Report No. 35361-AM Armenia: Labor Market Dynamics (In Two Volumes) Volume II: Main Report January 2007 Human Development Sector Unit Europe and Central Asia Region Document of the World Bank 2 CURRENCY EQUIVALENTS (Exchange Rate Effective January 8, 2007) Currency Unit = Armenian Dram (AMD) AMD 1,000 = $2.74 $1 = AMD 365 FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS ALMPs Active labor market programs BEEPS Business Environment and Enterprise Performance Survey BIS Business Information System CIS Commonwealth of Independent States CPI Consumer price index EBRD European Bank for Reconstruction and Development EC European Commission ECA Europe and Central Asia EPL Employment Protection Legislation EU European Union FDI Foreign direct investments FIAS Foreign Investment Advisory Service FSU Former Soviet Union FYR Former Yugoslav Republic GDP Gross domestic product GNI Gross national income GOSKOMSTAT State Statistical Committee of the USSR GTZ Deutsche Gesellschaft fur Technische Zusammenarbeit HHS Household survey IDP Internally displaced people ILCS Integrated Living Conditions Survey ILO International Labor Organization IMF International Monetary Fund IOM International Organization of Migration LFPR Labor Force Participation Rate LFS Labor Force Survey LRP Labor Redeployment Program MTEF Medium Term Expenditure Framework NES National Employment Service NSS National Statistical Service OECD Organization for Economic Co-operation and Development OSCE Organization for Security and Cooperation in Europe PES Public Employment Services PSU Probability Sample Unit 3 REC Regional employment centers SES State Employment Service SIDA International Development Cooperation Agency (Sweden) SME Small and Medium Enterprises SOEs State-owned enterprises SPAP Social Protection Administration Project SSEE Secondary Specialized Education Establishments SSI Social Security Institute SSP Social Support Program TFR Total fertility rate ULC Unit labor costs UNDP United Nations Development Program UNICEF United Nation’s Children Fund USAID United States Agency for International Development USSR Union of Soviet Socialist Republics VET Vocational education and training Vice President: Shigeo Katsu Country Director: Donna M. Dowsett-Coirolo Sector Director: Tamar Manuelyan Atinc Sector Manager Arup Banerji Task Team Leader: Arvo Kuddo 4 MAP OF THE REPUBLIC OF ARMENIA 5 ACKNOWLEDGMENTS This report was written by Arvo Kuddo (Task Team Leader; ECSHD). It relies on the contributions prepared by the team of Armenian experts from AVAG Solutions Ltd. led by Vahram Avanesyan. Background papers on particular topics were prepared by the following authors: (a) macroeconomic developments and the labor market: Armen Yeghiazaryan and Vahram Avanesyan; (b) rural employment: Armen Yeghiazaryan, Vahram Avanesyan, and Nairuhi Jrbashyan; (c) youth employment and unemployment: Vahram Avanesyan, Melik Gasparyan and Nairuhi Jrbashyan; and (d) labor legislation and labor market institutions: Vahram Avanesyan and Melik Gasparyan. The fieldwork on conducting labor market surveys was supervised by Ruben Yeganyan and Norayr Gasarjyan. The report uses the contributions provided by Sona Harutyunyan (Director), Anahit Parsadanyan and Hasmik Tadevosyan from the State Employment Service, Louisine Qalantaryan, Head of Labor Market Division of the National Statistical Service of the Republic of Armenia (administrative and Labor Force Survey data), and Gorana Krstic (Integrated Living Conditions Survey data). Tatyana Bogomolova and Asta Zviniene (HDNSP) provided assistance in preparing population forecasts for Armenia. The team is grateful for the support of Donna M. Dowsett-Coirolo, Country Director (ECCU3), Arup Banerji, Sector Manager (ECSHD), and Aleksandra Posarac, Country Sector Coordinator for South Caucasus (ECSHD). The team benefited from comments of peer reviewers Verdon Staines (AFTH3) and Carlos Silva Jauregui (MNSED), as well as Christian Peterson (ECSPE), Saumya Mitra (ECSPE) and Anthony Cholst (ECCU3), Special thanks to Diane Stamm, who edited the document. 