Slovakia is enjoying sustained high economic growth. Unemployment has fallen considerably, although long-term unemployment remains stubbornly high. The incoming government has made achieving a more equal distribution of income a priority insofar as this can be done without damaging long-term growth prospects. Ensuring that the benefits of high economic growth are more widely distributed is vital for making such growth sustainable. This objective calls for policies that give more priority to poverty alleviation, strengthen employment and remove barriers to competition in product markets. In the long term, improving education outcomes, including by reducing the impact of socioeconomic background on outcomes, will be central to sustaining high economic growth and social cohesion.

Slovakia has enjoyed a stellar economic performance in recent years. Economic growth has been high and unemployment has fallen considerably, although longterm unemployment remains high. Slovakia is on track to satisfy the Maastricht convergence criteria for entry to the euro area in January 2009. The authorities now need to prepare the economy for life in the euro area. In the short term, this entails heading off a potential post-entry boom. In the longer term, it entails maintaining flexible labour- and product markets so as to facilitate adjustment to idiosyncratic shocks. Slovakia has made solid progress in the past decade in catching up to living standards in the EU15 countries, but still has far to go. This progress has been achieved through high productivity growth. Labour utilisation, however, has detracted from progress. There is still considerable scope to support catch up and reduce relative poverty through increasing employment rates. Similarly, regulatory reform that supports competition in product markets would both strengthen productivity growth and reduce income inequality. In the long term, improving education outcomes, including by reducing the impact of socio-economic background on outcomes, will be central to sustaining high economic growth and reducing income inequality.

While employment growth has accelerated, allowing unemployment to fall significantly since 2005, many low-skilled workers are still unemployed and the duration of unemployment spells is still long. The introduction of an in-work benefit for workers in low-income households, subject to a minimum of hours worked, could lower barriers to higher employment which result from a relatively high tax wedge on low-skill workers, as would the elimination of poverty traps in the pension system. Measures to improve mobility of workers across regions, notably housing policy reform, would lower long unemployment durations, as would the provision of more training to the unemployed. Impediments to higher labour market participation of young women and older workers need to be removed.

Improving education outcomes is vital for achieving convergence with GDP per capita levels in Western European countries and for reducing income inequality. While some education outcomes are favourable, such as the low secondary-school drop-out rate, others have room for improvement: education achievement is below the OECD average and strongly influenced by socio-economic background; Roma children, who are mainly from disadvantaged socio-economic backgrounds, have particularly poor achievement; labour-market outcomes are poor for graduates of secondary vocational programmes not leading to tertiary education; and tertiary attainment is low, albeit rising. Reforms have been made in recent years or are planned to address many of these weaknesses, but much remains to be done. In particular, more progress needs to be made in increasing participation in early childhood education and care, reducing stratification in the education system, helping Roma children to integrate into the education mainstream, and in attracting high quality graduates to teaching, especially in socio-economically disadvantaged schools. In addition, secondary vocational education not leading to tertiary education needs to be made more pertinent to labour-market requirements. Tertiary education also needs to be made more attractive for technical secondary school graduates.

While general economic regulation does not create substantial impediments to competition, making sector-specific regulation in the network industries and in the liberal professions more competition-friendly could make a significant contribution to boosting consumer welfare and productivity growth as well as raise the share of labour earnings in GDP. In the energy industry, discrimination of market entrants needs to be more effectively prevented and the national market more closely integrated with neighbouring countries. In telecommunications measures to foster the entry of new market participants need to be taken more quickly and the independence of the regulator should be strengthened. In the liberal professions price regulation and entry barriers need to be removed including through abolition of compulsory chamber membership. Public sector reform could help reap the benefits from competitive product markets, by reducing administrative burdens on enterprises, strengthening contract enforcement through reform of the judicial system and encourage competition in public procurement.