846 6.5 9.7 Source; Table 1.2, 1.3.  - 15 - 1.28 Table 1.5 gives the structure of unemployment by sex and qualification level. The following trends emerge for the period 1970-81: (a) The majority of unemployed persons are women, although their relative share in total unemployment has remained roughly constant througbout the seventies. (b) In 1970, almost 70% of the unemployed were unskilled (i.e. semi-skilled and unskilled workers and workers with lower professional education). By 1981 this ratio declined below 50%. (c) Despite this drastic change in the skill composition of the unemployed, they still remained less skilled than employed persons. Only 35 percent of employed persons were unskilled in 1980, compared with 45 percent in 1970. (d) A bigher proportion of unemployed women are unskilled (51% in 1981) than is the case for men (45% in 1980). This gap has remained about constant during the period. Table 1.5: STRUCTURE OF THE UNEMPLOYED IN YUGOSLAVIA, BY SEX AND QUALIFICATION LEVEL, 1970-81 (In Percent of Total Unemployment) Total Men Women 1/ 1/ Year Unskilled Total Unskilled7 Total Unskilled7 1970 67.8 44.9 32.3 55.1 36.1 1971 65.7 43.0 29.8 57.0 36.4 1972 63.7 42.0 27.2 58.0 36.7 1973 60.5 41.7 24.6 58.3 35.5 1974 57.5 41.9 22.7 58.1 34.6 1975 57.4 42.1 22.6 57.9 34.7 1976 56.1 42.9 22.9 57.1 33.2 1977 53.7 43.8 22.6 56.2 31.1 1978 55.3 43.1 23.7 56.9 31.7 1979 53.6 42.1 20.9 57.9 32.6 1980 51.6 40.6 19.6 59.6 32.0 1981 48.9 39.3 17.8 60.7 31.1 I/ Semi-skilled and unskilled workers and workers with lower professional education. Source: Statistical Yearbook of Yugoslavia, 1982, Table 105-18.  - 16 - 1.29 Anotber way of examining this issue is to look at tbe! length of job search. Although the data reported in Table 1.6 cover all job seekers, it provides some idea about the unemployed, since they account for most of the increase in job seekers. The data clearly suggest that the rise of unemployment has been accompanied by a lengthening in the job search period. Table 1.6: STRUCTURE OF JOB SEEKERS IN YUGOSLAVIA BY LENGTH OF JOB SEARCH (In Percent of All Job Seekers) Up to 1 1-6 6-12 12-24 24-36 Over 36 Year Month -Montbs Months Montbs Months Months 1970 13.4 36.9 25.5 10.0 6.1 8.1 1971 11.3 41.8 23.1 9.8 5.9 8.1 1972 10.5 39.7 24.6 11.1 6.0 8.1 1973 9.9 39.8 23.7 13.5 5.8 7.3 1974 7.5 39.5 23.8 14.7 6.9 7.6 1975 8.9 34.7 23.3 16.1 8.4 8.6 1976 7.8 30.8 23.3 17.9 9.8 10.4 1977 6.4 29.6 20.8 19.0 11.2 13.0 1978 6.6 28.6 18.9 18.7 9.8 17.4 1979 7.7 27.1 1'5.1 20.6 11.9 17.6 1980 7.2 26.6 116.8 20.3 11.7 17.4 1981 7.3 30.6 15.8 19.0 12.7 17.3 Source: Statistical Yearbook of Yugoslavia, 1982, Table 105-14. Table 1.7: SOME INTERNATIONAL COMPARISONS OF THE AGE STRUCTURE O1F THE UNEMPLOYED, 1980 Age Spain Yugoslavia Germany Italy U.K. Group No. % No. % No. % No. % No. l 14-19 470 28.6 55 6.9 81 9.1 529 31.1 557 29.4 20-24 441 26.9 384 48.6 143 16.1 529 31.1 327 17.2 25-54 625 38.1 262 41.0 1/ 471 52.9 580 34.2 3/ 754 39.7 55+ 102 16.2 27 3.4 2/ 128 14.3 59 3.5 4/ 260 13.7 1/ 25-50 2/ 50+ 3/ 25-59 4/ 59+ Source: OECD Labor Force Statistics, 1982 and Statistical Yearbook of Yugoslavia, 1981.  - 17 - 1.30 As in other countries the effects of unemployment seem to be borne disproportionately by the young. Table 1.7 presents an international comparison of the age structure of unemployed workers in selected countries and for registered job seekers in Yugoslavia. While young people under the age of 25 form the bulk of the unemployed, there are distinct differences in the characteristics of youth unemployment in Yugoslavia, as compared with Spain, Germany, Italy and the UK. Most notably, the proportion of 14-19 year olds on the unemployment register is far lower in Yugoslavia than in the other countries, including Germany. This is due to very high educational participation rates in Yugoslavia. The participation rate is high even by European standards: 96% of Yugoslav children voluntarily undertake 9th and 10th years of schooling (ages 16-17) and almost 80% go on to 11th and 12th years; almost half of the children who complete secondary school education go on to universities or other higher learning establishments. Thus most Yugoslavs enter the labor force at a much later age than their western european counterparts. At the same time, the proportion of young people entering the labor force with the minimum level of compulsory schooling is much smaller in Yugoslavia. This group tends to be at a disadvantage in the search for employment. It forms the hard core of long term unemployed in most other countries, but is a far less significant component of the unemployment picture in Yugoslavia. 