Labour Markets in TransitionLabour 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 lecturesStructure of the lecturesPart I - Overview

Simple Conceptual framework for flow analysis of a labour market in transition“Quantity” vs. “Price” AdjustmentOptimal speed of transition models in the light of the evidenceReallocation of labour in CEE and NIS – some evidenceTransition probabilities between labour market states in CEE and NIS.Identification of vulnerable groups using flow analysis

Structure of the lectures cont.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 transitionInstitutional factors driving the differences in observed empirical patternsPolicy implications

Structure of the lectures cont.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

EmployedAll 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

UnemployedAll 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 forceAll 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 adjustmentQuantity vs. price adjustmentAggregate time series on GDP,

employment and wages show a very distinct pattern between CEE (“quantity” adjustment) and NIS (“price” adjustment).

Quantity vs. price adjustmentQuantity vs. price adjustmentIn 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 Employment and output adjustment adjustment (fig. 1 B&T)(fig. 1 B&T)

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

 

In NIS GDP and employment in secular decline, with GDP falling a lot moreReal wages in virtually “free fall” in NIS , while there is some real wage rigidity in CEESee 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.

GDP and Employment Dynamics - Poland

70

80

90

100

110

120

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Relative Employment (1988=100) Real GDP( 1995=100)

Fig. 3Fig. 3

The Evolution of Real GDP, Employment The Evolution of Real GDP, Employment and Real Wages in Russia: 1992-1999and Real Wages in Russia: 1992-1999

30 35 40 45 50 55 60 65 70 75 80 85 90 95

100 105

1991 1992 1993 1994 1995 1996 1997 1998 1999

real GDP index employment index real wage index

Fig. 4

Fig. 5 -Fig. 5 -GDP, Employment and Real Wage GDP, Employment and Real Wage Dynamics in Ukraine: 1990 - 2000Dynamics in Ukraine: 1990 - 2000

0

10

20

30

40

50

60

70

80

90

100

110

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Employment (1990=100) Real GDP (1990=100) Real wage (1990=100)

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

Optimal Speed of Transition Optimal Speed of Transition modelsmodels

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 Optimal Speed of Transition models cont.models cont.

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

Optimal Speed of Transition Optimal Speed of Transition models cont.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 Optimal Speed of Transition models cont.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 Reallocation of labour across ownership, size and activityownership, 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, Reallocation of labour across ownership, size and activity (continued)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 - Table 1 – B&T - Structural change Structural change and unemployment dynamicsand unemployment dynamics

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

Transition probabilities in CEE Transition probabilities in CEE and NIS (continued)and NIS (continued)

Transition probabilities can be used to identify problem groups. They are

female, older,low skilled workers

Aside - Ukrainian Unemployment stocksAside - Ukrainian Unemployment stocks(1999 and 2000)(1999 and 2000)(Source: Ukrainian Labour Force Survey)(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 aTable HL.1 aAside - Ukrainian Unemployment stocks - 1999 and 2000Aside - Ukrainian Unemployment stocks - 1999 and 2000(Source: Ukrainian Labour Force Survey)(Source: Ukrainian Labour Force Survey)

The Ukrainian Labour Market – Basic indicators bygender , age and educational attainment

participation

rateunemployment

ratelong-term

unemployment rateYear 1999 2000 1999 2000 1999 2000Ukraine 62,3 63,5 11,9 11,7 5,45 5,92gender

female 57,2 58,6 11,5 11,7 5,65 6,11male 67,9 69 12,2 11,7 5,28 5,76

Table HL.1 bTable HL.1 bAside - Ukrainian Unemployment stocks - 1999 and 2000Aside - Ukrainian Unemployment stocks - 1999 and 2000(Source: Ukrainian Labour Force Survey)(Source: Ukrainian Labour Force Survey)

The Ukrainian Labour Market – Basic indicators bygender , age and educational attainment

participation

rateunemployment

ratelong-term

unemployment rateYear 1999 2000 1999 2000 1999 2000

age 15-19 16,3 14,3 39,9 40,1 2,55 0,8420-24 69 68,4 22,9 20,5 4,93 4,2325-29 83,1 84,9 13,9 14,3 6,86 7,8830-34 86,2 87,6 12,1 12,1 7,31 7,8235-39 87,3 88,3 10,3 10,6 6,39 7,2140-44 87,1 88,7 9,5 9,3 5,71 6,0845-49 84,8 85,6 8,3 9,3 4,74 5,8850-54 77,2 79,5 7,7 8,8 4,72 5,8755-59 46,2 49,3 4,8 5 3,07 3,5060-70 17,3 19,6 2,6 1,2 1,95 0,90

Table HL.1 cTable HL.1 cAside - Ukrainian Unemployment stocks - 1999 and 2000Aside - Ukrainian Unemployment stocks - 1999 and 2000(Source: Ukrainian Labour Force Survey)(Source: Ukrainian Labour Force Survey)

The Ukrainian Labour Market – Basic indicatorsby gender , age and educational attainment

participationrate

unemploymentrate

long-termunemploymentrate

Year 1999 2000 1999 2000 1999 2000educationfullhigher 81,4 81,3 7,2 7,5 3,61 3,91basichigher 77,3 77,4 11,6 11,9 5,56 6,15vocationalsecondary 77,8 79,3 14,7 14,7 6,75 7,31fullgeneral 59,7 59,8 13,8 12,9 6,09 6,64basicgeneral 34,3 34,5 11 10,3 4,49 4,88primarygeneralor noeducation 19,4 20,1 3,9 4,3 2,37 1,46

Aside - Ukrainian Unemployment stocks - 1999 Aside - Ukrainian Unemployment stocks - 1999 and 2000and 2000(Source: Ukrainian Labour Force Survey)(Source: Ukrainian Labour Force Survey)

the young and the less skilled have higher unemployment ratesin particular, persons with vocational education have higher unemployment ratesno difference by gender

Aside - Ukrainian Unemployment stocks - Aside - Ukrainian Unemployment stocks - 1999 and 20001999 and 2000(Source: Ukrainian Labour Force Survey)(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 unemployedUpshot: 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 Returns to education, tenure and experience during transitionexperience 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 educationReturns to a year of education

Institutional Factors that might drive Institutional Factors that might drive the observed adjustment paths in the observed adjustment paths in CEE and NISCEE 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 Institutional Factors that might drive the observed adjustment paths in the observed adjustment paths in CEE and NIS cont.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 Minimum wage as a percent of real wagewage

Institutional Factors that might drive Institutional Factors that might drive the observed adjustment paths in the observed adjustment paths in CEE and NIS cont.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 Earnings inequality and non-employment benefits in selected transition economiesbenefits in selected transition economies

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

Implications for policy cont.Implications for policy cont.Preventing labour shedding seems to carry little benefits in the endGenerating 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.