Hungarian public works schemes just hide problems

Hungarian public works schemes just hide problems
The schemes have been widely criticised for creating a permanent underclass of unskilled workers.
By Blanka Zoldi in Brussels December 1, 2016

Hungary is very close to reaching full employment, Viktor Orban, the country’s prime minister, commented proudly on November 30, pointing to Hungary’s latest employment figures published one day previously. “Our country was a black sheep, but this is why ours is a success story,” he added.

The government claims that Hungary’s unemployment rate - which has fallen to the lowest level among the Visegrad countries - proves that recent years’ unorthodox policy measures have been successful.

Official employment figures, however, remain highly distorted, and further improvement on the labour market is unlikely to occur without tackling the increasing labour shortage and reforming the country’s education and training system.

In 2010, when the ruling Fidesz party came to power, the unemployment rate among Hungarians aged 15-74 stood around 11-12% compared to 7-8% preceding the global financial crisis. Unemployment figures have steadily fallen since 2010, reaching 4.7% in August-October 2016, the lowest level since communism collapsed in 1990. The employment rate in the country increased to 58.7% in August-October – compared to 48% in 2010 – with 4.4mn people employed in the country.

Labour markets have been tightening across the region, with unemployment falling in October to 9.08% in Slovakia, to 8.2% in Poland and to 5% in the Czech Republic. While Budapest boasts of having the lowest unemployment and highest employment rates among the Visegrad countries, Hungary’s lead disappears when only those in real employment inside the country are counted.

The country’s employment figures, for example, do not only include those Hungarians that work in the country. Hungarians who work abroad, but occasionally return home and contribute to the income of their household in Hungary are also counted. In August-October, out of 4.4mn employed people, 115,400 worked abroad.

Hungary's vast, state-funded public work programme inflates the data to an even bigger extent. Financed by the state and offering temporary employment to job seekers, the scheme is the main active labour market policy in Hungary.

Public works can be organized either by the state, by municipalities or by churches. They cover a wide range of jobs from street cleaning and agricultural work to building and maintaining the country’s razor-wire fence against migrants. The income collected under the scheme - around HUF50,000 per month (€160) - is lower than the current minimum wage (HUF73,815) on the primary labour market.

While similar public work schemes were also launched in other central European countries in the early 1990s in order to support the large number of unskilled workers who lost their jobs during the transition to capitalism, Hungary’s current program is unique in its scale. In 2014 public workers made up 0.52% of the population aged 25-64 in Slovakia, 0.24% in the Czech Republic and 0.05% in Poland, compared to 2.72% in Hungary, according to the latest data released by Eurostat.

While those on public work schemes are not taken into account in the employment statistics in Slovakia, and the inclusion of Czech and Polish public workers does not significantly influence employment figures, the considerable number of public workers in Hungary highly distorts the data. In August-October, 220,500 people were employed on the scheme, according to the country's statistics office KSH. If Hungarian public workers were considered as unemployed instead, the country’s unemployment rate would be around 9.5%, which would represent the highest level among the Visegrad countries.

The government has spent a total of HUF1300bn (€4.15bn) on the public work scheme between 2010 and 2016, and plans to allocate HUF325bn for the programme next year. However, it has been widely criticised for failing to improve the reintegration of participants into the open labour market, creating a permanent underclass of unskilled workers. 

"In the first half of 2015, the rate of successful exit from the scheme to regular employment was 13.1%, but around 60% of the participants who left it in that period returned to the scheme within 180 days. This significantly risks locking participants into the scheme, particularly low-skilled workers and people in disadvantaged regions,” the European Commission pointed out in its latest country report published earlier this month.

The OECD also suggested that Budapest’s fiscal policy should focus more on enhancing the economy's growth potential by re-prioritising public spending. “In particular, scaling back public works schemes as the labour market continues to strengthen (…) would boost productivity,” the OECD wrote in its latest Global Economic Outlook.

In a bid to decrease the number of public workers, the National Economy Ministry is reportedly considering to modify the programme. Those who are less than 25 years old or "are considered to have the potential to find a job on the primary job market”, will not be allowed to participate in the public work scheme, Vilaggazdasag wrote. Some also suggest that the 15% hike of the minimum wage will provide a greater incentive for those on the scheme to try to find a job on the better paying primary labour market.

Although companies struggle with the worst labour shortage on record, it is unlikely that a significant proportion of the mostly low-skilled workers on the scheme will be employed by them. One third of the companies are unable to fill vacancies because applicants are not sufficiently qualified. While the emigration of young and skilled workers hit historically high levels in 2014 and 2015, the skill mismatch index [calculated as the gap between the proportion of low-, medium-, and high-skilled in the working age population and the corresponding proportions in employment] is currently at an all-time high in Hungary," Gyozo Eppich, deputy head of research at OTP Bank told bne IntelliNews earlier this year.

Analysts have repeatedly pointed out that an in-depth reform of the public education and training system would be needed in order to tackle those problems, and called for measures to improve educational outcomes and to increase the participation of disadvantaged groups. Demonstrations by Hungarian teachers rattled the government earlier this year; however, the cabinet has offered only partial reforms.

The government has, for example, introduced several changes in the curriculum and the structure of vocational training as of September 2016. Many complain, however, that the reforms have not been adequately planned, were implemented only hastily, and are not sufficiently in line with the needs of the labour market. The Confederation of Hungarian Employers and Industrialists submitted a comprehensive package of suggestions for further reforms, including the need for supporting students to gain those basic skills – comprehensive reading, calculating, self-expression – that will help them to adapt to changes on the labour market.

The latest PISA tests show that there is indeed room for improvement. In 2012, Hungarian students fell short of the OECD average in reading comprehension, mathematics and natural sciences, and their performance has significantly deteriorated since 2000.

On November 29, the Hungarian parliament held a day-long debate on public education. Out of 199 MPs, however, only 13 were present at the session to discuss possible further reforms.