Labour market performance in cee and cis

Essay 1. Restructuring and labour market public presentation in CEE and CIS passage states.

The alone scene of passage economic systems ( the sheer graduated table of structural alteration, similar initial conditions, different policy attacks and diverging passage waies chosen by the CEE and CIS states ) allows research workers to acquire a rare penetration into the operation of labor markets, effects and efficiency of alternate LM policies.

In this paper we will sum up the bing literature and analyze available empirical informations to reply the undermentioned inquiries:

Why and to what extent was labour market reconstituting necessary in passage states? What were the get downing point and awaited consequence of structural alteration?

How can we explicate labour reallocation from worsening to spread outing sectors utilizing economic theoretical accounts and institutional cognition? What was the map of labour market policies and establishments in this procedure?

How did labour markets perform across the part? Are economic theoretical accounts successful in explicating existent market development and the differences in CEE and CIS passage waies?

Initial conditions and the importance of labour market restructuring.

Post-soviet passage, taking to change by reversal many decennaries of history under communism and replace the Soviet trade name of socialism and planned economic system with the Western theoretical account of democracy and free market, presented many daunting challenges. Labour market restructuring was one of the most critical undertakings for the new authoritiess, due to the black initial conditions, dazes ensuing from liberalisation and stabilisation policies, and critical importance of healthy labor markets, non merely for economic growing, but for the general life criterions of citizens and their support of reform.

Decades under planned economic system left a bequest of labour market deformations and inefficiency:

Labour market was ruled by supply instead than demand – full employment was achieved by agencies of overstaffed endeavors and low productiveness ( labour billboard in passage economic systems amounted to around 20 % of entire employment – Mickiewicz 2005 ) ;

Salary was a agency of wealth distribution and non related to productiveness – resulting in deficiency of inducement, inefficiency and pecuniary overhang ;

Social services were provided by the house instead than specialised province bureaus – therefore, a bran-new societal safety cyberspace had to be developed quickly ;

Allotment system was based on political motivations instead than economic logical thinking and handiness of resources

This led to constitution of an nflated and largely inefficient industrial sector, overdone portion of population employed in agribusiness, developing service sector.

Beginnings: Haltiwanger et al 2003, de la Camara 1997, Aslund 2002

These jobs started demoing long before the beginning of passage, ensuing in sulky growing, frequent deficits and inability to vie with the West.

As passage started, labor markets experienced monolithic dazes due to monetary value liberalisation, macroeconomic stabilisation and the prostration of old trading system. The prostration of Comecon put an terminal to subsidised supplies and guaranteed markets for industrial merchandise. Price liberalization rendered many houses and production procedures unviable, as natural stuffs would be more than the concluding merchandise. Rigorous financial subject and indurating budget meant that unproductive houses were non bailed out and unproductive workers had to be released, taking to monolithic cutbacks and closings. Massive occupation devastation at the oncoming of passage caused a crisp lessening in labour market engagement, employment, rewards and productiveness.

Employment and productiveness determine hereafter end product and growing, while high unemployment has negative societal, financial and political deductions. Therefore, initial failure of labor market reform could take to drawn-out economic stagnancy, impairment of the criterion of life or financial instability, making resistance to and possible reversal of the reform procedure.

Models of labour market flows and policy trade-offs in passage

The aim of labour market restructuring was twofold:

reapportioning about all labour force from the old ( state-owned, largely big industrial endeavors ) to the more productive new sectors ( private, little or average endeavors, antecedently neglected service sector ) or unemployed / out of labour force province ;

happening an optimum balance of economic efficiency ( difficult budget restraint, productiveness ) , societal equity ( unemployment rate, rewards and non-employment benefits ) and financial subject ( sustainability of societal payments ) .

Passage is associated with monolithic occupation creative activity, occupation devastation, and transitional flows between employment, unemployment and inaction. We will first expression at the development of these flows in passage states, and so present theoretical theoretical accounts explicating this development, policy trade-offs involved and grounds behind cross-country fluctuations in labour market public presentation.

