OECD Reviews of Labour Market and Social Policies 2 0 1 6 Latvia OECD Reviews of Labour Market Latvia has undergone major economic and social change since the early 1990s. Despite an exceptionally deep recession following the global financial crisis, impressive and Social Policies economic growth over the past two decades has narrowed income and productivity gohprsiwCCCCCneuafarhhhheoc fesspolaaaaaonistf srppppkeanmtsm ee ttttioirnnseeeeeenn teaprrrrg let gabdtr 1243sdintores ....io p v e gefbARRAwaeeorny ca e edlt v mtihtimsihcoosnnio pyio clfcgmcafn ooroloehoute,rneir fu cl sm vf oedpmloiriedn vriiprnegr reo gortayrgchsi.d resr oL te Alaumtilaannay otc enro gtova gatfvtdor iimfhenvci ie anlceae ak yc’nebo s dtn tdluiqehu ialeoveaemulenbqwoe ccaiteou gwbtrllsleiciiuiahenvet oodrptyetres ceesn.g of ison oioeartnooesrefmsl fc cnst LaLheLiyiotnnaaai e aaueitdaltn tvlrvqOnp v cilaiLauidaoaEean’aab ’lssnCsivdtclo ,is vepD t isus teiyroahoh.ryo s -paaecB cmlvsruiaiuaeae laratla gl ri l ctLsckeekiho aeof eatianttnhy v ltr pcelhiiecasosoenhkniml ogia scctnlee holiree s aeucdns tpno.ig s tpouTerprrlyh.dota , eH rdlaboi tougnewiewcod sftv deui gvevcerirrtetrgonhyerrw,me ae awrtteen ehsind t ht ’osu t OECD Reviews of Labour Mark siaseiieslaalennnuidumdomfumdesseeeeeiqgtnsqteq-iiqquaagrgluutqgaiioauunanararltun ttaaaialiiteageaobbaney ll tlnltsstl aieiea soioiettei o oubncarpcpyy sereineinslana qt nnnelee alo usiisl l ninm mpainpicipoiogrlfrafginin ieioobgetgeaes stnltyma- - rlreee aallissdc cgdadapopoutitreeeetotisirnqoaqnonqtiitnunouonosaggiua oaii sontnlnl tt naliilan eeeff itbe lse leinecsnsl- e-iiaLaoaoeelfeftl qdocrc orsqeeipeuinoinanae-on-quagglllnlnauliic a snoonliplpa tieilsertrogyngnaaeaoioun tr lgsrg tttssaasnuney e o pdiacscdiltln nctdetrtaeeegegiaiieaomvo oai iqaqqlnenenn urmtriamuu p gaalbleirinnagaigtiblrffoicertieriteetnln a ata-e-seeapetltltggoic e iooio sosoictn p nonniaaniosnooagge inddnloi ci cnnnsl l neepeleieelisusarqaiaqqaqfi iofursrluealouutan-nead t elplnpailaiea-nnociiqrtlttrtsggtniyuynoeie o ogo e aei s a nntnmtmtsslue beeigeieolsog gasiclqtcr frrccoaleeaatnuticie-itnt iaiaiilianpiaoaaoooolglbllennnrnn l i p nepgpetin i rnnms srsrylpoeieiuneugeiqoqot oaenreusugsttrcsaamnattne etitlloaasaiiiiiicconotntgd iiygnnystnitnrn e isisielaaaonoqaeuiumdfebbstsqnneeuiqgttlq-li u uaaaorlseuseaiioatnananu lu tnptaeapilit gsesobb eleiy slnltttsli nneef saooeayi unssaepcpi icsenreeneii-iaoqtonnnilmaaalausison nnibaibnpliiooggsnlrsa llnn ipobt e rgesesiiltyrmn n a e e aapiplso cegedtdpueeetreqteqiesioqnaaqnonetuutuunsarnssciaaoaiia oninl itttnollolianeefi iiib si oinenntfsntsl -oaoegnesyeslyqdcc o- peuiieiislnaanenqagomlulnulee sipnslpaitqqigertroytgeaououn ra srt tssaalnieae onclciltncttaiigiiitiaooob lylnnn l ip fe re o- e t an d S CTsVthioasinitsti s swwutiolcwt ratkwlh dii.ssoa epptacuubdbba-lliiiscsleihabsetri.doan roy on.on tr hglien feoO raE mtC hoDtr teipL i:inb//frodarxrmy.d,a wotiiho.oincr.hg /g1a0t.h1e7r8s7 a/9ll 7O8E9C2D64 b2o5o0k5s0, 5p-eernio.dicals and ocial Policies Latvia lpalesirmifdufoeige-estlerq-tocialannuttoiigieooann nnqtlae geiluanbi fraelslenqelo-eiulnia actogplrny ieieatgn mnye lil insm sgepuarigiorsiragn ttnoneaairioqnidtsnanugea e at iibecnlnqilmioetteeuqiy gniqpu aorse autaulnnltesaiis tiftosi lyoasen uiinsnot- sisulanyc esboeta tlqimdeanaaeuemii ilngqanpgal uei apgibranlttlbrsyeraeei looat s apsenuitrteooss neicnp tonasiaceaiidin nolntlne na gqipilssobfru silieaoaafnouetdt-ed s enelpest- eceqoassluntuqioon nissaoicuas intngnotibuaea enagl s llltsse qtii fpo n aeelaperuci naa-edeosialanaertbaoolbqslen rnlilcuipocgeteatnirn n iltiy poolasiepieengt nf laeneaes g e dlcrsomanpiei-tn cfodaqrsliieiionngau-odieonsglolarq noe ttlpaenenaiqeurgdmf gstoeescaui gq-o tilltiotlaeruceneoceiataainoaanettt rel siigeqrnoonl a posinnslin undrfsoe ocgeilioaaencunqi ctifreeli-auaesegnqmliialc-lattiuoi tlntga paayloeigprnorl dn i saironpneegtgotet myrom ailc eoql iilscgoiftebniaueuegtare ltl-isiraaa onrcleepttnneotraric taioq nnipeaonlnitnutggoit eadf aiis ieinboeplnonlneco-elriegtntsln qeaoqcsiyo or i t puu oalnusinnseeaagiaucdi unsnflnl lsttisligetestsift ieeoy paoaeq- tean i-ilnriamsnrsnu lnsoluanoioioe aginsabifannnrtqttceldgbagagae-eeeu ii tlb llanqpc poiaelesoarulelnatnbelo anoegrpitl stio in n eii iSbn 978-92-64-25049-9 81 2016 01 1 P OECD Reviews of Labour Market and Social Policies: Latvia 2016 This work is published under the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of OECD member countries. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. Please cite this publication as: OECD (2016), OECD Reviews of Labour Market and Social Policies: Latvia 2016, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264250505-en ISBN 978-92-64-25049-9 (print) ISBN 978-92-64-25050-5 (PDF) Series: OECD Reviews of Labour Market and Social Policies ISSN 2074-3416 (print) ISSN 2074-3408 (online) The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law. Corrigenda to OECD publications may be found on line at: www.oecd.org/about/publishing/corrigenda.htm. © OECD 2016 You can copy, download or print OECD content for your own use, and you can include excerpts from OECD publications, databases and multimedia products in your own documents, presentations, blogs, websites and teaching materials, provided that suitable acknowledgement of OECD as source and copyright owner is given. All requests for public or commercial use and translation rights should be submitted to [email protected]. Requests for permission to photocopy portions of this material for public or commercial use shall be addressed directly to the Copyright Clearance Center (CCC) at [email protected] or the Centre français d’exploitation du droit de copie (CFC) at [email protected]. 