Latvia: Annual Review -2010

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  • Published on: 17 November 2011



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Latvia: Annual Review -2010

1. Political developments

In 2010, Latvia celebrated the 20th anniversary of the restoration of independence. The centre right populist New Era government was ousted from government in October and was replaced by the Unity Bloc. Immediately after elections, on October 8, outgoing Prime Minister Valdis Dombrovskis (party New Era) presented a set of long-term priorities of a new government: sustainable economic growth, economic restructuring, creation of new jobs and improving Latvia's competitiveness on global markets. In November the coalition Unity Bloc reappointed Dombrovskis as prime minister. The Unity Bloc is a right wing coalition of New Era, Society for other Politics and the Civic Union. The majority of ministers in the new government have served in one or several of the previous administrations. The new government continued to implement austerity measures as part of its IMF programme. Substantial change in policy on employment and industrial relations is not expected. Presidential elections are to be held in May 2011.

2. Legislative developments

Important relevant legislation products are:

  • amendments to the Public Procurement Law - eliminate access to the state procurement for companies that are poor at declaring their official employment numbers and fail to pay taxes,
  • Action plan for fighting shadow economy and encouraging fair competition,
  • amendments to the Insolvency Law in order to ease insolvency procedure,
  • amendments to the Labour Law in order:
  • to ease administrative burden in issues such as hiring new employees, calculation of pay, study holidays, as well as anulation of requirement that the copy of work contract should be available for inspection directly in the structural unit were a worker is employed,
  • to eliminate unregistered employment by a norm that work contract should be in written form and concluded before employment is started,
  • Three amendments have been made which reduce employees’ rights in the areas of holiday entitlements and sickness leave. The amendment on holiday leave sets forth that in cases where employees are entitled to long periods of unpaid holiday leave, they cannot take regular paid holidays immediately after returning if the unpaid period was for more than 4 weeks. The rationale for this decision is to stop employees using holiday entitlements to take seasonal work abroad. The second amendment was a reduction in the number of days employees are legally entitled to receive pay for in the event of illness from 14 days to 10. A third amendment was to enable employers to release employees from their contracts if they have been unable to work for periods of longer than six consecutive months or intermittently for a period of one year and three months,
  • to improve industrial relations (see relevant section).
  • legislation on micro-undertakings’ taxation in order to encourage incentive to start micro businesses and to reduce unemployment. There are two variations on the special taxation regimes envisaged for micro-enterprises. One is that micro enterprises that are established as limited liability companies may opt for payment of a single tax that includes company income tax, personal income tax, social insurance contribution and risk duty (micro-enterprises tax). The other tax regime applies to micro enterprises – natural merchants (individuals) who have registered economic activity with the State Revenue Service. These enterprises must perform certain economic activities and cannot employ other persons. These enterprises may opt for a single payment – license fee (includes personal income tax, and social insurance contribution, if they meet certain criteria.
  • amendments in “service car” taxation in order to avoid bottlenecks in implementation of the tax. The service car tax is a levy imposed on those who use company cars for private needs. Originally the tax was to be paid according to the capacity of the engine. However, regulations on how to calculate this tax were not elaborated, and many technical issues remained unclear. The Ministry of Finance proposed that the benefit of use of the company’s car for private purposes should be calculated on the basis of engine capacity and personal income tax and social contribution should be paid regarding this benefit on the basis of progressive rate. At the end of 2010 the amendment had still not become law,
  • law on disability determinating status and privilegies of disabled persons,
  • amendments in tax and social legislation related to the Law on state budget 2010 (adopted in 2009, valid since January 1, 2010),
  • amendments in tax and social legislation related to the Law on state budget 2011 (valid since 1 January 2011). This amendment is related to austerity measures with the aim of reducing the state budget deficit,
  • legislative acts regarding use of EU structural funds aimed at better matching current economic needs. Seven Regulations of the Cabinet of Ministers made amendments in three action programs that are administered in the Ministry of Economics of the Republic of Latvia, namely: Human resources and employment, Entrepreneurship and innovation, and Infrastructure and services. The majority of changes envisaged better division of funding between activities so that resources were transferred from programs where fewer applications were received to those with higher activity. Another reason for the amendments was debate with European Commission on common understanding of EU regulation regarding guaranties for improving competitiveness (action program Entrepreneurship and innovation). The third reason was the agreement with the European Commission providing that less share of national funding was requested in application of the ERDF (European Regional Development Fund) and Cohesion Fund (projects in the Action Program Infrastructure and services activity).