Figure 1. Labor market flows in passage *

* E – employment ;

UE – unemployment ;

OLF – out of labour force.

Based on Mickiewicz 2005

Boeri and Terrell ( 2002 ) sum up statistical grounds of passage flows and list chances of each flow in some passage states and the USA ( see Annex 1 )

There were three possible waies of labour reallocation from the province sector:

Into private employment via denationalization or voluntary transportation – the most common way. Most occupation vacancies were filled by employed jobseekers instead than the unemployed.

Out of labour force – really common due to ab initio generous early retirement, societal aid and disablement strategies and “ natural ” accommodation of engagement rate harmonizing to penchants ( Mickiewicz 2005 ) .

Into unemployment, via layoffs or voluntary quits – chance of going unemployed was non really high by Western criterions, due to predomination of other waies ( job-job or job-OLF ) in CEE ( Boeri and Terrell 2002 ) and due to prevailing soft budget restraint, insider control and loath labor casting in the CIS ( Mickiewicz 2005 ) .

For the unemployed, there were several possibilities:

Into employment – chance of happening a new occupation was rather low by Western criterions, because occupation creative activity in the private sector did non immediately catch up with occupation devastation by public endeavors ( Haltiwanger et al 2003 ) , and most vacancies were filled by employed jobseekers ( Boeri 1997 ) = & gt ; dead pools and increasing portion of long-run unemployment

Out of labour force – disheartenment in happening a occupation due to congestion in the matching procedure, imperfect information and limited mobility ( de la Camara 1997 ) , ( particularly widespread among the deprived groups: youngest and older jobseekers, adult females, low qualified workers, cultural minorities, occupants of rural areas/areas specialising in heavy industry, etc. ) ; or higher attraction of pensions/social aid compared to unemployment benefits ( Bruno 2006 ) .

Table 1. Labor market flows in passage explained

A Flow

Policy instrument

Positive effects

From province Tocopherol



State endeavor closings ( Aghion, Blanchard 1994 ) ; difficult budget restraints

Geting rid of overemployment = & gt ;

a†‘ productiveness ;

Downward force per unit area on rewards = & gt ; facilitates creative activity of private Tocopherol

voluntary quits

Wagess vs UE benefits ( Boeri, Terrell 2002 ) ; opportunities of happening a occupation

To private Tocopherol

Denationalization ;

exciting concern start-ups

Higher productiveness and



Early retirement, societal aid & A ; disablement strategies ( Bruno 2005 ) ; a†“childcare commissariats

Reducing unemployment

and societal force per unit area

From UE

To private Tocopherol

Stimulating private occupation creative activity ; ALMP ( Boeri 97 )

Reducing financial load and societal force per unit area


The difference between values of pensions and UE benefits ( Bruno 2006 )

Reducing societal force per unit area and chance of reform reversal

Optimal Speed of Transition theoretical accounts are most widely used to explicate labour reallocation from low- to high-productivity sectors. Aghion and Blanchard in their 1994 paper develop a theoretical account that explains flows from province to private employment via an unemployment enchantment, uses labour casting ( occupation devastation in the province sector ) as a policy determiner, and defines the optimum velocity of restructuring which maximizes private occupation creative activity.

“ After initial accommodation, unemployment kineticss depend on the velocity of restructuring and private occupation creative activity ” ( this simplified theoretical account assumes that occupation devastation in province sector is transformed into unemployment, disregarding abrasion, voluntary foliages and direct flows into private employment ) . Unemployment affects private occupation creative activity through rewards ( downward force per unit area, positive consequence while unemployment is low ) and revenue enhancements ( upward force per unit area, negative consequence when unemployment is high ) .

