Labour Markets In Transition : The Case Of Eastern Europe

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Labour markets in transition: the case of Eastern Europe. In 1989 a political revolution in the Soviet Union and its Eastern Europeansatellites led to the dismantling of Communist controls and transition toward freemarkets in goods and services and factors of production. Surely the most criticallink between the new opportunities for entrepreneurial profits and the welfare ofaverage citizens has been the transformation of labour markets. Workers had totrade secure, if low, wages for greater earnings opportunities accompanied bysharply increased income risk due to involuntary unemployment. The severityand balance of the tradeoff has varied considerably among the affected countries.Perhaps a reason that Russia, by far the largest and most powerful, delayedformalmarket reform until January 2, 1992 was recognition that it faced themostdaunting obstacles to successfully integrating workers and firms under a systemof markets. Evidence that such a fear would have been warranted is found inaverage annual growth rates of per-capita GNP. World Bank data show anannual decline of 6.6 per cent in the Russian Federation between 1989 and 1999,compared, for example, to positive growth of 4.7 per cent in Poland, with mostother countries falling in between. Even Poland’s superior economic-growthperformance did not prevent high unemployment, however. As productivitygrowth approached 5.5 per cent and GDP growth slowed to less than 5 per centafter 1998, unemployment in Poland increased, and by the year 2000 had reached16 per cent of the labour force. Not only has there been substantial variation ineconomic growth rates, but also there have been many differences in measurestaken to protect workers fromdrowning in the sea of competition.Much researchhas investigated the degree to which such policies, as well as initial conditions,have affected the success of transition. The four papers in this volume of theInternational Journal of Manpower all shed light on some aspect of the successachieved in the Russian Federation and in three Eastern European economies inthe early stages of transition. In the first paper, Lisa Giddings investigates a special case of a generalproblem addressed by many labour economists: how do disadvantaged groupsfare under labour-market competition? As Giddings points out in herintroduction, despite the high frequency of various ethnic minorities in Eastern Europe and the Russian Federation, very little research has focused on theirexperience during the transition. The particular subject of her investigation isBulgaria’s ethnic Turkish minority. Over the period 1986-93, the averageTurkish worker’s earnings declined from approximately 85 per cent of anaverage Bulgarian’s earnings to approximately 80 per cent. The principal reasonfor this decline appears to be a disproportionately small representation of ethnicTurks in transportation, commerce, and service industries, which experiencedrelatively high earnings growth. Services, which were suppressed underCommunism, experienced relative expansion, and relative wages grew inresponse to an increase in the relative demand for labour. However, it appearsthat ethnic Turks were not prevented from finding employment in the growingsector. If past discrimination had suppressed their employment there, theyappear to have experienced improved employment opportunities after marketreform. An intriguing result is that while the marginal rate of return to schoolingincreased during the early transition for ethnic Bulgarians, it declined for ethnicTurks. I might speculate that less educated ethnic Turks are more mobile thantheir better educated counterparts because of smaller specific human capitalinvestments and thus were able to take better advantage of improved earningsopportunities during early transition. Whatever the answer, this intriguingpuzzle invites further investigation and I hope that publication of this paper willelicit further research if, indeed, Giddings is not alreadywell into it. Susan Linz’s paper tackles the giant country with the giant problem, theRussian Federation. The major challenge of Linz’s research is to explain why,in the presence of dramatic production declines, did employment inRussian industry fall so little? According to official Goskomstat statistics(www.nap.edu/html/transform/ch9_t2.htm) the employed population fell byonly 7 per cent between 1992 and 1995, while GDP was falling 6.2 per cent peryear between 1989 and 1999. She has developed a panel of data consisting of2,033 firms that were in business in both 1992 and 1995, employing over3,000,000 workers in 1992. Industries represented include food processing,machine building, light industry, wood/forestry/paper, construction materials,and printing. Regions include Central, Volga, North Caucasus, Western Siberia,and Northern. Linz analyzes employment changes as resulting from twosources: the initial deviation from optimal employment and subsequentchanges in output. Her empirical results show that firms with high initiallabour productivity reduced employment less than those with what wasevidently greater hidden unemployment in their workforces. She also finds thatnewly privatized firms responded much more sensitively to changing outputthan did firms that remained state-owned. She also finds that firms exposed tomore competitive pressures, e.g. due to location and/or exposure tointernational import/export competition appear to have reduced costs moreeffectively than their more sheltered counterparts. Noting that Linz was forcedto confine her analysis to firms that did not cease to exist or change industryduring her sample period, we hope that future research will soon tackle thequestion of the role of firm dynamics in Russia’s employment puzzle. International Poland’s economic transition has been, judging from the data on economicgrowth, far less traumatic than Russia’s. Nevertheless, Poland experienced aninitial ‘‘demand shock’’ and rising unemployment, followed, after 1992, by bothoutput growth and declining unemployment. Aleksandra Rogut and TomaszTokarski, like Susan Linz, offer an interpretation of employment dynamics,focusing in their paper on determinants of regional diversity in flows fromunemployment to employment. They aim to document factors that facilitatedrelatively rapid adjustment of the labour force to the competitive pressures of thereformed economy and labour market. Their primary tool of analysis is anaugmented matching function, which relates the regional reemployment ofunemployed workers to a variable that measures how closely the employmentstructure in the region resembles the employment structure of more advanced(specifically, G7) European countries. Holding this measure of regional labourforcematching constant, they also find that outflows from unemployment toemployment are larger when the number of unemployed workers and jobvacancies are larger and when economic growth is greater. Rogut and Tokarskidraw several policy implications form their research which are relevant not onlyfor Polish policy makers but also for officials in other transitional economies thatseek to reduce the negative labour-force impacts of the move from controlled tofree labour markets. One of them is the need to establish a housing market. Theyfind that there is a housing barrier in Poland that severely limits the geographicalmobility of workers, thus accentuating any mismatching of regional employmentstructure with the regional structure of labour demand They find that informaljob seeking outside the formal labour-office bureaucracy has been an importantmeans of leaving unemployed status. This would seem to imply that facilitationof informal information flows is a good idea. They also advocate governmentpolicies that subsidize bringing jobs to people in areas where the employmentstructure is particularly badlymatched with existing job vacancies. Research reported in the fourth paper, byMilan Vodopivec, is in the nature ofa ‘‘natural experiment,’’ in that he compares the labour-force reallocation processin Estonia, which adopted relatively liberal labour-market policies in itstransition, with that in Slovenia, which attempted much more to protect itsworkers from the risks of the new market economy. Vodopivec reports thatlabour-force dynamics (job creation, accessions, quits, job-to-job moves) duringtransition have been high, approaching and even exceeding those maturemarket economies; they have been much higher than in Slovenia. He believesthat Estonia’s overall favorable labour-market experience during transition andthe experience of certain groups of workers, specifically, young workers andworkers on fixed-term contracts, support the theoretical model of Blanchard(1998), which attributes labour-market stagnation to regulations that protectworkers from exposure to unemployment risk. On the negative side, Vodopivecnotes that ethnic minorities appear to have suffered during Estonia’s transition.In the light of Giddings’ paper in this issue, a close comparison of the Bulgarianwith the Estonian experience would be an interesting exercise. Belton Fleisher Previously published in: International Journal of Manpower, Volume 23, Number 1, 2002