**<u>Table 3 Labor market indicators, Western Balkans, 2004</u>**

||**Participation**<br>**Rate**|**Employ-**<br>**ment rate**|**Unemploy-**<br>**ment rate**|**Long-term**<br>**unemployment**<br>**12**|**Informal**<br>**employment**<br>**rate**<sup>**13**</sup>|
|---|---|---|---|---|---|
|Albania|63.7 %|60.1%|5.6%|68.4%|76%|
|Bosnia<br>and<br>Herzegovina|59%|46%|22%<br>||42%|
|Kosovo|n.a.|n.a.|50%<sup>14</sup>|n.a.|n.a.|
|Macedonia, FYR|51.2%|32%|37.2%|84.5%|n.a.|
|Montenegro|65.1%|40.6%|23%|85%|27%|
|Serbia|66.6%|53.5%|19.5%|71%|35%|

Source: ILO for Macedonia; World Bank estimates for other countries Note: Most estimates are based on household surveys; for Montenegro, data are based on the registered unemployed; all Kosovo figures should be treated with skepticism due to the poor availability of data.

_<u>C2.2 Limited scope to raise social health insurance contributions</u>_ In general, financial planning with respect to contribution rates is poor, and contribution rates are still not set according to an actuarial analysis of expected costs and revenues for the insured population. Rather, contribution rates tend to be based on a combination of estimates of desired revenues (which may or may not reflect the actual revenue that can feasibly be collected given the challenges outlined above) and an assessment of the political acceptability of adding to an already high tax burden (Langenbrunner _et al._ forthcoming).

There does not appear to be much scope to raise health insurance contributions in future. With the exception of Albania, contribution rates are already very high, and comparable to those in the EU-15. The situation is further constrained by the fact that other forms of payroll taxation are also high. In Serbia, for example, there is an effective 36% social tax on wages, including health insurance contributions of 12%, pension contributions of 22% and unemployment contributions of 1.5%.

High labor taxes are a brake on employment expansion. Indeed, one question that arises is whether the current high unemployment levels are partly the result of these high levels of payroll taxation. Although in theory, and in the long run, a tax on wages would be shifted onto employees, in countries where product and labor markets are not very competitive, employers may not be able to reduce wages to compensate for an increase in payroll contributions in the short run (Gottret and Schieber 2006). Therefore, payroll-financed health contributions may increase labor costs and, in turn, lead to higher unemployment. They may also reduce competitiveness of the country and deter further investment.

_<u>C2.3 Widespread formal exemptions from the payment of social insurance contributions</u>_ In addition to informal sector workers, many categories of labor force participants are exempt, by law, from paying contributions to the health insurance fund. These groups may include both

> 12 The long-term unemployment rate is the percentage of the unemployed that have been unemployed for 12 months or longer.

> 13 Definitions of the informal employment rate vary by country.

> 14 While the official unemployment rate in Kosovo is around 50%, World Bank estimates that take into account seasonal and informal employment place the unemployment rate within the 23%-33% range.

12