Figure 2. Dynamicss of Unemployment under Exogenous Restructuring

s – occupation devastation = flow into unemployment =

velocity of restructuring

H – private occupation creative activity

U – unemployment

Beginning: Aghion and Blanchard 1994There is a maximal velocity of restructuring/ labor casting at which private occupation creative activity is optimum. If s & gt ; H ( soap ) , passage fails. If s & lt ; H ( soap ) , there are two possible equilibria: A ( lower, stable ) and B ( higher, unstable ) . If initial

U0 & gt ; UB, so H & lt ; s, taking to a continued addition of unemployment and possible prostration of the private sector ( point C ) . If U0 & lt ; UB, so H & gt ; s ( occupation creative activity exceeds occupation devastation ) until unemployment ranges low equilibrium. The theoretical account with endogenous restructuring shows that, until unemployment ranges equilibrium degree, reconstituting slows down because resistance is excessively high.

While Aghion-Blanchard theoretical account succeeds in capturing chief policy tradeoffs between the velocity of passage, short-run unemployment and occupation creative activity, it has serious defects that were addressed and improved upon in other literature.

It merely looks at flows between province and private employment via an unemployment enchantment, which represent merely 15 % of labour market flows in passage ( Boeri 2001 ) . Outflows from employment are assumed to be under authorities control, overlooking voluntary foliages.

It does non give much penetration into the function of LM policies and establishments, such as non-employment benefits, lower limit pay, employment ordinances, active labor market policy.

Boeri ( 2001 ) introduces kineticss of labour supply into the theoretical account, which now captures direct flows between occupations, voluntary foliages and flows out of labour force ( 75 % of gross flows ) . He uses non-employment benefits as the chief determiner of public-service corporation value and pick between employment, unemployment and inaction. In the low benefit scenario ( 0.25 pay replacing rate ) unemploy-ment and inaction reach stable province similar to developed OECD economic systems within 8 old ages. If non-employment benefits are fixed at a high degree ( 0.35 pay replacing rate ) , after initial addition in occupation creative activity the economic system follows “ low-participation high-labour revenue enhancement way ” of worsening end product. This can be remedied by a reform cut downing the benefits, with a subsequent addition in unemployment ( as “ more non-employed people start looking for occupations ” ) . These consequences are consistent with the experience of Baltic provinces ( low benefit scenario ) and Visegrad states ( reform scenario ) .

Bruno ( 2006 ) besides looks at the pick between unemployment and inaction, and uses the spread between rates of pensions and unemployment benefits to explicate the shrinkage of labour force. Due to aggregate uncertainness optimum velocity of passage is lower

Garibaldi and Brixiova ( 1997 ) find that “ higher unemployment benefits speed up occupation devastation in the province sector and private occupation creative activity at the early phases of the passage, but they increase unemployment in the long tally ” and that “ higher minimal rewards can theoretically rush up the reallocation procedure without impacting the long tally equilibrium ” .

“ Recently, Boeri and Terrell ( 2002 ) have compiled more grounds, from all of the CEE and some of the CIS states, which supports the statement that the different degrees of outgo and constructions of non-employment benefit between these two parts explain their different reallocation forms. ”

Boeri ( 1997 ) looks into the impact of active labor market policies

Aggregate uncertainness and reform reversal – more complex ( Bruno )

Private occupation creative activity: consequence of entree to capital and belongings rights

In the following subdivision we will see how accurate are these theoretical accounts in explicating the differences in labour market public presentation in CEE and CIS states.

Analyzing empirical informations: divergent passage waies of CEE and CIS states



Commonwealth of independent states

Differences in labour market public presentation


U-shaped: Crisp diminution at the beginning of passage, speedy recovery and return to growing.

L-shaped: deep transitional recession that lasted a decennary, first marks of recovery in 2000 ( Annex 3 ) .

Job creation/ devastation

Early on in passage occupation devastation excee-ded occupation creative activity ; subsequently these procedures balanced each other out. Most CEE states achieved occupation reallocation rates similar to those in mature economic systems by 1995 ( Haltiwanger et al 2002, Faggio and Konings 2001, Jurajda and Terrell 2002 ) .

Job devastation dominated occupation creative activity long into passage, first marks of reversal appeared in 2000s, in some states net employment growing rate is still negative ( Haltiwanger et al 2002, Acquisti and Lehmann 2000, Brown and Earle 2002 ) .


