The general idea behind the labor market regulation is to protect interests of workers and provide rules of conduct for the employers. Therefore, employment laws are usually set to ensure fair treatment and contracting between employers and workers. The problem with employment regulations is that they distort the freedom and flexibility of employers and employees and can have negative effects on the efficiency of the labor market. To measure the extent of freedom in the field of labor market Freedom Barometer evaluates following indicators: (i) Hiring regulation and minimum wage, (ii) Hiring and firing regulations, (iii) Centralized collective bargaining, (iv) Hours regulation, (v) Mandates cost of worker dismissal and (vi) Conscription.

Within Freedom Barometer, to measure Hiring regulation and minimum wage sub-score we use one element of World Bank's Doing Business Report, i.e. "Difficulty of Hiring Index"[1]. It directly measures previously mentioned elements that are important for expressing the level of rigidity of labor market. Among the Western Balkan countries, Montenegro and Albania have the best sub-scores for the Hiring regulation and minimum wage and Croatia and Serbia show as the least free. Bosnia and Herzegovina is in between.

Why is the hiring and minimum wage regulation important?

High minimum wage, especially for young entering the labor market, as well as prohibition and restrictions of fixed term hiring represent obstacles for businesses to employ people. When business has to pay high minimum wage, together with social security contributions and taxes, than expected productivity of the worker may not justify high labor costs. For example, to hire a worker, employer in Serbia would have to be sure that expected productivity of the worker is at least 310 EUR monthly, to cover the minimum labor costs. However this is not the case for more than hundred thousand workers those actually produce and receive much less through illegal grey economy employment. The result is higher unemployment and illegal employment, especially for the manual or blue collar labor. This is especially true for young and inexperienced workers that are entering the labor market.

At the same time, prohibition of fixed term employment brings additional risk for the business. If the success of business operation is highly uncertain, or if it is not convinced that the worker will be suited for the particular vacancy, than fixed term employment represents useful solution. The sorter the period of allowed fixed term employment the greater the risk that filling the vacancy would not pay-off. In absence of long enough fixed term contracts some businesses turn again, when possible, to illegal employment for youth workers. These are fairly present practices in the Balkans region. Also, underpaying the worker can be the result at least for the time, before either worker or business operations are proven successful. Sometimes the obstacle of rigid employment terms and high labor costs could incentivize business not to employ at all in the first place. In conclusion, inflexible and costly employment regulation, even if it does benefit current and staying workers, can significantly harm prospects for unemployed and, especially, youth population.

[1] Data in this text are from Doing Business 2013 report.