3 FOREWORD – Foreword This volume consists of a background report prepared by the OECD Secretariat to support the Labour Market and Social Policy Review of Latvia which is currently being undertaken by the OECD Employment, Labour and Social Affairs Committee as part of the process for Latvia’s accession to the OECD [see the Roadmap for the Accession of Latvia to the OECD Convention: C(2013)122/FINAL]. In accordance with paragraph 14 of Latvia’s Accession Roadmap, the Employment, Labour and Social Affairs Committee agreed to declassify the report in its current version and publish it under the authority of the Secretary General, in order to allow a wider audience to become acquainted with the issues raised in the report. Publication of this document and the analysis and recommendations contained therein, does not prejudge in any way the results of the review of Latvia by the Employment, Labour and Social Affairs Committee as part of its process of accession to the OECD. The review was prepared by Jonathan Chaloff (Chapters 1 and 2), Paolo Falco (Chapters 1 and 3) and Herwig Immervoll (Chapters 1 and 4, Assessment and Recommendations), with statistical support from Véronique Gindrey, Maxime Ladaique and Sébastien Martin. Herwig Immervoll ([email protected]) co-ordinated and edited the report. Jean- Christophe Dumont, Mark Pearson, Monika Queisser, Stefano Scarpetta and several other colleagues at the OECD provided valuable comments. The report also accounts for comments received from the Latvian Ministry of Welfare. OECD REVIEWS OF LABOUR MARKET AND SOCIAL POLICIES: LATVIA 2016 © OECD 2016 5 TABLE OF CONTENTS – Table of contents Acronyms and abbreviations ........................................................................................... 9 Executive summary ...................................................................................................... 11 Assessment and recommendations ................................................................................ 13 Chapter 1. A volatile economy heightens Latvia’s social challenges ....................... 41 1. Strong growth and remarkable resilience, but major policy challenges ahead ...... 42 2. Inequality has reached very high levels ................................................................ 47 3. An unfavourable demographic situation exacerbated by high emigration ............ 65 4. The productivity challenge has its roots in the labour market ............................... 78 Notes ........................................................................................................................ 90 References ................................................................................................................. 94 Chapter 2. Responding to the decline of Latvia’s population ................................ 101 1. Finding effective ways to reduce negative net migration .................................... 102 2. Diaspora policy needs to be bolstered, but cannot reverse emigration ............... 106 3. Latvia has yet to start the uphill battle to attract labour and economic migrants to Latvia .................................................................................................................. 124 Notes ...................................................................................................................... 137 References ............................................................................................................... 139 Chapter 3. A more productive labour force in Latvia ............................................ 141 1. Making the most of Latvia’s human capital: Challenges ahead .......................... 142 2. Helping workers find productive employment in the formal sector .................... 145 3. Skills needed to boost productivity in the face of adverse demographic trends ..... 170 4. Addressing the needs of youth and older workers ............................................... 178 Notes ...................................................................................................................... 185 References ............................................................................................................... 189 Chapter 4. Reinforcing Latvia’s active social policies ............................................ 195 1. Making effective social protection a key policy priority ..................................... 196 2. Promoting self-sufficiency through accessible and adequate working age support ............................................................................................................. 211 3. Old-age pensions: Bold reforms but significant risks for social sustainability ........................................................................................................... 219 Notes ...................................................................................................................... 227 References ............................................................................................................... 