Enterprise restructuring and social benefits

Soviet era firms provided generous social benefits, including health and child care. Despite recent cuts, firm survey data show that benefits have remained a major component of total compensation. With benefits largely firm- specific and firms dominated by insiders, continuing attachment of workers as well as widespread informal sector participation has resulted. This has impeded restructuring, in part by generating significant set-up costs for new private firms. We simulate the effects of a cut in subsidies to benefits provision. We show that while this leads to a fall in benefits, employment and an increase in wages, the outcome critically depends on the availability of alternative providers. The key to cushioning these adverse consequences is the stimulation of a market in benefits provision. Given initial conditions, rapid removal of benefits support will require transitional income support to avoid underconsumption of these goods. We provide the design of a simple scheme of transitional support and show that it can be financed from the savings from removal of current subsidies to benefits.