1.31 As against this, because of the delayed entry of young Yugoslavs into the labor force, the proportion of 20-24 year olds on the unemployment register in Yugoslavia is markedly higher than in the other countries in Table 1.7. Almost 50% of the registered job seekers in Yugoslavia are between the ages of 20-24. Indeed according to a recent government study 73% of all registered job seekers in Yugoslavia were under the age of 30. Consequently, many Yugoslavs find themselves facing a period of extended adolescence as they wait for their first job. In economic terms the potential output lost to the economy by not using some of the most educationally well qualified and talented members of its labor force is obviously substantial. What is more difficult to quantify are the social and personal losses associated with such unemployment. Throughout our visit, however, the authorities demonstrated their clear sensitivity to the personal and social consequences of such high levels of unemployment amongst young people. F. Regional Development 1.32 Another important feature of the Yugoslav economy having a direct bearing on Yugoslavia's employment situation is the pronounced variation in the level of economic development of its constituent republics and provinces. On average per capita output (GMP) in the More Developed Regions (MDR) is currently more tban double that of the Less Developed Regions (LDR). At the extremes the level of economic output per capita in the most developed region (Slovenia) is over six times that of the least  - 18 - developed region (Kosovo).l/ These differences are closely linked to the share of agriculture in the economic life of eacb region and divergences in their underlying demograpbic characteristics. Botb of these factors have fundamental implications for the future pattern of unemployment in the country. 1.33 It should be noted that the differences in the regional levels of development across Yugoslavia stem from historical factors that predate the foundation of the modern Yugoslav state. Althougb at the end of World War 11 Yugoslavia was a predominantly agrarian society there were, nevertheless, considerable difiEerences in the economic characteristics and traditions of each region. Broadly speaking the northern and northwestern regions of Yugoslavia had been on the peripbery of western and central European industrialization and bad established a significant industrial and commercial base. South of the Sava and Danube, with the exception of a few small enclaves, Yugoslavia had been largely untoucbed by industrialization. The latter regions had very small urban populations and economic life largely revolved around traditional subsistence agriculture. 1.34 One of the fundamental goals of Yugoslavia's postwar economic policy bas been to overcome these inherited differences in the level of regional development and to promote a faster rate of economic growtb in the LDR than the rest of the country. Yugoslavia's multinationial character has given additional impetus to this drive, as policymakers have sought to equalize economic conditions for all of Yugoslavia's different peoples. Given the differences in linguistic, ethnic and cultural conposition of the different parts of the country regional differences in economic conditions are a sensitive political issue. Therefore government policy has consistently sought to promote regional development so as to promote the unity of the country. These efforts have resulted in a considerable increase in real per capita incomes in the LDR. Modern industrial and tertiary activities have spread. across the country and agriculture has lost its dominant position in the economic life of the LDR. Thus between 1952 and 1980 the share of industry in the GMP of the LDR rose from 17% to 42%. Accordingly the process of economic development has transfoirmed even the least developed parts of the country into relatively modern industrially based societies. 1.35 This being said, the agricultural sector is still a significant source of employment in the LDR. At the same time the population of the LDR is much younger than in the rest of the country owing to the relatively higher birth rates in these regions. This in turn means that the labor force of the LDR is growing more rapidly thaLn in the country as a whole. 1/ Throughout this report we shall employ the term region to denote a republic- or an autonomous province while the term area will be used to denote a geographical division within a region (e.g. a c:ommune of group of communes).  - 19 - Consequently the non-agricultural sectors of the LDR are botb relatively smaller and faced with more pressure to provide employment for new entrants to the labor market. It has been estimated, for example, that in order to absorb the demographic increase in the labor force social sector employment must increase by over 3% per annum in the LDR, whereas the increase required in the MDR is only 0.4X.l/ But even this statistic understates the enormity of the employment problems faced by the LDR, because, as in the rest of the country, young people are reluctant to enter agriculture. Thus the demand for new workplaces is equal to the demographic increase in the labor force plus the secular decline in the agricultural workforce as young people leave agriculture. 1.35 Yugoslavia's regional unemployment statistics reflect these variations in labor market conditions. As Table 1.8 sbows, there has been a pronounced surge in the degree of unemployment in Yugoslavia since 1973 (when external migration was at its peak). Nationally the ratio of registered job seekers to social sector employment has increased from 9.4 to 13.8%; similarly the ratio of registered job seekers to the active labor force has jumped from 4.4 to 8.6%. The general deterioration in the unemployment position of the country bas, however, been far more pronounced in the LDR. In these regions the ratio of registered job seekers to social sector employment climbed to 22.7% and the ratio of job seekers to the total labor force rose to 12.5%. These ratios are roughly double the level prevailing in the MDR as a group. The situation in Macedonia and Kosovo, however, is even more acute. These two regions, which incidentally experienced the most rapid rate of demographic increase in the labor force during the period, have recorded unemployment rates which are high even by the standards of the LDR. I/ Yugoslavia: Adjustment Policies and Development Perspectives, Report No. 3954-YU, Vol. II, pp. 216-7.  - 20 - Table 1.8: SOME INDICATORS OF REGIONAL UNEMPLOYMENT, 1973, 1981 Ratio of Registered Job Seekers Ratio of to Social Registered Job Seekers to Sector Employment Total Labor Force 1973 1981 1973 1981 LDR 15.5 22.7 6.5 12.5 Bosnia- Herzegovina 8.6 16.7 3.5 9.1 Kosovo 27.0 39.1 9.1 17.0 Macedonia 24.9 29.1 11.4 17.4 Montenegro 14.2 18.2 7.0 12.0 MDR 7.4 10.5 3.6 6.8 Croatia 5.2 6.1 2.7 4.2 Serbia 12.0 17.7 4.7 9.7 Slovenia 1.8 1.6 1.3 1.4 Vojvodina 8.9 14.6 4.6 9.2 Yugoslavia 9.4 13.8 4.4 8.6 Source: Sentic and Breznik, Stanornistvo 1972-3; Statistical Yearbook of Yugoslavia, 1981; Index 1982, No. 5.  - 21 - 1.37 Finally, we examine the unemployment situation in urban versus rural areas. For the purpose of this study, and given the data constraint, we have defined the urban areas of each region as comprising its largest cities. The figures in column (8) of Table 1.9 indicate that, in every region most of the unemployed are registered in rural areas, witb the exception of Serbia wbere Belgrade alone accounts for 35 percent of the region's unemployment. In addition, comparing columns (6) and (7), we observe that there is no substantial difference in unemployment rates between urban and rural areas except in Kosovo. Table 1.9: SOCIAL SECTOR EMPLOYMENT AND NUMBER OF UNEMPLOYED IN THE LARGEST CITIES IN 1980, BY REGION Region as a Whole Largest Cities in Region Employ- Unemploy- Number Employ- Unemploy- Unemployment Ratios ment ment of ment ment (percent) (000) (000) Cities (000) (000) (2)1(1) (5)/(4) (5)/(2) Region (1) (2) (3) (4) (5) (6) (7) (8) Bosnia 821 101 7 374 34 12.3 9.1 33.7 Montenegro 126 17 2 54 7 13.5 13.0 41.2 Macedonia 419 91 5 233 38 21.7 16.3 41.8 Kosovo 174 47 2 69 9 27.0 13.0 19.1 LDR 1,540 256 16 730 88 16.6 12.1 34.4 Croaha 1,379 38 9 717 16 2.8 2.2 42.2 Slovenia 773 4 4 314 1 0.5 0.3 25.0 Serbia 1,443 195 9 794 104 13.5 13.1 53.3 Vojvodina 546 44 4 228 20 8.1 8.8 45.5 MDR 4,141 281 26 2,053 141 6.8 6.9 50.2 Yugo- slavia 5,681 537 42 2,783 229 9.5 8.2 42.6 Source: Statistical Yearbook of Yugoslavia, 1981, Tables 204-1, 204-7, 4-1, and 4-2. 