3. Organisation and role of the social partners

The institutional setting of social partnership did not change. However, the internal structure of social partners changed – new members appeared in the Latvian Employers’ Confederation (Latvijas Darba Devēju konfederācija, LDDK) and some members merged in Free Trade Union Confederation of Latvia (Latvijas Brīvo Arodbiedrību savienība, LBAS). On February 17, social partners signed agreement on formation of new regional tripartite consultation council in Daugavpils city.

The social partners were involved in decision making process regarding austerity measures and budget consolidation; however their views were not always respected. LDDK and LBAS were involved in the social negotiation process, along with high level representation of local governments and research society. Employers were lobbied also by the Latvian Chamber of Commerce and Industry (Latvijas tirdzniecības un rūpniecības kamera, LTRK). On April 22, LDDK, LBAS, the Latvian Association of Local and Regional Governments (Latvijas Pašvaldību savienība, LPS), LTRK, the Latvian Academy of Sciences (Latvijas Zinātņu akadēmija, LZA) on behalf of Latvia’s organised civil society submitted a vision of Latvia’s future and actions to achieve this vision to the government. Before the election campaign, on June 9, LDDK, LBAS, LPS and LTRK in joint statement invited Saeima to take responsibility for decisions taken within the pre-election period.

The stable role of social partners may be characterised by the fact that the government gave positive response to social partners’ call for functional audit of its institutions in order to find savings for the public finances.

Mutual co-operation between LDDK and LBAS increased. Their joint action resulted in the introduction of companys’ sustainability index.

Moreover, national level tripartite social dialogue was active. Important issues were discussed in regular meetings of National Tripartite Cooperation Council (Nacionālās trīspusējās sadarbības padome, NTSP), however, fiscal issues, austerity measures and budget consolidation took major efforts. Trade unions successfully used the Council as a platform for negotiating important social issues such as national minimum wage (it was increased in 2011) and family benefits (these were not reduced).

4. Collective bargaining developments

General information

Statistics on number of collective agreements negotiated in 2010 were not available during writing of this report.

The importance of collective bargaining was reduced because agreed conditions were not observed. Trade unions raised this issue in 2009, immediately after unexpected wage cuts in the public sector. In 2010, the issue of the legitimaty of collective agreements was discused officially. On June 18, LBAS submitted proposals to the Labour Department of the Ministry of Welfare (Labklājības ministrijas Darba departaments) and NTSP regarding application of collective agreement norms in difficult economic condition. On October 7, the issue was discussed in meeting of NTSP.

Amendments in Labour Law, adopted in 2010, envisaged some improvement in industrial relations:

  • the procedure of entering into collective agreement was simplified,
  • general agreement that is concluded by employers’ organisation or association of employers’ is binding for all employers in the sector and covers all employees in the sector not only in cases when members of such organisations employ 50% of all employees in the sector, as it was set before amending, but also in case if these employers provide more than 60% of the total turnover or service amount of the sector.

Pay

The minimum wage was not increased in 2010. The last increase of minimum wage was in 2009, when monthly minimum wage was increased from EUR 227 in 2008 to EUR 256 and hourly rate was increased from EUR 1.37 in 2008 to EUR 1.54 (Regulation of the Cabinet of Ministers No. 791 of 23 September 2008).

On June 8, 2010 social partners agreed that the minimum wage would not change in 2011, and implementation of the Conception on minimum wage (adopted in 2004) would be halted. The government mandated the Ministry of Welfare to prepare a new way to set the minimum wage so that the level of minimum wage is derived from the macroeconomic situation and the state budget projections for following three years. New principles were discussed after elections, on October 14. Three discussed proposals envisaged slow increase of minimum wage starting from 2012 or 2013, yet neither was supported by social partners. As a result of trade unions’ presure, the minimum wage will be increased in 2011 to EUR 285 (LV1101019I).

Working time

No developments regarding working time were observed.

Some amendments in the Labour Law increased flexibility. The amended law envisages that in case when work contract is changed, one month after amending the employer should pay the previous wage (instead of average work remuneration as set before amendments) or average wage in case of payment by the piece. Employment of students was also facilitated.

