Labour Markets in Transition Main theme of overview: The different adjustment paths of Central and Eastern Europe (CEE) and the New Independent States (NIS)

Structure of the lectures Part I - Overview Simple Conceptual framework for flow analysis of a labour market in transition “Quantity” vs. “Price” Adjustment Optimal speed of transition models in the light of the evidence Reallocation of labour in CEE and NIS – some evidence Transition probabilities between labour market states in CEE and NIS. Identification of vulnerable groups using flow analysis

Structure of the lectures cont. [Aside: the unemployment stocks in Ukraine] labour market policies and the performance of the labour market Returns to education and to experience during transition Institutional factors driving the differences in observed empirical patterns Policy implications

Structure of the lectures cont. Part II – Topics from labour markets in some depth Job creation and job destruction Labour market policies Russian labour markets: a case study

Labor Markets in Transition Part I - Overview

ILO definitions - Employed Employed All persons in working age who during the reference period were either: 1. At work (performing work for a wage or salary, or for profit or family gain, in cash or in kind, for at least one hour); 2. With a job or enterprise but not at work (i.e. temporarily absent from work)

ILO definitions - Unemployed Unemployed All persons in working age who during the reference period were: 1. Not employed; 2. immediately available to start work and who had actively looked for a job at some time during the preceding four weeks.

ILO definitions – out of labor force Out of labor force All persons in working age who during the reference period were: 1. NOT employed; 2. NOT immediately available to start work and/or who had NOT actively looked for a job at some time during the preceding four weeks.

Quantity vs. price adjustment Aggregate time series on GDP, employment and wages show a very distinct pattern between CEE (“quantity” adjustment) and NIS (“price” adjustment).

Quantity vs. price adjustment In CEE GDP and employment U-shaped with elimination of labour hoarding clearly visible See Figures 1 and 2 from Boeri and Terrell (2002)

Employment and output adjustment (fig. 1 B&T)

Real wages (1989=100, adjusted by CPI) (fig.2 B&T)

In NIS GDP and employment in secular decline, with GDP falling a lot more Real wages in virtually “free fall” in NIS, while there is some real wage rigidity in CEE See also GDP and employment dynamics in Poland, Russia and Ukraine (Figures 3, 4, 5) NB: there are large differences within the NIS as demonstrated by the figures for Ukraine and Russia.

Fig. 3

The Evolution of Real GDP, Employment and Real Wages in Russia: Fig. 4

Fig. 5 -GDP, Employment and Real Wage Dynamics in Ukraine:

Fig. 7 - Simple graphical exposition of fully flexible and rigid labour markets

Optimal Speed of Transition models Set-up: Flow Analysis of the Labour market used to show reallocation of labour from declining to expanding sectors and from old state-owned to private new sector.

Optimal Speed of Transition models cont. Main hypothesis: there is an optimal speed (amount) of labour shedding by the state- owned sector.

Optimal Speed of Transition models cont. WHY SHOULD IT BE SO? we need enough unemployed to have downward wage pressure for the new private sector: a substantial amount of unemployment  lower wages  more job growth. too much unemployment will retard job growth in the new private sector: firms have to finance unemployment benefit payments, so too much unemployment  too little job growth.

Optimal Speed of Transition models cont. Two main empirical facts speak against the simplest OST models: 1. Most flows are job-to-job flows; 2. Majority of workers are voluntarily quitting and are not laid-off.

Reallocation of labour across ownership, size and activity 1. Different patterns for CEE and NIS above all with respect to growth of employment in services, small firms and self-employment (Table 1 of Boeri and Terrell, 2002). 2. Unemployment rises much more rapidly in CEE than in NIS (Table 1 of Boeri and Terrell, 2002).

Reallocation of labour across ownership, size and activity (continued) 3. Where wages have a floor, which makes labour costly in state-owned firms, one of the basic tenets of simple OST models seems to be borne out, i.e. massive labour shedding. As Table 1 of Boeri and Terrell also shows, unemployment does not have the dynamic function envisaged by these models, but is rather stagnant: see the large share of long-term unemployed in most CEE economies.