1.38 On the basis of the information gathered in this section, we can attempt to draw the portrait of a typical Yugoslav unemployed person in 1980. The unemployed have the following features: (i) no work experience; (ii) a 59% chance of being a woman (as opposed to only 36% for someone already employed);  - 22 - (iii) a 52% chance of being unskilled (as opposed to ontly 35% for someone employed); (iv) a waiting time in the job queue of 18-24 months, (v) a 52% chance of belonging to an MDR (as opposed to 73% for someone employed); (vi) a 43% chance of being (registered) in an urban area (as opposed to 49% for someone employed). C. Recommendation for Data Collection and Processing 1.39 The existing published data limit the potential for preparing a detailed analysis of unemploymenit in Yugoslavia. Basically, there are two solutions which could be adopted to remedy this situation. One approach, which would not require any new data collection, would be to obtain the individual files of registered job seekers and to draw a well-designed sample among them. Alternatively, the authorities might give serious consideration to mounting labor force surveys at regular time intervals (monthly, quarterly or annually). Almost every industrialized country follows this practice.l/ hence, there is a lot of experienice upon wbich Yugoslavia can draw to desTgn its own survey. This solution would be highly desirable since it would also enable the authorities to gain a broader perspective on the employment situation. This material would enable policymakers to monitor the impact of aployment policy in relation to such questions as; (a) Bow does the waiting period vary: by sex, age, qualification (education), location? (b) Where do the unemployed eventually get a job. How does it correspond to their qualification? (c) What type of benefits; do the unemployed receive? How does it affect their unemployment duration? (d) Where do the unemployed reside? In urban or rural areas? On a farm? With their parents or relatives? (e) What is the impact of rural-urban migration on unemployment? 1/ For further methodological aspects, see the report by the National Commission on Employment and Unemployment Statistics, Counting the Labor Force, Vol. III, 1979, U.S. Government Printing Office.  - 23 - CHAPTER II: STRUCTURAL'AND INSTITUTIONAL CHARACTERISTICS OF THE LABOR MARKET A. Introduction 2.01 The institutional character of the labor market in Yugoslavia is typified by five quite different sets of organizations. The contributions of these organisations to domestic employment and GMP is shown in Table 2.1. Table 2.1 INSTITUTIONAL STRUCTURE OF THE DOMESTIC LABOR MARKET, 1981 Employment Contribution No Percentage to GMP Organizational Type -(000's) -Distribution Social Sector Enterprises Productive Sector 4,848 59.0 89.8 Non Productive 998 12.1 - Private Sector Agricultural Households 1,962 23.9 8.7 Private Sector Non-Agricultural Enterprisesl/ 415 5.0 3.5 Mixed Enterprises n.a. n.a. n.a. Total Domestic Employment 8,223 100.0 100.0 1/ includes mixed enterprises Source: Statistical Yearbook of Yugoslavia, 1982 Tables 105.1, 107.7 and World Bank estimates. (i) Social Sector Productive Enterprises 2.02 These enterprises, which account for 59% of Yugoslavia's employment and 90% of its GMP, truly represent the driving force of the economy. They have been entrusted with the primary responsibility for transforming Yugoslavia into a modern and affluent society. And, indeed they bave provided the main impetus for the country's remarkable growth during the course of its postwar development. Social sector enterprises also constitute the core of the Yugoslav system of self-management socialism. As such their behavior is complex, since they need to respond to a variety of social and economic considerations in their decisionmaking. In terms of employment policy, one of the main areas where they must reach agreement (both within the enterprise and witb other decisionmaking bodies) is on the question of  - 24 - jobs versus income and productivity growth. Both individual enterprises and wider social dlecisionmaking bodies are interested in expanding employment and increasing the productivity and real incomes of existing workers. But the relative weights attached to these objectives differ. The enterprises have a tendency to prefer improvements in productivity and increased incomes for existing workers over new hiring. On the other hand, decisionmaking bodies outside the enterprise, who have to represent the interests of the unemployed, have a tendency to prefer new hiring, even though this may mean lower productivity growth and real incomes for existing workers. The observed outcome reflects a compromise between these concerns. It is based on a balance between various economic and social considerations which vary both regionally and over time. In the aggregate, however, the production and income relations emerging from the decisionmaking process have not led to a balance between the supply and demand for labor. This has resulted in unemployment and underemployment in the economy. (ii) Social Sector Non-Productive Organizations 2.03 These