Other conditions of employment

The crisis situation in general and the focus on budget consolidation meant that less attention was paid to employment issues such as training and skills, equal opportunities and diversity. Major developments in this field were within the EU Structural funds programs.

5. Responses to economic downturn

Since 2009, legislative developments are strongly subordinated to the austerity policy and state budget consolidation needs. On January 21, the Saeima authorised the Cabinet of Ministers to continue negotiations with international lenders on its loan program.

The consolidation was achieved mainly by increasing taxes and cutting social expenditures. Social partners reacted to events, yet little could be done to change the government’s policy.

The government’s tactics in difficult social issues was to decide which social payments to cut – for instance, pensions against family benefits or vice versa - if one should be protected rather than the other - reduced.

Another apporaoach the government used was to invite the social partners to seek sources for compensation in rejected proposals. Despite the strong position of social partners and international donors on significance of economic development in budget consolidation process, creative proposals in this field have not been provided. Economic development turned from decline to a “lesser decline” in first two quarters, and positive growth figures were achieved in two last quarters of 2010. The increase in timber and metal exports and some new orders for metal processing and machine building industry were main contributors to the growth.

Social partners have been very collaborative which has helped government to achieve social agreement on difficult austerity measures.

6. Pensions

The pension system was discussed as a potential source for budget consolidation. In 2009, pension budget constituated 63.4% of the state social budget – less than on average in 1998 – 2007 when the share was 67 – 72%. The share of total social budget increased from about 6% of GDP in 2007 (the lowest level since 1998) to about 11% of GDP in 2009.

The social budget turned from surplus (EUR 1353.3 million at the end of 2008) to zero balance in 2009 with future trend towards deficit. Social budget expenditures increased due to increasing size of newly awarded pensions and number of new pensioneers caused by sharp increase in wages in 2006 – 2008 and an aging population. The social budget revenues declined due to reduced wages after 2008, reducing number of taxpayers, unemployment and emigration. On the basis of good economic conditions in 2006 - 2007, the government increased contributions to the funded pension system from 4% of the total social contribution in 2007 to 8% in 2008 - more than expected in the existing pension legislation. The government also introduced several additional benefits without adequate increasing the rate of the social contribution. These actions destroyed the embedded balance of the social budget. Despite increasing size of newly awarded pensions, qualitative improvements were not achieved: the average size of old age pension remained low and substitution level declined.

The discussed aspects were: reducing of old age pensions, indexation, reducing of contribution to the funded pension system, increasing the pension age.

In 2009 Saeima adopted law “On payments of state pensions and state benefits in period 2009 – 2012”. The law is considered pertaining to extraordinary situation caused by crisis, and easily amended. According to the law, in 2009 old age pensions of working pensioneers were reduced by 70% and non-working pensioneers by 10% from the day of adopting a law. However, the Constitutional Court recognised this decision anticonstitutional and prescribed to stop deduction after 1 March 2010. Unpaid pensions were compensated in April 2010. Since this event, deductions from existing pensions were not discussed.

Since 2010, pension indexation has been frozen. The share of founded pension system was 2% of total social contribution.

In 2010, the discussion on economy on pension system for needs of budget consolidation in 2011 resumed. The government proposed to reduce contribution to funded pension scheme from 2% to 0.5%. Neither social partners nor international donors supported this proposal and it was rejected. Increasing of pension age was discussed regarding longer perspective. The social contribution rate was increased.

7 Developments in working conditions

Career and employment security

The legislation regarding career and employment security has not changed, yet it is somehow neglected under pressure of current economic situation. The economic downturn together with rather unpredictable government’s economic policy has made the business environment unstable and nervous. The economic policy has promoted creation of small and micro businesses, where career and employment security is highly conditional. In 2009, there were almost 115 thousand micro enterprises in Latvia or 90% of all market companies. 7.9% of the total number of market companies were small companies and 1.6% was average sized companies. This way 99.7% of total number of market companies are SMEs. Only 0.3% or 351 companies are large.