Table 1 – B&T - Structural change and unemployment dynamics

Transition probabilities in CEE and NIS Inflows into unemployment, P(eu) and P(ou) are not excessive by Western standards, in particular P(eu) is not that large, so most of labour shedding is done by attrition or by movements out of the labour force - high P(eo), e.g. early retirement schemes in East Germany and Poland,and in Estonia in early transition. Also note that Russian P(eu) is not lower than P(eu) of other transition countries.

Transition probabilities in CEE and NIS cont. Differences in outflow rates from unemployment, in particular into employment, P(ue), between Czech Republic and early years in Russia and the other countries listed in Table 2 of Boeri and Terrell (2002) Relatively low outflow rates lead to a build-up of long-term unemployment - note though that Russian outflows from unemployment are of same magnitude in later years of transition

Transition probabilities in CEE and NIS – Table 2 B&T 2002

Transition probabilities in CEE and NIS (continued) Transition probabilities can be used to identify problem groups. They are female, older, low skilled workers

Aside - Ukrainian Unemployment stocks (1999 and 2000) (Source: Ukrainian Labour Force Survey) Main message of the literature: in CEE there is labor shedding and those ending up in unemployment get stuck there and end up in LTU. Is situation of unemployed in NIS really that different? Incidence of unemployment is similar to that of other transition countries - see Table HL.1

Table HL.1 a Aside - Ukrainian Unemployment stocks and 2000 (Source: Ukrainian Labour Force Survey)

Table HL.1 b Aside - Ukrainian Unemployment stocks and 2000 (Source: Ukrainian Labour Force Survey)

Table HL.1 c Aside - Ukrainian Unemployment stocks and 2000 (Source: Ukrainian Labour Force Survey)

Aside - Ukrainian Unemployment stocks and 2000 (Source: Ukrainian Labour Force Survey) the young and the less skilled have higher unemployment rates in particular, persons with vocational education have higher unemployment rates no difference by gender

Aside - Ukrainian Unemployment stocks and 2000 (Source: Ukrainian Labour Force Survey) The incidence of long-term unemployment is certainly comparable to the incidence in CEE - often more than half of all unemployed are long-term unemployed Upshot: there is no trade off between aggressive labor shedding and stagnancy of unemployment pool as suggested by Boeri and Terrell (2002).  Being a “reform laggard” brings no benefits to the pool of the unemployed

Returns to education, tenure and experience during transition There are some increasing returns to education after transition started. There are no empirical results that point at returns to experience. This is what we might expect, as people who have acquired their general and firm specific human capital under the old regime have this human capital depreciated through the regime switch.

Returns to a year of education

Institutional Factors that might drive the observed adjustment paths in CEE and NIS The following factors are possible candidates as determinants of wage rigidity - how important are they? Trade unions - probably not that important as unions are weak throughout transition in virtually all countries. Main exception Polish unions in state sector in early years of transition

Institutional Factors that might drive the observed adjustment paths in CEE and NIS cont. Minimum wage - importance not that clear as in CEE the real value of the minimum wage is eroded and as minimum wage is often not enforced- see Figure 4 of Boeri and Terrell (2001) - also clear, though that real value of minimum wage collapses in Russia and Ukraine.

Minimum wage as a percent of real wage

Institutional Factors that might drive the observed adjustment paths in CEE and NIS cont. Non-employment benefits, relatively generous in CEE, hardly existing in NIS. These benefits (unemployment, disability, sickness, social assistance) generate a wage floor, which makes labor costly and raises the reservation wage, thus lowering outflows from unemployment (second effect a labor supply effect). Some caveats with this, though!

Earnings inequality and non-employment benefits in selected transition economies

Implications for policy Passive labor market policies need to be looked at - but CEE countries cannot lower non-employment benefits much as they have to abide by EU directives Active labour market policies might not improve the performance of the labour market much in transition countries

Implications for policy cont. Preventing labour shedding seems to carry little benefits in the end Generating an environment which promotes self-employment and job creation In the end the relatively poor performance of labour markets in transition is a labour demand issue rather than a labour supply issue.