1

Institutional framework of transfer from education to

work in UkraineIryna Akimova, Director of Analytical Centre BEST

ETF expert meeting

Turin, June 2007

2

Structure

1. General macroeconomic overview

2. Labour Market in Ukraine

3. Institutional framework of ETS

4. Interface between ETS and LM

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General overview

1. Ukrainian economy is growing: for 2000-2006, average annual

growth rate constituted 7.4% (and 7.1% in 2006). It exceeds growth rate of real GDP in most of the CEE countries.

2.Demographic situation is not favorable: the population is aging and shrinking

By 2015, the share of young people entering the labour market in total population will go down from 30% till 23%. In the next 20 years, the size of labour force will be decreasing by 1-0.5% annually.

More job opportunities for the young in the future

Higher labor productivity is needed to support the aging population skills challenges for the young

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0

5

10

15

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2000 2001 2002 2003 2004 2005 2006

Real growth rates: Ukraine (yoy %)

GDP growth rate

Real wage growth rate

Unemployment

Population trends by age:Ukraine

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000people

70+

35-69

30-34

25-29

20-24

15-19

0-15

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General overview : youth unemployment in Ukraine is not very high…

• The average unemployment in the economy is rather low (7.4% in 2006 according to ILO). For youth, this indicator is higher - about 10%. Youth unemployment is declining since 1999 (together with a general decline of unemployment). Main factors: high economic growth rates, increasing labour force emigration, and unfavorable demographic trends.

• The level of youth unemployment level varies across the age cohorts. It is the highest for the 15-24 years old (like in other countries)

• The duration of unemployment also varies across the age cohorts. It is the lowest for 15-24 years and doubles after the age of 24.

• The youth employment is likely to occur in the informal economy. Thus, while the average rate of employed in Ukraine work in informal economy is 22.3%, 30.4% of employed youth work in informal economy. (Derzhkomstat)

Level of unemployment by age group

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5

10

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30

1999

2000

2001

2002

2003

2004

2005

%

15-24 25-29 30-24

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General overview: … however, there are structural problems

• Higher education does imply higher wages……

• …. but does not increase chances for being employed ( in terms of getting the first working place)

In 2000- 2005, the rate of unemployment among graduates of vocational & secondary schools was decreasing , while similar indicator for graduates of higher school was increasing.

In 2005, the share of unemployed among graduates of higher schools was about 17%, for graduates of vocational and secondary schools - 10% and 5% respectively

Wages by level of education of youth (15-34)

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Illite

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UAH

2003 2004 2004

Unemployed graduates of educational establishments

0

5

10

15

20 thous. person

Secondary education Vocational education Higher education

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General overview: structural imbalance is likely to increase remaining high on the policy agenda

Gross enrollment ratio

1999 2000 2001 2002 2003 2004

Higher education Ukraine 47 50 53 58 62 66

CEE 39 42 44 48 51 54

Professional, technical

Ukraine 23 23 22 21 22 21

CEE 33 33 34 36 36 34

• There is a mismatch between LM and ETS in terms of educational levels : 60% of the youth is trained in higher education and 40% in vocational schools, while the demand

structure in LM seems to be just the reverse. In 2006, the lowest unemployed/vacancy ration is 2 for the “skilled tool workers” and 3 for “Professionals”. At the same time the average unemployed/vacancy in the economy was 5.

• This mismatch is likely to grow with the growing demand for higher education• There is a mismatch between LM and ETS in terms of structure of professional training :

about 40% of newly-trained economists become unemployed• There is a mismatch between ETS and LM in terms of quality of professional training:Lack of practical skills, low level of professional skills

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Labor market structure: from internal to occupational

• Jobs are defined in terms of content with qualification requirements which serve as entry barrier,

• A high level of consistency across the industries and enterprises in terms of job defining. Similar skills are required by different employers,

• Life long employment schemes are rare,

• Limited upward mobility within the firm(with the exception for the sectors/occupations with the low supply of skilled labour.E.g. lack of professional auditors led to intensive in-firm training programs followed by

upward promotion)

Ukraine has moved from “social internal LM” and “life long employment” to the domination of occupational LM

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Labour market structure: is there internal LM in Ukraine?