The Minister of economics of the Republic of Latvia said that intensive measures, aimed at the promotion of creation of SMEs (with special focus on micro enterprises) have produced results. Up to end of 2010, The Commercial Register has registered 4,145 companies with reduced equity capital (the limit is 1 LVL) or 40% of total number of limited liability companies that were registered in 2010. 1800 new companies appeared after September 2010, when new rule of micro enterprises taxation went into force. (Source: interview published in http://nekrize.lv/maza-biznesa-uzplaukuma-gads/). Several existing large employers have reduced number of employees or changed owners and were reformed. Reforms of public sector also entailed losses of jobs and income cuts. Research done by human resource management company Fontes reveals that 57% of companies have reduced number of employees in 2010. According with Central Statistical Bureau data, number of employed has reduced in 2010, compared to 2009 from 986.7 thousand people to 940.9 thousand people. 53.1% of all the population aged 15 - 74 years old were employed.

The leading packaging company in the Baltics, JSC Kvadra Pak is one example where ownership was changed. In 2010 the Europe's largest independent folding carton producer Van Genechten Packaging N.V. has acquired 50% of JSC Kvadra Pak, The current shareholder remains for the other 50%. Along with the changes also the company’s legal name has been changed to JSC VG KVADRA PAK and a new board has been elected.

In the period from beginning of 2008 until August 2009, the number of people employed in the state sector fell by 12 740 people or 16,2% (Data from the State Chancellery, Valsts kanceleja, VK).

At the end of 2010, the total number of employed in the government sector was 8.3% of the total number of population, approaching EU average of 7.9%. In 2010 on average, 62.9 thousand people were employed in organisations that were funded from the state budget – 25.4% less than in 2008 and 11.4% less than in 2009 (Source: Informative report on effective management of human resources in the public sector, as reported in http://www.db.lv/citas-zinas/samazinas-valsts-parvalde-stradajoso-skaits-238408). For instance, number of employed in VDI has reduced by 11.3% in 2009 compared to 2008, and by 20% in 2010 compared to 2009 (source: http://www.vdi.gov.lv/files/vdi_2010_budzets.pdf). Employment status and income guaranties have become minimal. The area where issues such as information, consultation and participation and equal opportunities are on agenda has reduced.

Health and well-being of workers

The State Labour Inspectorate (Valsts Darba inspekcija, VDI) was able to continue its work and health and well-being of workers was monitored and controlled. VDI statistics show that in 2010, main indicators have reduced in have reduced in absolute figures as well as in relation to 100 thousand employees, namely, accidents at work from 650 cases (68 in relation to 100 thousand employees) in 2009 to 517 case (56 in relation to 100 thousand employees) in 2010, lethal cases from 15 (1.6 in relation to 100 thousand employees) in 2009 to 11 (1.2 in relation to 100 thousand employees) in 2010, and occupational diseases from 700 cases (73 in relation to 100 thousand employees) in 2009 to 615 cases (67 in relation to 100 thousand employees) in 2010 (last available data on first half of years, see in http://www.vdi.gov.lv/lv/par-mums/parskati/).

In order to improve labour protection in undertakings and to assist SME (Small-medium enterprises) in implementation of effective labour protection system, Latvijas Darba Devēju konfederācija, LDDK, has produced electronic work environment risks’ assessment system and handbook “Labour protection in an undertaking. Manual for Young Entepreneurs”.

In 2010 extended research on working conditions and risks in Latvia was launched with assistance of LDDK. Contractors - Inspecta Preventium, Ltd. and TNS Latvia, conducted survey from November 2009 to January 2011. 1044 employers, 2455 employees and 210 specialists in work protection were surveyed. 85.3% of surveyed employers and 79.3% of surveyed employees represented small and micro enterprises.

The results were announced in January 2011. The survey shows that the number of micro-enterprises increases in Latvia. Working conditions are worse in micro-enterprises, risk assessment is rare done, and these issues are not high on agenda. The survey indicate that full risk assessment was made in 27% of enterprises with 1-10 employees (micro enterprises), 54.8% with 11-49 employees (small enterprises), 65.2% with 50-249 employees (medium sized enterprises) and 55.2% with 250 and more employees (large enterprises). Risk assessment was not made in 55.7% of enterprises with 1-10 employees, 23.5% with 11-49 employees, 9.4% with 50-249 employees and 9.1% with more than 250 employees. Larger enterprises more often use service of special organisations in assessment of working risks and this trend increases. In 2006, services of special organisations used: 67.5 % of enterprises with 1-9 employees, 81.4% with 10-49 employees, 79% with 50-249 employees and 60.9% with more than 250 employees. In 2010 the relevant figures were: 75.6% (enterprises with 1-10 employees), 84.7% (11-49 employees), 96,8% (50 – 249 employees), and 100% (250 and more employees).