organizations, which account for 12 percent of domestic employment, have similar income-employment characteristics to other social sector enterprises in the productive sector.l/ However, by virtue of their nature as quasi-governmental units and their dependence on fiscal revenues levied on the rest of the economy', there are important checks on the level of income that can be paid to employees in the sector. As a result, the growth of fiscal and para-fiscal revenues in this sector has led to rapid employment growth, since real income movemenl:s of workers in this sector have tended to move in parallel with those of their counterparts in the productive part of the social sector. It is generally considered that employment in non-productive activities is more attractive than in the rest of the social sector and the authorities are now following a fairly conscious policy of reducing the relative incomes of workers in these occupations. (iii) Non-Agricultural Private Enterprises 2.04 These enterprises, which account for 5% of the country's employment and 4% of its GMP, are concentrated in a few activities (construction, transportation, catering and tourism, and craft:s). Private firms are tightly regulated in the scope of their activities and the number of hired workers, which is limited to 5 per enterpri'se. Hiring is largely based upon marginal Cost and revenue considerations. Although such works enjoy thie same legal protection as their social sector counterparts, it appears that hired workers in these enterprises have lower inlcomes and less job security than their counterparts in the social sector. However, the majority of tlhose employed in private firms are not hired workers, but owner-operators. Hence, these firms cannot be viewed as constituting a residual (or "informal") employment outlet for non-agricultural sector workers. It: is worth noting that policymakers feel that there might be a significant extent of unreported 1/ According to the Material Prodluct concept used in calculating GMP, non-productive activities do rnLot contribute to the formation of GMP.  - 25 - employment in these enterprises involving both registered job seekers and social sector workers who seek to supplement their income through part time employment. (iv) Private Sector Agricultural Households 2.05 These enterprises, which account for 24% of Yugoslavia's employment and 9% of its GMP, constitute the residual employer in the economy. Private farms are family-owned and operated. They are generally characterized by a low productivity of labor and low incomes. However, a significant proportion of the agricultural households are "mixed" (particularly in the North), with some family members engaged in off-farm employment in the social sector. In these households, the productivity of labor and incomes are higher than in households which derive their income purely from agriculture. (v) Mixed Enterprises 2.06 Recently, Yugoslav authorities have taken various steps to encourage the creation of small-scale enterprises and direct the savings of private individuals (especially returning migrants) toward productive investments. One of these steps has been the introduction of a new institution, the contractual organization of associated labor (CTOAL).l/ This form of organization is a mixed enterprise in the sense that it combines features from both the social and private sectors. A mixed enterprise is formed on the basis of private resources pooled together by several individuals. These individuals earn an income from both their labor and capital and there is no limit on the number of workers that may be hired by the enterprise. However, after a certain contractual period, the capital becomes wholly socially owned and the firm becomes a social sector enterprise. Nevertheless, the founding individuals continue to be comipensated for their investment. There are still very few mixed enterprises, but the initial progress made in this area is encouraging. Yugoslav observers report that personal incomes and productivity tend to be above average in these enterprises and that they have been able to build effective links with enterprises in the social sector through various forms of subcontracting. B. Rigidities in the Labor Market 2.07 It is generally agreed, by both Yugoslav and Western researchers, that the current unemployment problem started in the mid-sixties, when a number of factors coincided:2/ (i) the 1965 economic reform which reduced the demand for labor; 1/ See Raising Productivity in Yugoslav Industry, 1981, pp. 57-8. 