DOING BUSINESS 2009 - JOHN J. HADDAD, Ph.D.

Employing workers 23Increasing flexibility in settinghours and using contractsOver the past 5 years 36 reforms havebeen aimed at increasing flexibility inworking hours and the use of fixed-termcontracts (figure 4.5). Five reforms havemade scheduling working hours moredifficult. Nine have restricted the use offixed-term contracts.Most of the reforms aimed at increasingflexibility in working hours tookplace in Eastern Europe and CentralAsia. These reforms, concentrated in2004 and 2005, allowed more flexible arrangementsfor overtime and permittedbusinesses to shift working hours fromthe low to the high season. In Latvia andPoland working hours must balance outwithin 4 months; in Hungary, within ayear. Overtime hours have become morepredictable for employees, and employerscan more easily adjust to cyclical demand.Elsewhere in the world, Pakistaneased limits on overtime, while Ugandaallowed employers and employees tofreely set the legally required rest day.Bhutan eased restrictions on night work.Sixteen economies allowed greaterflexibility in the use of fixed-term contracts.In Azerbaijan and Burkina Faso,for example, fixed-term contracts cannow be used for permanent tasks. Latviaand Togo extended their maximumduration. That makes it easier for bothemployers and employees to adapt workarrangements to their needs.Reducing dismissal costsTen economies granted businesses moreflexibility in dismissals during economicdownturns. But 15 economies (includingBolivia, Fiji, Kazakhstan and Zimbabwe)made such dismissals costlier or moredifficult. In Bolivia and Venezuela anemployer cannot let workers go for economicreasons without their consent.Under these circumstances employersmight think twice before hiring a newworker.High dismissal costs can deter employersfrom creating jobs in the formalsector. That argues for reducing dismissalburdens. But excessive flexibility leads toanother problem: concern among existingemployees about losing their jobsand being left without a safety net.One solution is to offer unemploymentinsurance rather than severancepay. In Austria employers contribute toa fund from which they may withdrawif a worker is made redundant after 3years of employment. In St. Kitts andNevis severance payments are madefrom a government-administered fundthat employers pay into over time. InItaly employers deposit a portion of eachemployee’s salary into a designated fundover the course of the employment relationship.In Korea employers adoptingthe new defined contribution plan willcontribute 1 month’s salary annually toeach employee’s private pension account.Chile adopted a successful unemploymentinsurance system in 2002. Thereform introduced individual savings accountsto which both employee and employercontribute. It also reduced severancepay from 30 working days to 24 foreach year worked. Unemployed Chileanworkers receive benefits from their individualsavings accounts for 5 months.Notes1. This example is from the World Bank’sDoing Business: Women in Africa(2008a), a collection of case studies ofAfrican entrepreneurs.2. Amin (forthcoming).3. Almeida and Carneiro (forthcoming).4. ILO Convention 14 on weekly rest (industry),ILO Convention 171 on nightwork, ILO Convention 132 on holidayswith pay and ILO Convention 158 ontermination of employment.5. Data on the share of the labor forcecovered by unemployment insurance,from Clasen and Viebrock (2008), are for2002.6. Eurobarometer (2006).7. Djankov and Ramalho (2008). A 10-point increase in the rigidity of employmentindex is associated with anincrease of 0.9% of GDP in the size of theinformal sector.8. Djankov and Ramalho (2008).9. Feldmann (2008).10. Kaplan (forthcoming). The study usesdata from the World Bank EnterpriseSurveys, available athttp://www.enterprisesurveys.org.11. Van Stel, Storey and Thurik (2007) andArdagna and Lusardi (2008).12. Aghion and others (forthcoming).13. Besley and Burgess (2004).14. Wangda (forthcoming).(c) The International Bank for Reconstruction and Development / The World Bank