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The optimality and overuse of labour in Estonian manufacturing enterprises

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  • Jaan Masso
  • Almas Heshmati

Abstract

Transition economies need labour market flexibility for successful restructuring and reallocation of the labour force, and for coping with the requirements of the European Monetary Union. In this paper we apply a novel approach to the issue of labour market flexibility in transition countries by studying the optimality and efficiency of labour usage in Estonian manufacturing enterprises. We employ a dynamic model in which both the long-run optimal level of employment and the speed at which actual employment is adjusted to the optimal are modelled as functions of several variables. Firm-level panel data of 1995-99 were used. The results showed that in the long run, employment responds most strongly to wages, followed by value added and capital stock. The speed of adjustment, labour use optimality and efficiency all show much greater variations over firms than over time. In the course of time, both labour-saving technical change and an increase in the efficiency of labour usage occur. On average, there is shortage of labour compared to firms' own optimal level, along with overuse of labour compared to best-practice technology. Capital seems to be a binding constraint on the development of employment in the Estonian labour market. Copyright (c) The European Bank for Reconstruction and Development, 2004.

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Bibliographic Info

Article provided by The European Bank for Reconstruction and Development in its journal The Economics of Transition.

Volume (Year): 12 (2004)
Issue (Month): 4 (December)
Pages: 683-720

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Handle: RePEc:bla:etrans:v:12:y:2004:i:4:p:683-720

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References

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  1. Kenneth R. Troske, 1998. "Evidence on the Employer Size-Wage Premium From Worker-Establishment Matched Data," Labor and Demography 9807001, EconWPA.
  2. Michael Funke & Jörg Rahn, 2000. "How Efficient is the East German Economy? An Exploration With Micro Data," Quantitative Macroeconomics Working Papers 20012, Hamburg University, Department of Economics.
  3. George E. Battese & Lennart Hjalmarsson & Almas Heshmati, 2000. "Efficiency of labour use in the Swedish banking industry: a stochastic frontier approach," Empirical Economics, Springer, vol. 25(4), pages 623-640.
  4. Brown, J. David & Earle, John S., 2002. "Gross Job Flows in Russian Industry Before and After Reforms: Has Destruction Become More Creative?," Journal of Comparative Economics, Elsevier, vol. 30(1), pages 96-133, March.
  5. Francesca Pissarides & Miroslav Singer & Jan Svejnar, 2000. "Objectives and constraints of entrepreneurs: evidence from small and medium-sized enterprises in Russia and Bulgaria," Working Papers 59, European Bank for Reconstruction and Development, Office of the Chief Economist.
  6. Kumbhakar, Subal C & Hjalmarsson, Lennart, 1995. "Labour-Use Efficiency in Swedish Social Insurance Offices," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(1), pages 33-47, Jan.-Marc.
  7. Tito Boeri & Katherine Terrell, 2002. "Institutional Determinants of Labor Reallocation in Transition," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 51-76, Winter.
  8. Heshmati, Almas & Ncube, Mkhululi, 1998. "A Flexible Adjustment Model of Employment with Application to Zimbabwe's Manufacturing Industries," Working Paper Series in Economics and Finance 278, Stockholm School of Economics, revised 15 Aug 2003.
  9. Helena Hannula & Katrin Tamm, 2002. "Restructuring And Efficiency In The Estonian Manufacturing Industry: The Role Of Foreign Ownership," University of Tartu - Faculty of Economics and Business Administration Working Paper Series 15, Faculty of Economics and Business Administration, University of Tartu (Estonia), revised 2003.
  10. Campos, Nauro F & Coricelli, Fabrizio, 2002. "Growth in Transition: What we Know, What we Don't and What we Should," CEPR Discussion Papers 3246, C.E.P.R. Discussion Papers.
  11. Eamets, Raul & Masso, Jaan, 2004. "Labour Market Flexibility and Employment Protection Regulation in the Baltic States," IZA Discussion Papers 1147, Institute for the Study of Labor (IZA).
  12. Polona Domadenik & Janez Prašnikar & Jan Svejnar, 2003. "Defensive and Strategic Restructuring of Firms during the Transition to a Market Economy," William Davidson Institute Working Papers Series 541, William Davidson Institute at the University of Michigan.
  13. Swati Basu & Saul Estrin & Jan Svejnar, 2000. "Employment and Wages in Enterprises Under Communism and in Transition: Evidence from Central Europe and Russia," William Davidson Institute Working Papers Series 114, William Davidson Institute at the University of Michigan.
  14. Kumbhakar, Subal C. & Heshmati, Almas & Hjalmarsson, Lennart, 2000. "How Fast Do Banks Adjust? A Dynamic Model of Labor-Use with an Application to Swedish Banks," Working Paper Series in Economics and Finance 411, Stockholm School of Economics, revised Nov 2001.
  15. Jozef Konings and Hartmut Lehmann & Jozef Konings and Hartmut Lehmann, 2001. "Marshall and Labour Demand in Russia: Going Back to Basics," William Davidson Institute Working Papers Series 392, William Davidson Institute at the University of Michigan.
  16. Raul Eamets & Urmas Varblane & Kaja Sostra, 2003. "External Macroeconomic Shocks and the Estonian economy: How did the Russian Financial Crisis affect Estonian Unemployment and Foreign Trade?," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 3(2), pages 5-24, July.
  17. Baltagi, Badi H & Griffin, James M, 1988. "A General Index of Technical Change," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 20-41, February.
  18. Haouas, Ilham & Yagoubi, Mahmoud & Heshmati, Almas, 2003. "Labour-Use Efficiency in Tunisian Manufacturing Industries," IZA Discussion Papers 687, Institute for the Study of Labor (IZA).
  19. Faggio, Giulia & Konings, Jozef, 1999. "Gross Job Flows and Firm Growth in Transition Countries: Evidence Using Firm Level Data on Five Countries," CEPR Discussion Papers 2261, C.E.P.R. Discussion Papers.
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Citations

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Cited by:
  1. Maaja Vadi, 2003. "Background to the organisational culture developments in transitional Estonia," University of Tartu - Faculty of Economics and Business Administration, in: Organisational Culture in Estonia : Manifestations and Consequences, volume 16, chapter 1, pages 27-46 Faculty of Economics and Business Administration, University of Tartu (Estonia).
  2. Ali Saggay & Almas Heshmati & Mohamed Dhif, 2007. "Effects of trade liberalization on domestic prices: Some evidence from Tunisian manufacturing," International Review of Economics, Springer, vol. 54(1), pages 148-175, March.
  3. Piekkola, Hannu, 2006. "Tax cuts and employment: Evidence from Finnish linked employer-employee data," Discussion Papers 1041, The Research Institute of the Finnish Economy.
  4. Heshmati, Almas, 2007. "Labor Market Policy Options of the Kurdistan Regional Government," IZA Discussion Papers 3247, Institute for the Study of Labor (IZA).
  5. Thirunaukarasu Subramaniam & Ahmad Zubaidi Baharumshah, 2011. "Unemployment And Speed Of Adjustment In Asean-3 Economies: A Cointegration Analysis," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 56(03), pages 327-347.
  6. Tomasz Mickiewicz & Kate Bishop & Urmas Varblane, 2004. "Financial Constraints in Investment - Foreign Versus Domestic Firms. Panel Data Results From Estonia, 1995-1999," William Davidson Institute Working Papers Series 2004-648, William Davidson Institute at the University of Michigan.

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