Labor Market Institutions And Unemployment Dynamics In Transition Economies

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.

More than a decade after the start of the transition process, unemployment rates remain in the double digits in a number of Central and Eastern European countries. That unemployment rates have failed to decline, even in countries experiencing good growth, is puzzling. In this paper the authors examine three interrelated questions: How has the transition from central planning to market economies affected labor market performance? How have labor market institutions and policies influenced developments? Why have regional differences in unemployment persisted? The authors take an eclectic methodological approach: construction of a new data set and a simple analytical model; econometric estimation; and case studies. They find that faster-performing countries have better unemployment records; that labor market policies have some, but not dominant, influence over labor market outcomes; that policies not typically viewed as labor market policies can nevertheless significantly affect labor markets; and that market processes cannot be relied on to eliminate regional differences in unemployment.

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 discusses theoretical aspects and evidences related to designing labor market institutions in emerging market and developing economies. This note reviews the state of theory and evidence on the design of labor market institutions in a developing economy context and then reviews its consistency with actual labor market advice in a selected set of emerging and developing economies. The focus is mainly on three broad sets of institutions that matter for both workers’ protection and labor market efficiency: employment protection, unemployment insurance and social assistance, minimum wages and collective bargaining. Text mining techniques are used to identify IMF recommendations in these areas in Article IV Reports for 30 emerging and frontier economies over 2005–2016. This note has provided a critical review of the literature on the design of labor market institutions in emerging and developing market economies, and benchmarked the advice featured in IMF recommendations for 30 emerging market and frontier economies against the tentative conclusions from the literature.

Countries undergoing economic transition in the early 1990s faced enormous challenges in the process of shifting from a centrally-planned economic system toward a market-based economy. During the transition period, large state sectors of the former Socialist countries in the Eastern bloc suffered indispensable restructuring demands from not only policy makers, but also from society. The massive industrial restructuring not only involved changes in firms' ownership from public to private, but also ignited a huge, socalled “transformational recession” (Kornai, 1994).The labor market consequences of the recession, large-scale job destruction and high unemployment were very severe; Yet, the labor market shocks that the Eastern bloc countries received were more intense than they had expected. In spite of the well-designed reform packages, the growth of the private sector was sluggish, and so weak as to catch up with the speedy pace of unemployment expansion. While most transition countries have overcome the recession moderately since 2000, some labor market performances such as the employment rate and employment-to-population ratio still have ample room for continuous improvement.Meanwhile, a set of reformers in Eastern bloc countries have prepared transition policies together with pursuing accession into the European Union. They consist of the seven countries of central and eastern Europe (CEE), Czech Republic, Slovakia, Slovenia, Poland, Hungary including three Baltic States that joined the EU in 2004, the two countries of southeastern Europe (SEE), Bulgaria and Romania, that joined in 2007, and Croatia, which became a member of the EU in 2013.The enlargement of the EU provided the transition countries with a well-ordered curriculum that induced them to learn essential rules of a market economy in the very early stage of transition. The EU operates a comprehensive approval process that complies with all the EU's standards, which consist of a well-functioning market economy, the capacity to deal with competition and market forces, the rule of law, and stable institutions guaranteeing democracy, etc. Thus, the prospective members of the EU were able to not only have a natural incentive to self-enforce the market institutions, but also receive strong political support for continuing reforms. This is why the remarkable institutional reforms cannot be fully understood without taking into account the EU enlargement movement in the early 1990s.This paper studies labor market dynamics of Eastern Bloc countries by comparing the long-term labor market performances of the newly affiliated EU countries with the countries that had not yet joined the EU. The analysis not only sheds light on why the labor market performances have been heterogeneous among the transition economies, but it also provides implications for both the future transition of North Korea and for the unification of the Korean Peninsula. The future labor market policies of South Korea with respect to North Korea's economy cannot help but have relevance to the economic transition of North Korea as well as to economic integration with North Korea. Thus the unique aspect of the Eastern Bloc's gradual integration into the EU can apply to the South Korea's labor market policies in preparation for the future unification.

Changes in economic systems provide a rare opportunity to redesign basic institutional structures in labor markets. This paper attempts to provide guidance for such institutional choice by drawing on the findings of recent labor market research in market economies on the links between institutional structure and labor market performance. After considering the suitability of research from market economies for the labor market problems faced by economies in transition from central planning, the paper considers the effects of alternative institutions for wage determination (collective bargaining structures and minimum wage and indexation legislation), employment security, income security, and active labor market policy.

The challenge for labor market policy in the transition economies has been to redress the sharp drops in employment and rises in unemployment in a way that fosters the creation of productive jobs. The authors first document the magnitude and productivity of job and worker reallocation. Then they investigate the effects of privatization, product and labor market liberalization, and obstacles to growth in the new private sector on reallocation and its productivity in Hungary, Romania, Russia, and Ukraine. The authors find that market reform has resulted in a large increase in the pace of job reallocation, particularly that occurring between sectors and through firm turnover. Unlike under central planning, the job reallocation during the transition has contributed significantly to aggregate productivity growth. Privatization has not only stimulated intrasectoral job reallocation, but the reallocation is more productive than that among remaining state firms. The effect of privatization on firm productivity varies considerably across countries and is not always positive. The productivity gains from privatization have generally not come at the expense of workers but are rather associated with increased wages and employment.