2/ Breznik, "The Dynamics of Population in Yugoslavia" Eastern European Economics 1982. Malacic, "Unemployment in Yugoslavia from 1962 to 1975", Eastern European Economics, 1979. Sapir, "Economic Growth and Factor Substitution; What happened to the Yugoslav Miracle", Economic Journal, 1980.  - 26 - (ii) demographic pressures; (iii) rapid transfer out of agricultural activities. However, at that time, unemployment remained at very low levels as large- scale emigration of Yugoslav workeirs to other European countries provided ample opportunities for employments. However, the slowdown in economic activity which took place in these host countries starting in 1973 put a halt to such migration opportunities andl unemploymenit rapidly increased. 2.08 There are two salient feat:ures which emerge from the portrayal of the unemployed: youth unemployment and regional disparities. In most countries, youth unemployment accounts for a large share of total unemployment. However, this share is higher in Yugoslavia than in any of the OECD countries.l/ In this section,, an attempt is made to analyze the factors which account for this phenomenon both as well as why certain regions have remained relatively immune to the growth of unemployment. Demographic pressures and differences in the degree sectoral transformation of the economy play a principal role in these two features of the unemployment situation. However, they do not ccmpletely explain why young workers, especially in certain regions, founid it increasingly difficult to obtain employment. It can be argued that youth unemployment has also been influenced by a number of rigidities surrounding the operation of the labor market in Yugoslavia. At the micro level, employment decisions on the part of firms lead to certain rigiditiesl which result in unemployment. However, the fact that Yugoslavia's regions have been experiencing widely different unemployment problems points to other rigidities besides those associated with firm behavior. This makes it necessary to examine the facltors which inhibit more uniform regional development. 2.09 A major factor underlying the employmernt problem in Yugoslavia has been the rapid decline in the size of the agrictultural workforce due to the relatively low income and status attached to agricultural work. Consequently, young people in particular have sought to obtain non-agricultural employment. Thus, in order to understand the phenomenon of unemployment in Yugoslavia, it is necessary to examine the responsie of the non-agricultural sectors to the availability of this labor. As noted earlier, production of noni-agricultural goods and services takes place in both the social and private sectors. In some ways, the dichotomy between these two sectors is reminiscent of certain features of the dual labor market theory. According to this theory the labor market is divided into a primary (or protected) and a secondary segment. In the former, jobs are stable, high paying and with chances of advancement, and the allocation and pricing of labor is done through labor market:s internal to the enterprises themselves. On the other hand, the secondary segment is 1/ See Appendix Table A2.  - 27 - characterized by unstable, lowpaying jobs and by an allocation and pricing of labor which is, more or less, competitive.l/ (a) Social Sector Guaranteed Employment 2.10 The main feature of employment in the social sector is the fact that workers are rarely dismissed. In practice, this system of guaranteed employment is close to one of permanent commitment by which workers are hired by enterprises directly from school.2/ After a probationary period of about 6 months, most new workers achieve tenured status, which implies that they can be fired only in very special cases involving grave professional faults. However, such discharges appear to be extremely rare. Workers may, of course, resign, but again this is unlikely event. Hence, it may be asserted that enterprises in the social sector are basically organized as an internal labor market. 2.11 In some respects, the Yugoslav employment system is similar to the Japanese one. There are however, some notable differences. Contrary to Yugoslavia where, as a rule, all workers in the social sector are covered by the system of guaranteed employment, in Japan permanent commitment only applies widely to workers in large-size enterprises. Moreover, in Japan female workers are excluded from the system.3/ 2.12 Guaranteed employment in Yugoslavia does not always imply lifetime attachment. A certain number of workers do leave their jobs voluntarily. However, as the figures in Table 2.2 indicate, the monthly turnover rate (defined as the ratio of the number of persons who left their job during a given month to the initial number of workers plus the new entrants during the month) is relatively low and has been declining during the last decade. 