Dropped significantly ( employment-output snap: from 0.59 in the Balkans to 0.80 in Visegrad provinces ) .

Measure accommodation

Employment decreased merely somewhat in malice of a immense bead in production ( Employment-output snap in Russia – merely 0.17, Annex 2 ) .


Dead pool and continuity of long-run unemployment

Higher unemployment turnover rate, lower proportion of long-run UE.

Real rewards

Initially decreased, but stabilized at about 75 % of 1989 degree within two old ages, so started turning.

Fell significantly and remained at 50 % of 1989 degree for about a decennary ( Annex 3 ) . Price accommodation


Rapid structural alteration and reallocation of occupations.

Slower restructuring because of loath labor casting ( Annex 2 ) .


Decreased somewhat, but shortly returned to growing ( GDP growing & gt ; employment kineticss – Annex 3 ) . Productivity increased by 30-100 % and is bit by bit meeting to OECD degrees ( Annex 4 ) .

Decreased dramatically ( bead in GDP & gt ; & gt ; lessening in employment ) . By 2007 merely Russia reached 1990 productiveness degrees, which is merely 30 % of the US index ( Slow recovery due to decelerate restructuring )


CEE passage way seems to be more successful: although it entails higher unemployment rates, it is compensated by faster restructuring, speedy economic recovery, higher productiveness and better criterion of life with similar or lower degrees of inequality than in the CIS.

Suggested accounts


Aghion-Blanchard theoretical account focuses on the differences in gait of restructuring ( come closing it to denationalization ) and sees the diminution in employment as a map under authorities control ( as if there were no voluntary escapes ) . It fails to explicate why Russia, which ab initio launched a large knock denationalization plan, experienced lower unemployment than, for illustration, gradual reformists Hungary and Slovakia. We need to look at other determiners of escapes from employment, such as minimal rewards and unemployment benefits ( Garibaldi and Brixiova 1997, Boeri and Terrell 2002, Haltiwanger et al 2003 ) .

Wage flexibleness

Enforcing minimal pay leads to alleged “ measure accommodation ” : greater lessening in employment ( to E ‘ instead than E* ) , smaller lessening in rewards and high unemployment.

If rewards are to the full flexible, the awaited result of a daze is monetary value accommodation: greater diminution in rewards, smaller diminution in employment, with lone natural unemployment.

Boeri and Terrell ( 2002 ) suggest that, while minimal pay was non universally enforced, generous unemployment benefits in CEE at the beginning of passage provided the de facto minimal pay benchmark.

Baltic provinces seem to be an exclusion from this regulation, as they introduced really low lower limit pay and unemployment benefits and still experienced labour market public presentation similar to the CEE provinces. That might be due to following two factors:

Quality of market establishments

EU rank

Had twofold influence: foremost, rank standards provided ready-to-implement institutional theoretical accounts and reform bench-marks, while rank chances ensured popular support of reform ;

2nd, entree to the Single Market, EU assistance and investing facilitated fleet GDP recovery and occupation creative activity

CIS states slackly followed IMF guidelines ( Washington consensus ) which did non earn much public support and did non set accent on establishments, administration or regulation of jurisprudence ( Dabrowski 2007 ) . Market entree, foreign investing and development assistance were all inferior to CEE degrees.


Distortions built-in to planned economic system and dazes ensuing from liberalisation and stabilisation policies led to monolithic alterations on the labor market in passage. Passage was associated with large-scale occupation devastation, occupation creative activity and transitional flows of workers between old province employment, new private employment and out of labour force province towards a new equilibrium.

