Unemployment In Transition

The emergence of open unemployment is an unavoidable consequence of postcommunist transition. Some countries-notably in the former Soviet Union-initially slowed economic contraction. But in the longer run slower reformers have generally sustained deeper and more prolonged recessions than faster reforming central European countries. Moreover, the initially low unemployment rates in the former Soviet Union are now rising, and may stabilise at higher post-transition equilibrium rates than in Central Europe.

This paper studies interactions between labor market institutions and unemployment dynamics in transition economies. It presents a dynamic matching model in which state sector firms endogenously shed labor and private job creation takes time. Two main conclusions arises. First, higher unemployment benefits increase steady-state unemployment, and, during the transition, they reduce the fall in real wages and speed up closure of state enterprises. Second, higher minimum wages can theoretically speed up the elimination of state sector jobs without affecting steady-state unemployment. These results are broadly consistent with existing evidence on the dynamics of unemployment and real wages in transition economies.

"The paper reviews labor market developments in the transition economies of Europe and Central Asia. It argues that the scarcity of productive job opportunities and the growing labor market segmentation are the two main labor market problems facing the transition economies. In the European transition economies the lack of jobs has led to persistent open unemployment. In the Commonwealth of Independent States (CIS) it has led to hidden unemployment (underemployment and low productivity employment). Unemployment in the European transition economies is supported by the developed social safety net. In contrast, in the CIS for most workers unemployment is not an affordable option. They either stick to their old, unproductive jobs in unrestructured enterprises, or work in the informal sector, or resort to subsistence agriculture. Thus, underemployment in the CIS is a mirror image of unemployment in the European transition economies. Accordingly, the high employment-to-population ratios in many CIS countries do not necessarily signify favorable labor market performance. Instead they often indicate delayed enterprise restructuring, the maintenance of unsustainable jobs in uncompetitive firms, and the existence of a large informal sector as an employer of last resort. Labor market segmentation has been caused by a sharp increase in earnings differentials and the attendant increase in the incidence of low-paid jobs, by the polarization of regional labor market conditions, and finally by the growth of the informal sector offering casual, low-productivity jobs. Labor market segmentation and accompanying inequalities are more pronounced in the CIS than in the European transition economies. "--World Bank web site.

This paper develops a model of the process of reallocation of labor from the state sector to the private sector. When growth is exogenously determined, we show that in the initial stages of transition unemployment will rise over time. After a critical stage in the transition process, restructuring is accompanied by a decline in unemployment. When growth is endogenously determined, and human capital is acquired by learning-by-doing, we show that whether restructuring eventually occurs is determined by the level of human capital in the private sector and the rate of unemployment. The effects of various shocks and government policies in affecting the costs, speed, and eventual outcome of restructuring are analyzed.

This volume is primarily concerned with the first key component of transition: restructuring—the changing behavior of firms and their complex interaction with the labor market, most particularly with unemployment. Chapter 1 gives an overview of firm behavior, restructuring, and the labor market in the transition. Chapter 2 focuses on the effect of output, ownership, and legal form on employment and wages in Central European firms. Chapter 3 explores employment and wage setting in three stages of Hungary's labor market transition. Chapter 4 considers enterprises in the Polish transition. Chapter 5 explains labor market flows in the midst of structural change. Chapter 6 explores the role of unemployment and restructuring in the transition, and chapter 7 presents a numerical model of transition. Emphasis is placed on the Czech and Slovak Republics, Bulgaria, Hungary, Poland, and Russia.

"The transition to market in Slovenia created labor displacements that were on par or greater than that experienced in North America in the 1980s. A simple theoretical model suggests that factors which raise the probability of layoff should also increase the probability of a quit, predictions that are borne out in data. Probability of both layoffs and quits fell with worker tenure, firm profitability and expected severance costs. Individuals facing a higher probability of displacement accepted slower wage growth than otherwise comparable workers. The incentives to avoid displacement were strong -- workers that actually were displaced faced a slow process of transiting out of unemployment with only one-third finding reemployment. Correcting for selection, real wage losses for displaced workers are comparable to those reported for displaced workers in North America"--Forschungsinstitut zur Zukunft der Arbeit web site.