Advanced Search
MyIDEAS: Login to save this paper or follow this series

Transition with Labour Supply


Author Info

  • Boeri, Tito

    (Bocconi University)


Ten years after the start of transition, there are many puzzles we still have to live with. Why did all countries experience strong declines in output at the outset of economic transformations and most of them are slowly, if at all, recovering from this "transitional recession"? How can these L-shaped patterns of GDP be reconciled with a shift from a less efficient to a more efficient economic system? Why were (and still are) unemployment pools of these countries so desperately stagnant in spite of the radical transformations going on? Why was unemployment dynamics so much different between, on the one hand, the Czech Republic, and, on the other hand, the other members of the Visegrad group? Why were employment-to-output elasticities negligible in Russia compared not only with Western countries, but also with the countries now knocking the door of the European Union? In this paper it is argued that many of these puzzles can be explained by simply taking on board labour supply. Surprisingly enough, the literature on the economics of transition has devoted little, if any, attention to labour force participation decisions. In the models of the optimal speed of transition (OST) literature, the labour force is generally assumed to be fixed. All the action takes place on the demand side. No mention is made to labour supply factors, the unsustainability of full employment at low wages in the absence of coercive power and the role played by non-employment benefits in inducing large flows to inactivity. The model developed in this paper allows for labour supply to play a key role in the transition by introducing three basic mechanisms in the Harris-Todaro type of models of the OST literature. First, room is made for frictions in the shift of workers from the old to the new sector. Second, job-to-job shifts are not ruled out: employers are free to choose their recruitment pool, that is, whether to hire from the unemployment ranks or among the employees of the old sector. Third, those without a job are allowed to make a non-trivial decision between searching or not searching a job. The model generates locking-in effects at the micro-level, and unemployment persistence at the aggregate level. The initial steps of transition are crucial in determining the importance of these locking-in effects. When the initial market-oriented reforms promote large flows from the old-sector to inactivity, it is very likely that employers in the new sector will be reluctant to hire from the ranks of the unemployed, as many of those without a job are not actually seeking. Low job finding probabilities in turn induce "discouraged worker" effects thereby those without a job do not actively seek a job, as their outside opportunity looks more appealing than spending a long time in job search efforts, having a very low chance to succeed. The model has important policy implications. Among these, it suggests that the emphasis placed by the OST literature on measures winning the resistance of insiders to restructuring, e.g., "buying-off" workers in the old sector, is ill-placed and possibly conducive to wrong policy prescriptions. By putting in place at the outset overly-generous non-employment benefit schemes, conditions were created for having stagnant unemployment pools throughout the transition. Long-duration unemployment made these promises unsustainable because generous non-employment benefits had been conceived for unemployment of a shorter-duration. Moreover, this tightening did not significantly reduce the duration of unemployment. Rather than starting with generous non-employment benefits and then subsequently cutting them down, the right sequence should have been the other way round.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL:
Download Restriction: no

Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 257.

as in new window
Length: 73 pages
Date of creation: Feb 2001
Date of revision:
Publication status: published in: in Berglöf, E. and Roland, G. (eds.) The Economics of Transition: the Fifth Nobel Symposium in Economics, 2007, Palgrave, 94-143.
Handle: RePEc:iza:izadps:dp257

Contact details of provider:
Postal: IZA, P.O. Box 7240, D-53072 Bonn, Germany
Phone: +49 228 3894 223
Fax: +49 228 3894 180
Web page:

Order Information:
Postal: IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany

Related research

Keywords: non-employment benefits; matching; Transition;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:


References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Boeri, Tito & Burda, Michael C., 1996. "Active labor market policies, job matching and the Czech miracle," European Economic Review, Elsevier, Elsevier, vol. 40(3-5), pages 805-817, April.
  2. Wright, Randall, 1986. "The redistributive roles of unemployment insurance and the dynamics of voting," Journal of Public Economics, Elsevier, Elsevier, vol. 31(3), pages 377-399, December.
  3. Ours, J.C. van & Ridder, G., 1992. "Vacancies and recruitment of new employees," Open Access publications from Tilburg University urn:nbn:nl:ui:12-142178, Tilburg University.
  4. Rodrik Dani, 1995. "The Dynamics of Political Suppport for Reform in Economies in Transition," Journal of the Japanese and International Economies, Elsevier, vol. 9(4), pages 403-425, December.
  5. Burda, Michael C, 1992. "Unemployment, Labour Market Institutions and Structural Change in Eastern Europe," CEPR Discussion Papers, C.E.P.R. Discussion Papers 746, C.E.P.R. Discussion Papers.
  6. Campos, Nauro F., 2000. "Back to the future: The growth prospects of transition economies reconsidered," ZEI Working Papers B 13-2000, ZEI - Center for European Integration Studies, University of Bonn.
  7. Boeri, Tito & Flinn, Christopher J, 1999. "Returns to Mobility in the Transition to a Market Economy," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2098, C.E.P.R. Discussion Papers.
  8. Boeri, Tito & Scarpetta, Stefano, 1996. "Regional mismatch and the transition to a market economy," Labour Economics, Elsevier, Elsevier, vol. 3(3), pages 233-254, October.
  9. repec:fth:coluec:655 is not listed on IDEAS
  10. Blanchard, Olivier & Jimeno, Juan F, 1995. "Structural Unemployment: Spain versus Portugal," American Economic Review, American Economic Association, American Economic Association, vol. 85(2), pages 212-18, May.
  11. Fidrmuc, J., 1999. "The Political Economy of Reforms in Central and Eastern Europe," Open Access publications from Tilburg University urn:nbn:nl:ui:12-80019, Tilburg University.
  12. Djankov, Simeon & Pohl, Gerhard, 1997. "The restructuring of large firms in Slovakia," Policy Research Working Paper Series 1758, The World Bank.
  13. Blanchard, Olivier Jean & Diamond, Peter, 1992. "The Flow Approach to Labor Markets," American Economic Review, American Economic Association, American Economic Association, vol. 82(2), pages 354-59, May.
  14. Dewatripont, M & Roland, G, 1992. "Economic Reform and Dynamic Political Constraints," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 59(4), pages 703-30, October.
  15. Richard Jackman & C Pauna, 1997. "Labour Market Policy and the Reallocation of Labour Across Sectors," CEP Discussion Papers, Centre for Economic Performance, LSE dp0338, Centre for Economic Performance, LSE.
  16. Daniel Munich & Jan Svejnar & Katherine Terrell, 1998. "Worker-Firm Matching and Unemployment in Transition to a Market Economy: (Why) Were the Czechs More Successful than Others?," William Davidson Institute Working Papers Series 107, William Davidson Institute at the University of Michigan.
  17. Fischer, Stanley & Sahay, Ratna & Vegh, Carlos, 1998. "How far is Eastern Europe from Brussels?," MPRA Paper 20059, University Library of Munich, Germany.
  18. Tito Boeri, 1994. ""Transitional" unemployment," The Economics of Transition, The European Bank for Reconstruction and Development, The European Bank for Reconstruction and Development, vol. 2(1), pages 1-25, 03.
  19. repec:fth:eeccou:146 is not listed on IDEAS
  20. van Ours, Jan & Ridder, Geert, 1992. "Vacancies and the Recruitment of New Employees," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 10(2), pages 138-55, April.
  21. Pietro Garibaldi & Zuzana Brixiova, 1997. "Labor Market Institutions and Unemployment Dynamics in Transition Economies," IMF Working Papers 97/137, International Monetary Fund.
  22. Richard Jackman & C Pauna, 1997. "Labour market policy and the reallocation of labour across sectors," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 2047, London School of Economics and Political Science, LSE Library.
  23. Blanchard, Olivier Jean & Aghion, Philippe, 1994. "On the Speed of Transition in Central Europe," Scholarly Articles 4481322, Harvard University Department of Economics.
  24. Boeri, Tito, 1999. "Enforcement of employment security regulations, on-the-job search and unemployment duration," European Economic Review, Elsevier, Elsevier, vol. 43(1), pages 65-89, January.
  25. Simeon Djankov & Gerhard Pohl, 1997. "Restructuring of Large Firms in Slovakia," William Davidson Institute Working Papers Series 73, William Davidson Institute at the University of Michigan.
  26. Schaffer, Mark E., 1998. "Do Firms in Transition Economies Have Soft Budget Constraints? A Reconsideration of Concepts and Evidence," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 80-103, March.
  27. Derek C. Jones & Takao Kato, 1998. "Chief Executive Compensation During Early Transition: Further Evidence from Bulgaria," William Davidson Institute Working Papers Series 146, William Davidson Institute at the University of Michigan.
  28. Antonio Spilimbergo & Eswar Prasad & Paolo Mauro, 1999. "Perspectives on Regional Unemployment in Europe," IMF Occasional Papers 177, International Monetary Fund.
  29. Philippe Aghion & Olivier Jean Blanchard, 1994. "On the Speed of Transition Central Europe," NBER Working Papers 4736, National Bureau of Economic Research, Inc.
  30. Boeri, Tito, 1997. "Labour-Market Reforms in Transition Economies," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 13(2), pages 126-40, Summer.
Full references (including those not matched with items on IDEAS)


Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.


This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.


Access and download statistics


When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp257. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Fallak).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.