230 OECD REVIEWS OF LABOUR MARKET AND SOCIAL POLICIES: LATVIA 2016 © OECD 2016 6 – TABLE OF CONTENTS Tables Table 1.1. Most recent emigrants do not plan to return ............................................. 77 Table 2.1. Emigration rates are higher from urban areas ........................................ 112 Table 2.2 Many factors prevent Latvian emigrants from returning ........................ 113 Table 2.3. Remittances are a key component of household income for one in ten poor families .................................................................................................. 118 Table 2.4. Many Latvians abroad have the potential to create and develop businesses in Latvia ................................................................................................. 123 Table 2.5. Foreigners in Latvia: Inflows (first temporary permits) by permit category, selected categories, 2004-14 ................................................... 125 Table 4.1. The majority of poor or socially excluded receive no significant income support ........................................................................................................ 214 Figures Figure 1.1. Large but uneven income gains .............................................................. 43 Figure 1.2. Subjective wellbeing remains very low, despite being remarkably resilient during the crisis ........................................................................................... 44 Figure 1.3. Key challenges: Inclusiveness, demographics, and productivity ............ 46 Figure 1.4. Low-income groups benefited from the pre-crisis boom but fared badly during the recession ......................................................................................... 48 Figure 1.5. Income fluctuations cause hardship for many Latvians .......................... 49 Figure 1.6. Large gaps between rich and poor, and a very ........................................ 51 Figure 1.7. Older workers and children are among the most disadvantaged ............. 54 Figure 1.8. Large regional differences in income levels, poverty and concentration of ethnic minorities ............................................................................. 55 Figure 1.9. Job prospects of youth, older men and low-skilled workers deteriorated sharply during the crisis ........................................................................ 60 Figure 1.10. High wage inequality at the bottom and at the top................................ 62 Figure 1.11. Gender, education, labour market experience and citizenship have strong impacts on earnings ............................................................................... 63 Figure 1.12. Estimated earnings shortfalls of national minorities are somewhat smaller than in Estonia .............................................................................................. 64 Figure 1.13. The working age population has been shrinking................................... 66 Figure 1.14. A trough in births post-1990 contributes to a declining population ...... 66 Figure 1.15. The dependency ratio is rising quickly, driven by population ageing .. 68 Figure 1.16. Population decline is concentrated in rural areas and outside greater Riga ......................................................................................................... 68 Figure 1.17. Latvians are now emigrating mostly to European countries ................. 70 Figure 1.18. Youth cohorts show decline due to high emigration ............................. 70 Figure 1.19. The non-citizen population is declining ................................................ 73 OECD REVIEWS OF LABOUR MARKET AND SOCIAL POLICIES: LATVIA 2016 © OECD 2016 7 TABLE OF CONTENTS – Figure 1.20. Most non-citizens are older and the younger non-citizen population is shrinking further .................................................................................................... 75 Figure 1.21. A large and growing emigrant population ............................................ 76 Figure 1.22. Productivity growth has fallen and remains lower than in comparator countries ................................................................................................. 79 Figure 1.23. The incidence of long-term unemployment remains high .................... 80 Figure 1.24. NEET rates among youth are significant .............................................. 81 Figure 1.25. Strong disparities in unemployment across regions .............................. 82 Figure 1.26. The shadow economy represents a large share of the Latvian economy .................................................................................................................... 84 Figure 1.27. Incidence of temporary contracts in OECD countries .......................... 85 Figure 1.28. Changes in employment across sectors ................................................. 86 Figure 1.29. The share of students lacking basic skills is relatively low .................. 87 Figure 1.30. Strongly declining enrolment in secondary and tertiary education ....... 88 Figure 1.31. Perceived quality of vocational education and training ........................ 89 Figure 2.1. The decline in student enrolment has mostly been in self-paying students .................................................................................................................... 