6 CONTENTS PAGE Abbreviations and Acronyms 2 Map of the Republic of Armenia 4 Acknowledgements 5 Contents 6 Introduction 13 Chapter I. Macroeconomic Developments and the Labor Market 17 1.1. Economic Growth and Employment 17 1.2. Job Flows, by Industry 23 1.3. Productivity Improvements 30 Chapter II. Labor Market Trends 35 2.1. Labor Force Participation 35 2.2. Employment Ratio 40 2.3. Unemployment Trends 45 2.4. Inactive Population 50 2.5. Older and Disabled Workers 51 2.6. Child Labor 53 2.7. Gender Segregation 54 2.8. Urban-rural Dimension and Regional Disparities 55 2.9. Education Level and Labor Market Outcomes 57 Chapter III. Wage Dynamics and Unit Labor Costs 61 3.1. Wage Dynamics 61 3.2. Unit Labor Costs 67 Chapter IV. Rural Employment 69 4.1. Output and Employment in Agriculture 69 4.2. Landownership and Land Use 74 4.3. Income from Agriculture 75 Chapter V. Youth Employment and Unemployment 77 5.1. The Level and Structure of Unemployed Youth 77 5.2. Sociodemographic Characteristics of Registered Unemployed Young People and their Households 79 5.3. Past Interactions of Unemployed Youth with the Labor Market 83 5.4. Students in Primary Professional Schools and in Secondary Specialized Education Establishments 86 7 Chapter VI. Labor Migration 90 6.1. Outflow of Population 90 6.2. Current Labor Migration 92 6.3. Urban-rural Migration 95 6.4. Remittances 95 Chapter VII. Business Environment and Labor Markets 98 7.1. Importance of the Business Environment 98 7.2. Challenges to Creating a Business 100 7.3. The Role of Labor Regulations, and Skill Level and Education 104 Chapter VIII. Labor Legislation and Labor Market Institutions 106 8.1. State Intervention in the Labor Market 106 8.2. Employment Protection Legislation 108 8.3. The Capacity of the State Employment Service 113 8.4. Active Labor Market Programs 115 8.5. Unemployment Benefits 119 8.6. Social Dialogue 121 Chapter IX. Policy Recommendations 124 References 133 Annexes 141 Tables Table 1.1.Volume Indexes of Gross Domestic Product (constant prices), 1991 = 100 18 Table 1.2. Employment Dynamics in Health, Education, Science, and Public Administration, 1995–2004 21 Table 1.3. Jobs, Value Added, and Labor Productivity in the Nonagricultural Sector of the Economy, 1995–2003 22 Table 1.4. Parameters of Cobb-Douglas Production Function for Industry, by Sector, 1995–2003 27 Table 1.5. Dynamics of Agricultural Employment in Armenia and other Transition Countries, 1990–2003 30 Table 1.6. Output and Labor Productivity in Industry, 2001–2003, by Enterprise Size 32 Table 1.7. Labor Productivity: International Comparisons 34 Table 2.1. Employment of Population in the USSR and in Some of the National Republics (including in subsidiary household plots; 1989 population census, in %) 36 Table 2.2. Employment/Population Ratios and Activity and Unemployment Rates in 2004 in Armenia and Georgia, and in some European Countries 39 8 Table 2.3. Unemployment Rate Estimates from Different Sources, 1996–2004 46 Table 2.4. Economically Inactive Population, 2001 Population Census Data; ’000 51 Table 2.5. Employment, by Occupation and Gender, in Percent, 2004 LFS 55 Table 2.6. Population and Labor Force, by Marz 58 Table 2.7. Have You Worked since Graduation? (respondents aged 23–33), Percent 59 Table 3.1. Armenia: Summary of Earnings Distribution, 1998/99 and 2004 63 