US embassy cable - 05PRAGUE1586

C O N F I D E N T I A L SECTION 01 OF 02 PRAGUE 001586 
 
SIPDIS 
 
E.O. 12958: DECL: 11/07/2015 
TAGS: PGOV, ELAB, EZ 
SUBJECT: CZECH DRAFT LABOR CODE: APPEALS TO THE COMMUNISTS 
AND APPALLS THE BUSINESS COMMUNITY 
 
REF: A. PRAGUE 911 
 
     B. PRAGUE 1325 
     C. PRAGUE 1575 
 
Classified By: ECONOFF KIRK SAMSON for reasons 1.4(b+d). 
 
1.  (SBU) SUMMARY:  In a political move that has brought 
together the Social Democrat and Communist parties and could 
cool investment in the Czech Republic, Prime Minister Jiri 
Paroubek has made his union-friendly Labor Code a "super 
priority" that he wants passed before the elections in June 
2006.  By most analyses, the bill would do nothing to inject 
the labor market flexibility the Czech Republic needs to 
boost long-term growth prospects.  END SUMMARY 
 
2.  (U) The new Labor Code is one of about 20 bills that PM 
Paroubek his designated as super priorities for passage in 
the coming months.  On October 19, the draft Labor Code 
passed its first reading in Parliament and will receive the 
second reading before end 2005.  While debate continues on 
the contents and interpretation of the 300 plus pages of 
draft legislation, there is general agreement among 
economists and businesses that it expands the role of labor 
unions and does not improve the flexibility of the labor 
force. 
 
--------------------------------------------- -------------- 
Labor Code pulls Communists and Ruling Social Democrats Closer 
--------------------------------------------- -------------- 
 
3.  (U) The bill was approved by the cabinet September 19 
despite the opposition of junior coalition member KDU-CSL, 
which argues that it is not business-friendly.  The Communist 
party, which likes the pro-union elements of the bill, joined 
with the CSSD to approve the bill in the first reading.  PM 
Paroubek has openly declared that the bill is so important 
that he will continue to turn to the Communists if his 
center-right coalition partners decide not to support it 
during the second and third parliamentary readings.  The 
Prime Minister's willingness to deal with the Communists on 
this and other important pieces of legislation has caused 
noisy debates about the possible makeup of the government, 
which will be formed after the general election next June (as 
reported in reftel C). 
 
------------------------- 
Businesses Appalled 
------------------------- 
 
4.  (SBU) While speaking to the AmCham in Prague on 3 
November, Paroubek attempted to squash discussion of the 
Labor Code by noting that "labor costs in the US are higher 
because they have a shorter notice period" and therefore 
lower wages in the CR require that workers receive longer 
notice period for employment termination.  This nonsensical 
argument did not go over well with the business community in 
attendance, but questioners were more interested in grilling 
the Prime Minister on the rampant corruption in the 
construction industry than on discussing the labor code. 
This is in part due to the Prime Minister's prefacing 
comments before the question and answer period of his speech, 
in which he stated that the Social Democrats are a labor 
party, and that a non-negotiable platform of their party is 
protect the worker.  He said that there is nothing 
"completely" new in the proposed code, and that claims from 
the opposition parties that it is a barrier to business are 
propaganda, otherwise they would have changed the code when 
they were the government in the mid 1990s. 
 
5.  (U) Labor flexibility is an important element of 
improving the EU competitiveness of the Czech Republic, as 
well as the rest of Europe, as articulated in the Lisbon 
Agenda.  At best, the draft Labor Code would maintain the 
current lack of flexibility in the labor sector.  As noted by 
the IMF, the virtually flat employment trend in the Czech 
Republic (8.3 percent unemployment rate in 2004, essentially 
unchanged in the first three quarters of 2005) despite solid 
GDP growth in recent years is indicative of labor market 
rigidity (reftel B).  Even the Czech National Bank Governor 
Zdenek Tuma came out on October 18 saying that the draft 
Labor Code would not improve the flexibility of the labor 
market. 
 
6.  (SBU) Consequently, there is a widely shared view that 
the draft Labor Code would have a negative impact on the 
investment climate.   Specifically, it would expand the role 
of labor unions by mandating that they represent non-union 
members, grant labor unions the power to shut down production 
based on their sole determination of worker safety standards, 
and possibly (depending on interpretation) give labor unions 
a voice in the hiring and firing of top executive positions. 
Defenders of the draft Labor Code insist that none of the 
proposed language is 'new.'  This is a telling statement 
since the current Labor Code was drafted in the 1960s, with 
numerous subsequent amendments which have led to an 
admittedly Byzantine patchwork of labor regulations.  Times 
have changed; a change to a market economy and  globalization 
have lead to permanent and dramatic changes to the Czech 
economy.  To the extent that the draft Labor Code does not 
reflect that change, this is a reason for concern from the 
competitiveness and investment climate perspectives. 
 
7.  (SBU) The way in which the Labor Code was drafted added 
to the controversy.  Consultations between the Tripartite -- 
the umbrella labor union organization (CMKOS), the government 
(as represented by the Ministry of Labor) and the employers' 
representative (the Confederation of Industry of the Czech 
Republic) -- broke down during the corruption scandal that 
eventually brought down former Prime Minister Stanislav 
Gross, when the business representatives walked away from the 
table.  They were frustrated by their seemingly futile 
efforts to inject more business-friendly language into the 
draft Code, and allegedly were betting that the then-CSSD 
government would fall, making the consultations moot.  They 
were wrong, as the CSSD-led coalition survived, and by the 
time the Confederation returned to the negotiating table, the 
unions and Labor Ministry had essentially agreed on the 
current draft of the bill. 
 
8. (C) COMMENT:  The new Labor Code would substantially 
increase the powers of the Czech trade unions that were 
otherwise on their way to oblivion (20% of the workforce is 
currently unionized and membership has been dropping by an 
average 8% annually.)  By passing the Labor Code in its 
current form, the Paroubek government is making a strong 
statement against liberalization, and seems intent on 
rewarding their voters with a German-style labor system that 
will make it much harder for businesses to adjust to market 
conditions.  However, business leaders see the passage of the 
legislation as inevitable now that Paroubek has proven that 
he is prepared to work with the Communists to pass this bill, 
and are hoping that a win by the center-right opposition in 
next year's election might lead to a reversal of the Code. 
This hope seems slimmer every month, as CSSD continues to 
gain ground in the polls. END COMMENT. 
CABANISS