Optimal velocity of passage theoretical accounts tell us that if unemployment is excessively little, engaging workers is excessively dearly-won, which hinders occupation creative activity. Yet if unemployment is excessively high, employment revenue enhancements levied to finance unemployment benefits addition concern costs, which besides negatively affects occupation creative activity. High unemployment has extra societal and political costs, as it causes poorness, increases income inequality and hinders popular support of reform. The province can command escapes from employment straight ( by rushing up or decelerating down denationalization, province endeavor closings and layoffs ) or indirectly, by modifying the rate of unemployment benefits. Optimum rate of unemployment benefits is high plenty to “ get the better of workers ‘ opposition to staff decreases and let directors to cut down employment ” , but non excessively high, so that the financial load does non hider occupation creative activity ( Boeri 2001 ) .

At the beginning of passage unemployment additions, as labour stashing becomes unsustainable and it takes a piece for occupation creative activity to catch up with occupation devastation. One manner of cut downing unemployment at this phase is exciting flows out of labour force, but if rate of inaction becomes excessively high, it generates a heavy financial load on the employed population, reduces the velocity of passage and hinders the state ‘s long-run growing chances. Policy instrument modulating these flows is the spread between rates of pensions and unemployment benefits. The higher it is, the more workers prefer inaction to unemployment.

As occupation creative activity catches up with occupation devastation, most workers are traveling from old to new occupations straight, while the pool of unemployment remains dead. Active labour market policies are designed to better the jobseeker-vacancy duplicate procedure and increase unemployment turnover, but they may be excessively dearly-won. Large graduated table ALMP are merely efficient if unemployment is comparatively low and inactive LMP are tightened. If unemployment reaches dual figures, “ selective and narrowly targeted ALMP ” are efficient in forestalling most affected groups from go forthing the labour force. ( Boeri 1997 ) .

Non-labour market policies exciting occupation creative activity ( constructing healthy market establishments, bettering concern clime, substructure development, pulling foreign investing, etc. ) were besides

Looking at the empirical informations, we can follow two distinguishable waies of passage: measure accommodation ( CEE way ) and monetary value accommodation ( CIS way ) . The difference can non be explained by initial conditions and velocity of passage entirely. One feasible account is based on the differences in unemployment benefits, which acted as a de facto minimal pay. More generous benefits in CEE led to more labour sloughing, faster restructuring and higher productiveness. Very low benefits in the CIS encouraged labour billboard, therefore employment declined somewhat while rewards and productiveness plummeted.

Yet the Baltic provinces with their low benefits managed to follow the way similar to the CEE, but with lower unemployment. They boosted occupation devastation by speedy and unequivocal denationalization, and stimulated occupation creative activity by beef uping market establishments, bettering concern clime and opening up to foreign investors. Meanwhile, CIS states were plagued by corruptness and rent-seeking, maintained insider control of endeavors and had insecure environment for investors.

The grounds between such different policy picks and quality of establishments lie in the kingdom of political economic system. The most obvious one seems to be stronger desire to “ return to Europe ” in the CEE and Baltic provinces, major impact of EU accession conditionality on the quality of establishments.

Annex 1. Passage Probabilities for Six Transition Economies and the U.S.


P ( Eu ) : Probability ( Employment – & gt ; Unemployment )

P ( ou ) : Probability ( Out Labour Force – & gt ; Unemployment )

P ( eo ) : Probability ( Employment – & gt ; Out Labour Force )

P ( oe ) : Probability ( Out Labour Force – & gt ; Employment )

P ( ue ) : Probability ( Unemployment – & gt ; Employment )

P ( uo ) : Probability ( Unemployment – & gt ; Out Labour Force )

Beginning: Boeri and Terrell 2002

Annex 2. Structural Change, Labour Mobility and Employment-Output Elasticity

( mean annually steps )

Beginning: Boeri 2001

Structure of employment in 2005: still a long manner from convergence with EU-15

Beginning: LABORSTA, International Labour Organization

Annex 3. Price versus measure accommodation

Beginning: Boeri and Terrell 2002

Annex 4. Labour productiveness

Figure 1. Labour productiveness, per centum of the US

Beginning: EBRD Transition Report 2008. Growth in Transition.

Figure 2. Development of labour productiveness in passage states

Beginning: ILO Key Indicators of the Labour Market database