1/ The relevance of the dual labor market theory to the Yugoslav situation was first noted by Rivera-Botiz "Economic Dualism in a Labor Managed Market Economy" Massachusetts Institute of Technology mimeo (1977). However, the present analysis differs somewhat from his in the sense that the duality is viewed as one that exists between the social and private sectors rather than within the social sector itself. 2/ For instance, in an autobus factory visited in Skopje, 90 percent of the new workers come straight out of school. 3/ See Galenson "The Japanese Labor Market" in Asia's New Giant M. Patrick and H. Rosovsky (eds.)  - 28 - Table 2.2: AVERAGE MONTHLY TURNOVER RATE 1971-8l0 (in percent) Turnover Turnover _Year Rate Year Rate 1971 1.54 1976 1.11 1972 1.41 1977 1.14 1973 1.37 1978 1.23 1974 1.18 1979 1.25 1975 1.22 1980 1.19 Source: Statistical Yearbook of Y'ugoslavia, 1981, Table 105-12. 2.13 One of the reasons for the low level of inter-enterprise labor mobility is that many social benefits are organized and financed by enterprises. In turn one of the primary considerations in distributing these benefits is length of service. Thus, if a worker moves, his eligibility for certain benefits may be reduced. This is especially true for housing, which remains in short supply in Yugoslavia, but also applies to servrices like nurseries. Thus most workers who decide to leave their jobs do so within their first few years of service, otherwise it is in their interest to stay in the firm and accumulate points toward such social benefits, since direct inter-enterprise income differentials are quite small. For instance, at a large textile enterprise in Ljubljana visited by the mission, it was indicated that most of the workers who leave the organization do so within the first 3 years of joining it. A similar picture emerges from the data piresented in Table 2.3 concerning registered job seekers having some work experience. As these figures indicate, during the period 1970-80, only about 25% of job seekers had more than 5 years of work experience. Data available for 1976 indicate that about 14% of employed workers with up to 5 years of experience were registered job seekers. The comparable rate for workers with over 5 years of experience was only about 2%. 2.14 An important question arises in view of this long-teram relationship between enterprises and workers. How do enterprises respond to' cyclical and structural changes in demand? As far as fluctuations are concerned, several options are available to enterprises in order to adjust their labor use. One of the main ones is variation in the number of hours worked, especially via changes in overtime work. A second option is subcontracting. There is no data available on subcontracting, but it seems to be fairly widespread. For instance, the manager of a large furniture manufacturer in Slovenia indicated that his firm contracts out the production of certain components, especially at times when it faces an unexpected surge in demand. It is not quite clear  - 29 - Table 21'a .105 SEEKERS WITH WORK EXPERIENCE BY DURATION OF EXPERIENCE (in thousands) Up to 1-2 2-3 3-5 Over 5 Year Total 1 Year Years Years Years Years 1970 142 36 22 18 21 45 1975 235 80 39 27 28 61 1980 251 91 45 27 26 62 Source: S &i i Yearbook of Yugoslavia, 1981, Table 105-14. whether g ;c:aors tend to belong to the social or private sector, but there are vaziouL, indications that the private sector is involved in subcontractingiw-t social sector enterprises. This is the case in construction, tyhaer cyclical fluctuations are very important. There are also reportedly som well organized networks of home workers in some parts of the country, whser -inmen produce handicrafts and light manufactures on a piece work basis, 2.15 A thiyd oolution is to employ temporary workers, who are taken on for specific, Laf-t%fc1y short periods of time. Again, although there is no available data, this practice does not appear to be uncommon. The manager of the furnitur pise mentioned above, indicated that his firm occasionally hires woreso n- a fixed-term contractual basis for 10 or 11 months. Apparentli-, ffh pr actice seems to exists mostly in sectors that employ a high proportion of 7U5'y&eu. This was confirmed by some reseachers at the Economic Institute of a'greb. who indicated that schools and hospitals frequently hire women for en:i