Securing Poland's economic success II : labour market and product specialisation - is there a link?; Volume 12, issue 4, April 2015

The flexibility of the Polish labour market has served the economy well and has hitherto supported its catching-up process with the rest of the EU. It was instrumental in achieving and safeguarding cost competitiveness, which in turn allowed exports to gain market share and, ultimately, underpinned sustained economic growth. As the country has moved up the income ladder, however, the current institutional design of the labour market may have lost some of its appeal. In a previous Country Focus on Poland (Country Focus Volume 11, Issue 9, 2014) we looked at Poland's growth performance and growth potential from a macro perspective. This time, we zoom in on the labour market. We argue that, while the current set up helped contain labour costs, it also created room for an unprecedented use of temporary contracts, including so-called 'civil law contracts' that offer particularly low wages and social protection. Almost 27 % of employees in Poland are now on temporary contracts, a larger proportion than in any other EU country. Since labour market institutions not only affect the levels of employment and unemployment, but also shape a country's economic performance more generally, the widespread use of temporary employment can be a mixed blessing. While contributing to cost competitiveness and supporting higher employment levels, it can slow down physical and human capital accumulation, and weigh on innovation. We argue that, in the long term, these 'side effects' can hamper a re-orientation of the economy towards high-technology products and services and, ultimately, weigh on its future growth potential. Our assessment is corroborated by empirical findings and established economic models.