From very high initial conditions, transition countries in the CEE have experienced an overshooting of the reduction in employment rates: these rates have declined below levels generally associated with economies at their level of development. Boeri outlined a series of policy recommendations, including increased investment in secondary education – contrary to perceived belief – CEE countries’ secondary educational record is strikingly inadequate when compared with OECD countries, and increased investment in transport infrastructure, in order to increase workers’ mobility.

 

• Reductions in labour force participation have occurred at high costs. The actual retirement age has fallen significantly below the statutory retirement age, which is itself low by Western standards. Early retirement provisions, built into the system at the outset have made it relatively attractive for those with depreciated human capital stocks to retire, and working pensioners were the first to be dismissed.

 

• As a result of the decline in formal employment, the increase in the number of pensioners and a sizeable informal sector, which erodes away the contribution base, systemic dependency ratios have increased sharply, and are currently significantly above those of OECD countries, in spite of more favourable demographic conditions prevailing in CEE economies.

 

• There is a growing consensus on the need to increase retirement ages in these countries and concrete steps are being taken in this direction. However, increased participation of older people will inevitably involve having a rising number of older people in the unemployment pool who are not on a bridging scheme towards early retirement. Public employment services will have to learn to deal with this new clientele – which is still under-represented in the unemployment pools – e.g., offering support to older people searching for temporary employment.

 

• For a given stock of jobs, an increase in the actual retirement age will make it more difficult for first- time entrants to the labour market. The most productive use of the time before entering the labour market is, under current conditions, to extend time spent in school learning basic new (particularly numeric and foreign language) skills. Contrary to claims made elsewhere, the human capital stock in CEE countries, in terms of basic secondary education, is strikingly inadequate when compared with OECD countries. Evidence from Hungary and the Czech Republic shows that this adjustment channel is already being used extensively.

 

• Marked and persistent regional unemployment differentials point to significant barriers to mobility, e.g., housing shortages in urban areas where most vacancies are located and very high commuting costs, mainly attributable to poor transport infrastructure.

 

• There is little job creation and job destruction in the CEE countries in the sense observed in advanced industrial economies. This is partly because a broad base of small and medium firms do not yet exist and the dynamics of self-employment, which are significant, are not measured. Many of the small firms registered in the CEE countries are ‘one-man-operations’, which could represent a source of employment growth in the future.

 

• Wage structures tend to be distorted away from new and smaller firms for a number of reasons, leading to more unstable labour forces and less activity in small firms. Large monopolies tend to pay better and drive up wages in small labour markets. Foreign firms tend to pay higher wages. State owned enterprises or co-operatives which are not governed by a hard budget constraint may also pay relatively high wages, especially to the unskilled workers.

 

• While TIP (tax-based incomes policies) in many countries have kept wages down, the associated efficiency costs render it an unattractive solution. Two possible alternatives are to encourage competition in product markets as well as enforce income policies via the tripartite and centralised wage bargaining institutions which have developed in the transition.

The Report argues that policy-making has a potentially constructive role to play in the transition for labour markets.

 

• The short duration of unemployment benefit systems in most of the transitional countries may motivate a quicker exit from unemployment, but this is conditional on the availability of vacancies, and probably has in fact accelerated movements out of the labour force instead.

 

• At the same time more and more individuals are forced to rely on social assistance, which is means-tested and generally has a negative effect on work incentives. The resulting poverty trap may worsen over time as, so far, high inflation and partial indexation of benefits have reduced disincentives to work. Unemployment traps are likely to arise in the case of two-earner families in which both are unemployed and face very high effective marginal tax rates.

 

• Active labour market policies could serve as an important flanking function. These policies could force the unemployed to reveal their willingness to work and tend to push the inactive into other categories or to motivate further job-search. The brokerage function of the Public Employment Services, established in all of these countries, and proactive staffing policies help monitor workers and provide an efficient flow of job information to (credit or otherwise) constrained individuals.

 

• Fiscal traps are important; the steep drop in employment ratios has coincided with increases in dependency ratios and tax burdens. The underground economy can further contribute to this fiscal trap by draining the state of revenues and thus necessitate further increases in labour taxes. Saving in social policy spending (e.g., associated with the decline in unemployment) should be translated as much as possible into the reduction of statutory contribution rates without allowing the extra-budgetary funds to run into surpluses.

 

• Imposing non-negotiated restrictions on job and labour turnover via severance benefits would seem inappropriate in the transition, when a high shadow value is placed on new firm matches which bring together capital, talent and ideas. Employment security costs have significant fixed costs. Thus small firms should be exempted from the application of some of these regulations, e.g., creating procedural obstacles to layoffs.

 

• There are distinct rewards but also dangers to EU accession. Accelerated structural change induced, inter alia, by trade creation and diversion will lead to more output for many firms and sectors, but will also hurt others. We present evidence that recent EU accessions are sometimes associated with a relative increase in unemployment rates post-accession; the experiences of Denmark, Greece and especially Spain may be instructive in this regard. The employment outcomes of accession will very much depend on the flexibility of product and labour markets.

 

• Education policy is an excellent example of a public good with large externalities, as well as an investment with high returns which are often difficult to finance. Given the relatively poor secondary educational record of the CEE countries (despite a widespread view to the contrary) it would seem that increased spending in this area is appropriate.

 

• Given the small size of most of these countries, significant labour mobility in response to regional mis-match in the allocation of posts and jobseekers can be achieved via commuting without requiring changes in residence. Investment in infrastructural projects, improving the transportation network, would significantly contribute to enhancing regional labour mobility.

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Launched in 1994 by the Centre for Economic Policy Research and the Institute for EastWest Studies, the EPI project will strengthen and ‘multilateralize’ the public policy process in the Associated Countries and will assist in their preparation for accession to the EU. The Initiative operates in seven EU Associated countries – Bulgaria, the Czech Republic, Hungary, Poland, Romania, the Slovak Republic and Slovenia – where local partner institutes coordinate activities within their own country. In the first phase of the project, participants from Estonia, Latvia, Lithuania, Russia, and Ukraine are involved as observers. Funding for the Initiative is provided by the Ford Foundation, the Pew Charitable Trusts and the EU’s Phare Programme. Any opinions expressed in the Report are those of the authors and not those of any of the funders.

Tito Boeri was Senior Economist at the OECD between 1987 and 1996, and from 1990 coordinated their work on human resource policies in the transition economies. He is currently Professor of Economics at Bocconi University, Milan, where he teaches a course on the economics of transition.

Michael C. Burda is Professor of Economics at Humboldt-Universität zu Berlin and holds the chair in macroeconomics and labour economics there. He is also a Research Fellow in CEPR’s Human Resources, International Macroeconomics and Transition Economics research programmes.

János Köllö is Senior Research Fellow at the Institute of Economics of the Hungarian Academy of Sciences, Budapest. He specialises in labour economics, labour sociology and more recently, the transformation of Central and East European labour markets.

Mediating the Transition: Labour Markets in Central and Eastern Europe
Edited by: Lorand Ambrus-Lakatos and Mark E Schaffer