Under communism, enterprises provided a variety of social benefits to employees on top of their wages. As the process of reform got underway, everyone anticipated a rapid decline in these benefits as enterprises were privatized and sought to become more efficient. But research reported in a new CEPR volume suggests that while there has been a modest decline in the benefits provided by firms, in many cases the outcomes have looked more like stability than change.

What happens to these social benefits is an important issue. Reallocating the responsibilities that state-owned enterprises had under central planning impinges on some of the key challenges of the transition: corporate restructuring; adapting labour markets; reforming tax and social security systems; and maintaining the social consensus in support of reform. And these challenges in turn are all essential parts of East European countries’ preparations for accession to the European Union.

The CEPR volume distinguishes two aspects of social protection in Eastern Europe: social insurance and benefits in kind. The former protects people from risk of income loss from retirement, unemployment, sickness and disability. And as in most market economies, such protection was and remains primarily the responsibility of government. At the same time, it is often financed by mandatory contributions from enterprises and, more recently, from employees themselves.

Under communism, there was one important form of social insurance provided by enterprises: a significant degree of job security. Employees were often retained and paid even if they were redundant. In effect, they were protected against the risk of income loss on a preventive basis rather than after the fact. This was obviously costly to enterprises but it was never visible or properly measured and accounted for.

As the reforms have proceeded in Eastern Europe, governments have begun to consider transferring some of their social insurance responsibilities to enterprises. But so far, such efforts have been limited to redundancies. In Hungary, for example, enterprises have been providing severance pay and contributing to early retirement pensions for older dismissed employees. In effect, the old enterprise benefit of job security is being transformed into a new benefit of redundancy payments.

Like social protection, the actual range of benefits in kind under central planning was not markedly different from that provided in market economies. What was different was that enterprises were often the principal providers, whereas in market economies they more typically supplement state or private provision. In addition, benefits tended to take the form of fixed assets, such as houses, schools or clinics, rather than financial support, such as mortgage subsidies, scholarships or health insurance.

Enterprises in the East still provide many services that in the West are provided by local government, non-profit organizations or specialist companies. The studies of individual countries in the CEPR volume indicate that the same kinds of enterprise-provided social benefits recur across the region. Cafeterias, health clinics, kindergartens and crèches, recreation facilities, work clothing subsidies and housing are all common.

While restructuring enterprises are tending to cut back on some of their social and recreational services, the process so far has generally been slow. Such service activities often require substantial physical infrastructure, much of which remains from the old days. Though the common trend in the transition is for enterprises to divest themselves of these assets, there are many market and legal constraints on the speed of this adjustment.

Meanwhile, governments still actively influence the scope and magnitude of enterprise benefits. In Hungary for example, some benefits, such as sick leave and travel subsidies for long distance commuters, are mandated by government, while others, such as food and clothing subsidies, are stimulated by incentives. Overall, the tendency is for governments to move from mandates to incentives, and this is likely to increase the variations across enterprises in the kinds and extent of benefits they offer.

The type and size of an enterprise also seem to affect the benefits it provides. For example, analysis of 200 enterprises in Poland reveals a concentration of benefits in state-owned enterprises, somewhat lesser amounts in privatized enterprises and much smaller benefits in new private enterprises.

Nevertheless, ownership does not seem to be the decisive determinant of how much enterprises spend on social benefits. The impact of benefits on enterprise efficiency is by no means clear: obviously they can raise costs significantly, but they can also be used to attract and retain employees, enhancing productivity. Similarly, from the point of view of labour supply, benefits may reduce mobility by making employees reluctant to move. But they may also stimulate greater participation in the labour force.