104 Figure 2.2. International study in Latvia is relatively inexpensive ......................... 105 Figure 2.3. More than one in five recent emigrants was a student or trainee before emigrating .................................................................................................... 106 Figure 2.4. Latvia’s emigration rate is higher and faster growing than for almost all OECD countries ...................................................................................... 107 Figure 2.5. Reasons for emigration of emigrants, 2000-14, by period of emigration ........................................................................................... 108 Figure 2.6. Incidence of spells of employment, unemployment or inactivity in Latvia during the previous year among Latvian guestworkers, 2002-13 ............ 109 Figure 2.7. Higher educated emigrants sought more than just employment abroad ................................................................................................. 110 Figure 2.8. Members of national-minority groups are more likely to cite political and social security factors in their emigration decision ............................ 111 Figure 2.9 Reservation wage for emigrants is higher for men ................................ 114 Figure 2.10. About half of those working abroad return ......................................... 115 Figure 2.11. Emigrants' plans to return and family members left behind in Latvia .................................................................................................................. 116 Figure 2.12. Remittance flows provide a major contribution to GDP ..................... 117 Figure 2.13. Valid temporary permits, by reason, 1 January 2012-15 .................... 126 Figure 2.14. Foreigners in Latvia: Inflows (first temporary permits) by permit category, selected categories, 2004-11 and 2014 .................................... 129 Figure 2.15. Latvians do not think that their country is a good place for migrants from other countries ................................................................................................. 130 Figure 2.16. There are relatively few international students in higher education ... 132 Figure 2.17. The number of international students is increasing............................. 133 OECD REVIEWS OF LABOUR MARKET AND SOCIAL POLICIES: LATVIA 2016 © OECD 2016 8 – TABLE OF CONTENTS Figure 3.1. Participation in ALMPs has increased, but remains low by international standards........................................................................................ 146 Figure 3.2. Expenditure on ALMPs is low .............................................................. 147 Figure 3.3.Despite a large increase in unemployment, ALMP spending declined ..... 148 Figure 3.4. The incidence of disabilities is significant ............................................ 156 Figure 3.5.Despite cuts after the crisis, the number of labour inspectors is relatively high ...................................................................................................... 159 Figure 3.6. Fiscal pressure on labour is high, especially for low-paid workers ...... 163 Figure 3.7. The minimum wage has increased significantly since 2007 ................. 166 Figure 3.8. The proportion of workers earning at or below the minimum wage is high ...................................................................................................................... 167 Figure 3.9. The tax wedge for minimum wage earners is among the highest in the OECD, 2013 .................................................................................................. 168 Figure 3.10.The share of youth combining education and employment is relatively low ........................................................................................................... 175 Figure 3.11.Participation in lifelong learning is low ............................................... 177 Figure 4.1. Government programmes do little to alleviate inequality ..................... 196 Figure 4.2. Public social spending is low ................................................................ 202 Figure 4.3. Limited use of means-testing is one reason for weakly targeted social protection ...................................................................................................... 203 Figure 4.4. Spending on working age support programmes has been pro-cyclical ............................................................................................................ 207 Figure 4.5. Social transfers are poorly targeted ....................................................... 209 Figure 4.6. Low social protection coverage among the working age population .... 213 Figure 4.7. Safety net benefits are far lower than commonly used poverty thresholds ................................................................................................................ 216 Figure 4.8. Current legislation implies very large falls in future public pension levels and spending ................................................................................................. 222 Figure 4.9. Latvians have an unfavourable view of their pension system ............... 226 OECD REVIEWS OF LABOUR MARKET AND SOCIAL POLICIES: LATVIA 2016 © OECD 2016