Labor, taxation and social welfare policies in countries around Europe and Central Asia must be brought into the 21st century to tackle rising inequality between groups and help workers face increased uncertainty, says a new World Bank study.
Toward a New Social Contract calls for a fundamental rethinking of policies to ease the growing divide between those who benefit from new economic opportunities and those who are left behind in an ever-more flexible economy.
"Although countries in the Europe and Central Asia region have vast experience with social welfare institutions and programs, these were designed for a different economic environment and they no longer provide the same benefits for citizens as before," says Cyril Muller, World Bank Vice President for Europe and Central Asia. "Long-term wage employment is no longer the norm, especially for younger people, and we need to ensure the benefits of growth and opportunities are more equally shared."
Despite Europe and Central Asia being one of the most equal regions when compared globally, many citizens are still not experiencing upward mobility, feel stuck in an inequality trap, and are more vulnerable than previous generations. Furthermore, declining financial and job security means that a greater share of the middle-class is vulnerable to falling into poverty – all of which has led to lower trust in institutions, greater polarization, and rising populism within society.
In Serbia, changes in the occupation structure were similar to those observed in Western Europe and show evidence of some job polarization: non-routine, task-intensive jobs grew as a share of wage employment, while routine, task-intensive occupations, which are more prone to automatization, shrunk.
According to the report, individual birth circumstances are more important determinants of access to tertiary education among the generation that came of age in the early 2000s than among the generation that started education before the transition. In the case of Serbia, the index of inequality of opportunity in access to tertiary education for those born in the 1980s is more than twice as much as that of those born in the 1940s.
Inequality across regions is relatively strong in Serbia. The country is in the top third of the countries with most spatial inequality in Europe and Central Asia, the report says. The average gap in household per capita consumption between the richest and the poorest region is $1,655 (2011 Purchasing Power Parity).
Spatial gaps also exist in consumption as well as in other relevant outcomes, such as PISA test scores. The gap in the 2015 PISA test scores between urban and rural areas in Serbia was equivalent to more than one schooling year of difference. Closing spatial disparities by ensuring that people build the human capital they need and that they can access opportunities will lead to more inclusive growth.
Poverty has declined, but the expansion of the middle class has also decelerated. While the population share of the poor fell sharply from 2000 to 2015, in Serbia the share of the middle class - defined as those individuals who live with between $11 and $28 per day (dollars at PPP, 2011) - fell from 43% in 2008 to 38% in 2013. When using a relative definition of the middle class - those between 75% and 125% of median income - the size of the middle class only grew from 32% to 34% between 2006 and 2013.
To address the challenges across the region, the report proposes a set of three policy principles: moving toward equal protection of all workers, no matter their type of employment; seeking universality in the provision of social assistance, social insurance, and basic quality services; and supporting progressivity in a broad tax base that complements labor income taxation with the taxation of capital.
"When we ask people about their well-being, we hear concerns about rising inequality and insecurity. This report investigates the causes of these concerns by analyzing the changes in income distribution in recent decades," says Maurizio Bussolo, World Bank Lead Economist for the Europe and Central Asia region and co-author of the report."We believe trying to stop globalization or technology is not the solution. Instead, a new social contract, with a fairer way of sharing risks and opportunities, is needed to preserve and expand the impressive economic gains the region has made in past decades."
The report identifies four types of tension between groups that are eroding social cohesion: disparities between young and old generations; inequalities between workers engaged in different occupations; unequal access to opportunities based on geography; and inequalities based on gender, ethnicity, background and other factors, rather than individual efforts or abilities.
Acknowledging that countries across Europe and Central Asia differ in many respects, this report emphasizes policies aimed at reducing tensions by protecting all workers, improving social services, and making tax systems fairer.