Table 3.2: Average Annual Earnings and Return per Unit of Cost of Education, 16–33 Year-olds with Jobs, by Gender and Level of Education, in ’000 Drams; 2001 65 Table 3.3. The Dynamics of Average Monthly Wages and Minimum Wages in Armenia, 1997–2004, Drams 66 Table 4.1. Number of Farms and the Total Area of their Privatized Agricultural Lands 69 Table 4.2. Employment-to-Population Ratio and Employment Status by Stratum, Percent 71 Table 4.3. Economic Activity and Unemployment by Age Group, June–July 2005 73 Table 4.4. The Average Monthly Income from Agricultural Activity (crop production, animal husbandry, processing) per Household, Drams 75 Table 5.1. School Attendance of De Jure Population, by Age and Type of Educational Institution, 2001 Census 78 Table 5.2. Youth Unemployment Rates and the Ratios of Youth-to-Adult Unemployment Rate 79 Table 5.3. Unemployed Youth with Professional Qualification, by Area of Specialization (percent) and Average Duration of Being Registered at the SES (months) 82 Table 5.4. Distribution of Reasons for Not Obtaining Training or Retraining by Unemployed Youth, Percent 83 Table 5.5. Unemployed Youth, by Source of Job Search, Percent of Total 85 Table 5.6. Circumstances with a Decisive Influence on the Selection of Specialization by VET Students, Percent 88 Table 6.1. The Number of Population of Armenian Nationality Living in the USSR and in Some of the CIS States; in Millions (according to the 1989 population census and the latest census data) 92 Table 6.2. Estimates of the Average Remittance that Armenian Temporary Workers in Moscow and Rostov Send Home, 2003 96 Table 6.3. The Impact of Remittances on Household Incomes in Armenia (drams) 96 Table 6.4. Economic Benefits and Costs of Remittances to a Receiving Country 97 Table 7.1. Starting-a-Business Indicators—Measures to Register a Business Formally in Some Countries 101 Table 8.1. Key Benchmarks on Labor Regulations from the National Labor Laws (regular employees, that is, excluding minors, disabled, and so forth) 111 Table 8.2. Armenia: Public Expenditure on Labor Market Programs, 1998–2003 116 Table 8.3. Involvement of Officially Registered Job Seekers in Active Policy Measures 118 9 Table 8.4. Reasons for Unwillingness of Unemployed to Register at the Regional Employment Centers in the Opinion of Directors 120 Table 9.1. Impacts of ALMPs Based on Experience of EU Countries 126 Figures Figure 1.1. Structure of Value Added and Employment, 1990–2003 19 Figure 1.2. Dynamics of Main Economic Indicators (1991=100) 21 Figure 1.3. Nonagricultural Jobs in the State and Private Sectors, 1995–2003 24 Figure 1.4. Job Creation and Destruction in Industry, 1999–2003 (in reporting enterprises) 25 Figure 1.5. Job Creation and Destruction in Construction, 1999–2003 (in reporting enterprises) 26 Figure 1.6. Number and Size of Industrial Enterprises in Armenia, 1996–2003 (1995 = 100) 28 Figure 1.7. Main Indicators for Agriculture in Armenia, 1990 – 2004, Percent 29 Figure 1.8. Structure of Output and Employment in Industry, by Sector, 1990–2003 31 Figure 1.9. Ratio of Labor Productivity-to-GDP Per Capita in Armenia, 1994–2003 1990 = 100) 33 Figure 2.1. Population Pyramid of Armenia, 2001 Population Census 38 Figure 2.2. Population Pyramid of Armenia in 2025, Scenario I 38 Figure 2.3. Population Pyramid of Armenia in 2025, Scenario II 38 Figure 2.4. The Dynamics of the Able-bodied Population of Armenia, 2001–30, by Main Age Groups, ’000s 40 Figure 2.5. Employment-to-Population Index in Armenia; 1990 = 100 41 Figure 2.6. Employed by Actually Worked Hours; 2004 LFS 41 Figure 2.7. Employed, by Gender and Type of Work, in Percent, 2004 LFS 42 Figure 2.8. Employed by Employment Status, 2004 LFS, in Percent 