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Transition with Labour Supply

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Author Info
Boeri, Tito () (Universita Bocconi-IGIER, CEPR and IZA, Bonn)

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Abstract

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.

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

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Length: 72 pages
Date of creation: Feb 2001
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Handle: RePEc:iza:izadps:dp257

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Related research
Keywords: Transition; matching; non-employment benefits;

Other versions of this item:

Find related papers by JEL classification:
J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
J6 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies
P2 - Economic Systems - - Socialist Systems and Transition Economies

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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.:
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    Other versions:
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    Other versions:
  6. Gavin, M., 1993. "Unemployment and the Economics of Gradualist Policy Reform," Discussion Papers 1993_07, Columbia University, Department of Economics.
  7. Philippe Aghion & Olivier Jean Blanchard, 1994. "On the Speed of Transition Central Europe," NBER Working Papers 4736, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Boeri, Tito, 1998. "Enforcement of Employment Security Regulations, On-The-Job Search and Unemployment Duration," CEPR Discussion Papers 1850, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  9. Stanley Fischer & Ratna Sahay & Carlos A. Végh Gramont, 1998. "How Far is Eastern Europe from Brussels?," IMF Working Papers 98/53, International Monetary Fund.
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    Other versions:
  13. Djankov, Simeon & Pohl, Gerhard, 1997. "The restructuring of large firms in Slovakia," Policy Research Working Paper Series 1758, The World Bank. [Downloadable!]
  14. Rodrik, Dani, 1995. "The Dynamics of Political Support for Reform in Economies in Transition," CEPR Discussion Papers 1115, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  15. Tito Boeri & Christopher J. Flinn, 1999. "Returns to Mobility in the Transition to a Market Economy," William Davidson Institute Working Papers Series 217, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
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  16. Paolo Mauro & Eswar Prasad & Antonio Spilimbergo, 1999. "Perspectives on Regional Unemployment in Europe," IMF Occasional Papers 177, International Monetary Fund.
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    Other versions:
  19. Boeri, Tito, 1997. "Labour-Market Reforms in Transition Economies," Oxford Review of Economic Policy, Oxford University Press, vol. 13(2), pages 126-40, Summer.
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Full references

Cited by:
(explanations, 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.)

  1. Katalin Balla & János Köllo & András Simonovits, 2006. "Transition with Heterogeneous Labor," IZA Discussion Papers 2179, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  2. Kupets Olga, 2005. "Determinants of unemployment duration in Ukraine," EERC Working Paper Series 05-01e, EERC Research Network, Russia and CIS. [Downloadable!]
  3. Fiona Duffy & Patrick Paul Walsh, 2000. "Individual Pay and Outside Options: Evidence from the Polish Labour Force Survey," William Davidson Institute Working Papers Series 364, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
    Other versions:
  4. Stepan Jurajda & Katherine Terrell, 2001. "What Drives the Speed of Job Reallocation during Episodes of Massive Adjustment?," CERGE-EI Working Papers wp170, The Center for Economic Research and Graduate Education - Economic Institute, Prague. [Downloadable!]
    Other versions:
  5. Ekaterina Kalugina & Boris Najman, 2004. "Travail et pauvreté en Russie : évaluations objectives et perceptions subjectives," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00266727_v1, HAL. [Downloadable!]
  6. Patrick Paul Walsh, 2000. "Regional Unemployment in Poland: A Legacy of Central Planning," LICOS Discussion Papers 9100, LICOS - Centre for Institutions and Economic Performance, K.U.Leuven. [Downloadable!]
  7. Bonin, Holger & Euwals, Rob, 2001. "Participation Behavior of East German Women after German Unification," IZA Discussion Papers 413, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  8. Mihails Hazans, 2007. "Looking for the workforce: the elderly, discouraged workers, minorities, and students in the Baltic labour markets," Empirica, Springer, vol. 34(4), pages 319-349, September. [Downloadable!] (restricted)
    Other versions:
  9. Alan A. Bevan & Saul Estrin, 2000. "The Determinants of Foreign Direct Investment in Transition Economies," William Davidson Institute Working Papers Series 342, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  10. John Giles & Albert Park & Fang Cai, 2003. "How has Economic Restructuring Affected China’s Urban Workers?," William Davidson Institute Working Papers Series 2003-628, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  11. Janos Kollo, 2001. "The patterns of non-employment in Hungary's least developed regions," Budapest Working Papers on the Labour Market 0101, Institute of Economics, Hungarian Academy of Sciences. [Downloadable!]
  12. Lubomir Lizal & Evzen Kocenda, 2000. "Corruption and Anticorruption in the Czech Republic," William Davidson Institute Working Papers Series 345, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  13. Maxim Bouev, 2004. "Diverging Paths: Transition in the Presence of the Informal Sector," William Davidson Institute Working Papers Series 2004-689, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  14. Boriss Siliverstovs & Dmitri Koulikov, 2003. "Labor Supply of Married Females in Estonia," Discussion Papers of DIW Berlin 321, DIW Berlin, German Institute for Economic Research. [Downloadable!]
  15. Frederic Chabellard, 2001. "Dollarization of Liabilities in Non-tradable Goods Sector," William Davidson Institute Working Papers Series 380, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  16. Jekaterina Dmitrijeva & Mihails Hazans, 2005. "A stock-flow matching approach to evaluation of public training program in a high unemployment environment," Labor and Demography 0506007, EconWPA. [Downloadable!]
    Other versions:
  17. Stepan Jurajda & Katherine Terrell, 2000. "Optimal Speed of Transition: Micro Evidence from the Czech Republic," William Davidson Institute Working Papers Series 355, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  18. Vlad Ivanenko, 2001. "Effective Tax Rates in Transition," William Davidson Institute Working Papers Series 378, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
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