Civil service : an example of internal LM

About 570 thousand people are employed in the civil service

• Upward promotion of insiders is a common practice;

• Сareer path depends on working experience as a civil servant,

• Career promotion is defined by special administrative procedures;

• There is sector-specific internal training which supports upward mobility;• There are special educational establishments that are aimed at provision of training

to civil servants.

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LM rigidity: restrictive labour legislation

Rigidity of LM is rather high due to a restrictive labour legislation

Hiring difficulty Rigidity of hours Difficulty of firing Rigidity of employment Firing difficulty

Bulgaria 33 40 10 28 30

Croatia 61 60 50 57 55

Czech 44 20 20 28 22

Estonia 11 80 40 44 33

Hungary 11 80 30 40 34

Latvia 78 20 50 49 42

Lithuania 33 60 30 41 34

Poland 11 60 30 34 25

Russia 0 60 20 27 17

Slovakia 0 20 10 10 17

Slovenia 28 80 50 53 47

Ukraine 44 40 80 55 13

High-income OECD 26 50 26 34 40

Ireland 28 40 20 29 52

UK 11 40 10 20 25

USA 0 0 10 3 8

WB Doing business survey

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LM : general de juro rigidity is complemented by special provisions for youth

Rigid LM legislation:

Restrictions on the use of term contracts; Relatively high minimum wage rate (close to 40% of average wage in the economy), In

2002-2006 the share of employed whose wages do not exceed minimum wage declined from 18.1% to 7.6%.

High hiring costs due to high payroll taxes (38.8% of the wage bill); Rigidity of hours (restrictions on night work and weekly holiday work); Firing is difficult (need for a third party permission, priorities for staff redundancy).

Additional provisions for youth Labour Code, The Law “On promotion of social development of youth in Ukraine”

First working place is to be provided for at least 2 years; No probation period; Additional paid vocations for study, short working week, privileges in case of lay-offs; Employment quotas (5% of working places to be provided to uncompetitive persons + fines

for violation the legislation)

Results:

• The employer becomes more selective, skill requirements increase;

• Legislation creates incentives for shadow economy and tax avoidance

• Unemployment among youth is not below the average level

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LM rigidity: de-facto rigidity is lower due to implementation gap

• reduction of hiring costs via hiring “black” labour , a large share of youth works in the shadow economy;

• minimization of tax burden by registering as entrepreneurs (simplified tax scheme used for the employed labour force);

• poor compliance with labour legislation

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LM: unemployment insurance is not generous

• Relatively low level of general unemployment assistance: In 2006, average unemployment benefit constituted:

– 20% of average wage and – 51% of subsistence minimum for those who able to work.

• No special unemployment provisions for youth.• Limited public policies to support unemployed youth through:

– facilitation of entrepreneurial activity, – vocational guidance and training/re-training,– provision of public works

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LM: conclusions

• Unfavorable demographic situation together with good growth perspectives provides better employment opportunities for the youth in the future, however, it raises demand for specific skills

• Rigid labour market increases probability of shadow employment for the youth

• Rigid occupational labour market + non-generous unemployment support

demand for strong vocationally/occupationally specific skills and ETS as a good sorting machine

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Educational system and its institutional framework

Policy context:

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ETS: institutional framework

ET providers:• Secondary schools – compulsory education for 11 years •Vocational training institution•Higher school (institutions, universities, academies)

National agencies involved in the development of educational policy :Main: Ministry of Education and Science – a high level of state intervention in ETS activities including licensing of ET providers, setting, monitoring and control of standards and quality, determining distribution of public funds across ET providers

Ministry of Labour, Ministry of Economy, Ministry of Finance

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ETS: a high level of formal standardization…

• The level of standardization in secondary school is high including strong regulation of curricula, setting obligatory minimal set of subjects to be taken and minimal end points to be achieved at the end of the courses. Ranking of pupils is based on their academic performance

• Unified national final tests in secondary school are still under introduction

• In higher education, despite a high level of formal standardization (curricula, minimal set of subjects and minimal end points) comparability of diplomas is problematic. Quality standards vary across the ET providers. Image of the university matters more for quality judgment of the graduates than their final grades

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ETS: … together with poor quality insurance

Signals:•A significant difference between national and international standards ( especially, in humanities)•A lack of practical skills that should be closed via on-job training • Significant deviations in quality of teaching across the different ET providers are not necessarily reflected in outcome differentiation