43 Figure 2.9. Tax Compliance in Armenia, CIS, EU8, and ECA Countries in 2005, According to the World Bank Business Environment and Enterprise Performance Survey (BEEPS) 44 Figure 2.10. Forecast of the Dynamics of Employed Population Aged 15–64, to Maintain the Employment Rate of Able-bodied Population at the Current Level of 55.9 Percent, or to Raise to the Level of 65 Percent and 70 Percent 45 Figure 2.11. Unemployment Rates at Age 15 and Over, According to the Labor Force Survey Data for 2001–05, in Percent 47 Figure 2.12. Officially Registered Youth and Adult Unemployment, 1994–2003 (end-year data) 48 Figure 2.13. Structure of Registered and Self-reported (ILO definition) Unemployment, by Selected Age Groups, 2003 49 Figure 2.14. Unemployed by the Duration of Job Seeking, 2004 LFS, in Percent 50 Figure 2.15. Population Projection for Age Groups 7–17, 65–79, and 80 and Over, in Armenia 52 Figure 2.16. Employment Rates of Older Workers, 2004 LFS and 2004 ILCS Data 53 10 Figure 2.17. Hours Worked by Employed Children in a Week, 2004 LFS 54 Figure 2.18. Participation, Employment, and Unemployment Rates in Urban and Rural Areas, According to the 2004 ILCS, Population Aged 15 and Older 56 Figure 2.19. Unemployment Rate by the Level of Education, in Percent, 2004 LFS 59 Figure 3.1. Dynamics of Gross Domestic Product, Employment, Real Wages, and Labor Productivity in Armenia, 1990–2004 (Indexes, 1990 = 100) 62 Figure 3.2. Average Wages of Employees with Different Levels of Education, According to 2004 LFS Data, in Drams 64 Figure 3.3. Dynamics of Unit Labor Cost in Armenia, 1990–2004 (1990 = 100) 67 Figure 4.1. Dynamics of Value Added, Employment, Labor Income, and Productivity in Agriculture, 1990–2004 (1990 = 100) 70 Figure 4.2. Employment by Age Group, Percent of Population 72 Figure 4.3. Average Size of Agricultural Land per Household, Hectares 74 Figure 5.1. Households of Unemployed Youth, by Number of Working-age and Employed Members, Percent 80 Figure 5.2. Unemployed Youth without Professional Qualification (specialty) by Intention to Continue Education in the Future, Percent 81 Figure 5.3. Unemployed Youth, by Reasons of Losing Last Job, Percent 84 Figure 5.4. Reasons for Failure to Take a Job Offered by the SES, Percent 86 Figure 5.5. Households of VET Students by Number of Working-age and Employed Members, Percent 87 Figure 7.1. Problems of Doing Business (percent of firms indicating a problem) 100 Figure 7.2. Underemployment Due to Labor Regulations in Armenia, and ECA, EU8, and CIS States, Percent, by the BEEPS 2002 and 2005 102 Figure 7.3. Skills and Education of Available Workers as a Constraint to Business Expansion 104 Figure 7.4. Current Level of Employment in Surveyed Firms (in percent); FIAS 2003 Study 105 Figure 8.1. Government Interventions and Regulation in the Labor Market 107 Figure 8.2. Labor Regulations as a Problem of Doing Business (percent of firms indicating labor regulations as a problem doing business, 2005, according to the BEEPS survey) 109 Figure 8.3. Labor Market Regulation in Armenia (before the approval of the new Labor Code) and in Selected Transition Economies 110 Figure 8.4. Assessment of Labor Protection Legislation in Armenia (for old and new Labor Codes) and Comparisons with OECD Countries 112 Figure 8.5. Annual Expenditure on Public Employment Services and Administration per PES Total Staff: International Comparisons (2002, 2003; U.S. dollars) 114 Figure 8.6. Distribution of Regional Employment Centers by Budgeted Annual Expenditure per Officially Registered Job Seeker (2004) 115 Figure 8.7. Public Expenditure on Labor Market Programs per Officially Registered Job Seeker (drams) 117 Boxes Box 1. Country Characteristics 14