These activities were implemented on the basis of financing from the EU ESF within the project “Industrial relations and implementation of work protection normatives in undertakings” (nr.1DP/1.3.1.3.2./08/IPIA/NVA/002). Entrepreneurs are advised to apply for free of charge assessment of working environment risks (de minimis support) provided by the same ESF program. The program also assists in elaboration of labour protection plans and systems in undertakings and informing people in undertakings on labour protection issues.

Developing skills and competences

The most important issue was the discussion of reforms in the higher education system. All higher education institutions are involved in the discussion as potential reforms concern essential issues such as funding, quality and total number of higher education institutions. The discussion is hosted by the Strategic Analysis Committee affiliated to the State Presidents office and it is strongly promoted by rector of the Latvian University Mārcis Auziņš. The reforms will be based on evaluation of high education institutions.

Social partners have contributed to developing skills and competences in their fields. LBAS continued informative campaign “Know your rights”. On March 23, LBAS and VDI concluded agreement on cooperation in informing and training on legal relations at work and labour protection issues. The permanent consultation facility was opened in the LBAS main site in Riga.

LDDK offers free of charge training program “Development of enterprise and corporative social responsibility”. The program is elaborated on the basis of ILO methodology. The programme will be available for entrepreneurs for four years. Training is provided not only in Riga, but also in other cities and towns of Latvia.

LDDK also have updated its Handbook of entrepreneurs. It is supplemented by a chapter on labour protection.

Work-life balance

Work–life balance was at the best on agenda at the level of theoretical considerations, for instance in EU Structural funds projects. Practical developments in issues such as time management at work and social infrastructures were not observed. It is typical for this period that management issues have disappeared from the business press consultation sections, as there are less service offers from consulting companies.

8. Major conflicts and restructuring cases

Major conflicts appeared in the second half of the year when the government finally announced its considerations on amount and measures of consolidation of the state budget. Trade unions insisted that further cuts of social benefits can not be approved. Employers insisted that taxes can not be increased.

The Trade Union of Health ans Social Care Employees of Latvia (Latvijas veselības un sociālās aprūpes darbinieku arodbiedrība, LVSADA) has been involved in negotiations regarding reforms in health care system. When local negotiations were not productive, the trade union in cooperation with the Latvian Umbrella Body for Disability organisations SUSTENTO (Latvijas Cilvēku ar īpašām vajadzībām sadarbības organizācijas SUSTENTO, SUSTENTO) and the Latvian Patients' Ombud (Latvijas Pacientu ombuds, LPO) made a complaint to the European Ombudsman concerning developments in the health care system in Latvia. The trade union and its partners insist that austerity measures and reforms in health care system have considerably worsened health care provision in Latvia. The complaint was supported by approximately 54 thousand people’s signatures.

LBAS also organised some actions:

  • on September 29 it supported European level trade union action “No – more austerity, yes – growth!” by manifestation opposite the building of the Cabinet of Ministers in Riga and in four other biggest cities - Liepaja, Valmiera, Daugavpils and Jelgava;
  • on November 25, a picket opposite the building of the Cabinet of Ministers, where NTSP discussed proposals on budget consolidation in 2011, was attended by about 300 people.
  • on December 9, there was People’s meeting in the square Esplanade in answer to the adopted Law “On State budget 2011”. LBAS repeated its position that the law puts consolidation burden mainly on the populations’ shoulders. No reforms were made in public sector, and no proposals were heard regarding better economic development as a source for consolidation. More than 500 people attended the meeting despite nasty weather.

Employers warned the government that they will not pay taxes if tax rates will further increase, but these warnings did not develop in actions.

Restructuring cases occurred in private and in state structures. As mentioned above, research by Fontes reveals that about 57% of Latvian enterprises have reduced number of employees in past 12 months. At the same time the State Employment Agency (Nodarbinātības Valsts aģentūra, NVA) reports only three cases when over 100 employees were dismissed, and four cases when more than 30 employees were dismissed in companies employing more than 250 employees.

9. Other relevant developments

In 2010, there were no other significant developments in Latvia.

Raita Karnite, EPC Ltd.

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