Reasons:• weak selection criteria for the professors•Lack of objective external audit•Lack of incentives to improve quality of teaching•Lack of financial autonomy of ET providers & distribution of public financing does not provide incentives for improving performance of ET providers•The role of academic ranking as a sorting mechanism is weakened by the widespread corruption , especially, on the upper secondary level of schooling and further on in higher education

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ETS: differentiation (1)The level of track differentiation is rather high:• At school pupils are divided into separate “curricula tracks” by

2 instruments :a) subject specialization within/across the schools (on the primary level- language specialization; on the upper secondary

level – languages/humanities vs IT/natural sciences specialization)

Subject specialization of school usually also implies quality differentiation as it signals better quality of programs and teaching

b) general/academic vs vocational training ( vocational schools – professional schools or technical schools- offer general and professional training , while general schools do not provide professional training)

• In higher school, the level of differentiation increases after the first two years of training

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ETS: differentiation (2)

Formal differentiation of training outcome is also high:• grading the performance results: 12 point scale for

secondary school Differentiation of tracks allows moving between different

tracks/routes:• Vocational training allows for having an academic

career Flexibility of progression in educational system is rather

high:• Possibility to change training specialization (except for

post-graduate studies)Actual differentiation of training outcome is low

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ETS: differentiation (3)Selection process for pupils is based on academic performance and, partly, on

family’s income level:• selection by income starts already on the primary level if parents choose a

private school; • it continues on the upper secondary level, where most of (but not all)

specialized schools or gymnasiums collect some tuition fee;• specialized schools/ tracks (both free- and fee-based) use academic tests in

order to select better pupils and control their academic progress.

Access to upper secondary level is selective only for specialized schools Access to higher education is selective and based on academic performance.

However, development of wide low quality and tuition-fee-based educational opportunities reduces the role of performance-based selection criteria.

Widely spread corruption weakens performance-based selection criteria

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ETS: Conclusions

• A high level of formal standardization in ETS does not reflect the actual needs of labour market

• A high level of formal standardization of ETS vs low quality assurance weak signals of ETS about quality of labour force

• ETS does not play a role of efficient sorting machine

• Can increase in standardization and tightening of quality control help to improve quality of education without crucial changes in ETS?

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Interface between ETS and LM: Employer Involvement in ETS is weak

• Loosely coupled ET/Employer systems- Occupational LM, entry requires specific training, ET

provides occupationally specific certificates- Formally, there is a high level of in-school provision of

ET specific to particular occupation. Actually, there are large discrepancies between curriculum and actual occupational specification/ entry requirements of LM

- Low level of employers’ impact on specifying curriculum and qualifications

- Non-institutionalized involvement of employers in ET

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Interface between ETC and LM: Employer Involvement

• Employers’ involvement in ET is limited to a provision of short-term internship opportunities or beneficiary donations to ET providers

• Adjustments: movement towards direct and collinear linkage Development of direct links between ET providers (vocational schools

and Universities) and employers in co-financing of specific training&research activities, “in-firm” vocational schools, joint development of special curricula for big employers, providing effective internships for the students, participation of employers in supervisory boards of the Universities

Increasing requests to the Ministry of Education to institutionalize employers’ involvement in curricula development and supervisory boards of the Universities

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Interface between ETC and LM: youth training and guidance

Systems of guidance within the educational structure are weak:- Professional orientation at school is poorly designed and

implemented- Career centres/extension services/alumni centres in the

Universities start to originate- Lack of consistent, consolidated and accessible information on

LM opportunities and forecastsAssistance in job searching is stronger and is mainly provided by:- Professional HR agencies,- State employment service centresWeak impact on the choice of profession with a stronger focus on

adjusting already trained labor force to LM opportunities waste of resources (given occupational LM that require

appropriate skills)

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Conclusions

• ETS in Ukraine does not meet demand of a structured LM, there are mismatches in terms level, type and quality of education, on the one hand, and type and level of job, in the other hand

• Consequences: inefficient use of public and private investment in education

• Main problems include:1. Lack of objective and accessibly information about

potential job opportunities (including LM forecasts)2. Weak links between ETS and LM3. Lack of incentives for ETS providers due to the

overregulation and inefficient financing of ETS

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Thank you for your attention!

Our contacts:

akimova@best-ltd.com.ua

osinkina@best-ltd.com.ua