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Rapid labor reallocation with a stagnant unemployment pool : the puzzle of the labor market in Lithuania


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  • Rutkowski, Jan
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    Lithuania is a transition economy undergoing rapid enterprise restructuring associated with substantial job turnover. At the same time, unemployment in Lithuania is high and of long duration. This presents a puzzle: high job turnover epitomizes labor market flexibility, while high unemployment indicates labor market rigidities. What are the reasons behind this paradox? Why do the unemployed not benefit from job opportunities created by high job turnover, which entails high rates of job creation and hiring? To answer this question, the author looks at three perspectives on labor market flexibility: 1) The macroeconomic perspective-A flexible labor market is one that facilitates full use and efficient allocation of labor resources. 2) The worker perspective-A flexible labor market means ease in finding a job paying a wage adequate to the worker's effort and skills. 3) The employer perspective-A flexible labor market does not unduly constrain the employer's ability to adjust employment and wages to changing market conditions. The author looks at all three dimensions of labor market flexibility by analyzing job reallocation, worker transitions across labor force states, wage distribution, and regulatory constraints faced by employers. He focuses on the issue of job creation and job destruction, using micro level data on all registered firms. He finds that flexibility in one dimension can concur with rigidities in the other. Specifically, employers in Lithuania have a substantial degree of flexibility with employment adjustment coupled with limited flexibility to wage adjustment due to a high statutory minimum wage. The relatively rigid wage structure locks low productivity workers who are preponderant among the unemployed. The low-skilled long-term unemployed have become marginalized and unable to successfully compete for available jobs, while the high job turnover is accounted for largely by job-to-job transitions. As a result, a dynamic labor market coincides with a stagnant unemployment pool.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2946.

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    Date of creation: 31 Jan 2003
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    Handle: RePEc:wbk:wbrwps:2946

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    Keywords: Labor Markets; Environmental Economics&Policies; Labor Standards; Labor Policies; Labor Management and Relations; Banks&Banking Reform; Environmental Economics&Policies; Labor Management and Relations; Labor Standards; Labor Markets;

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    1. Lilien, David M, 1982. "Sectoral Shifts and Cyclical Unemployment," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(4), pages 777-93, August.
    2. DiTella, Rafael & MacCulloch, Robert, 1999. "The consequences of labour market flexibility: Panel evidence based on survey data," ZEI Working Papers B 02-1999, ZEI - Center for European Integration Studies, University of Bonn.
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    4. Carlin, Wendy & Fries, Steven & Schaffer, Mark E & Seabright, Paul, 2001. "Competition and Enterprise Performance in Transition Economies: Evidence from a Cross-country Survey," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2840, C.E.P.R. Discussion Papers.
    5. Tito Boeri & Katherine Terrell, 2001. "Institutional Determinants of Labor Reallocation in Transition," William Davidson Institute Working Papers Series 384, William Davidson Institute at the University of Michigan.
    6. International Monetary Fund, 2001. "Labor Markets in Hard-Peg Accession Countries: The Baltics and Bulgaria," IMF Staff Country Reports 01/100, International Monetary Fund.
    7. Bertola, Giuseppe & Blau, Francine D & Kahn, Lawrence, 2001. "Comparative Analysis of Labour Market Outcomes: Lessons for the US from International Long-Run Evidence," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3023, C.E.P.R. Discussion Papers.
    8. Tito Boeri & Giuseppe Nicoletti & Stefano Scarpetta, . "Regulation and Labour Market Performance," Working Papers 158, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    9. Steven J. Davis & John Haltiwanger, 1990. "Gross Job Creation and Destruction: Microeconomic Evidence and Macroeconomic Implications," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 123-186 National Bureau of Economic Research, Inc.
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    Cited by:
    1. Rutkowski, Jan, 2004. "Firms, jobs, and employment in Moldova," Policy Research Working Paper Series 3253, The World Bank.
    2. Mihails Hazans, 2007. "Looking for the workforce: the elderly, discouraged workers, minorities, and students in the Baltic labour markets," Empirica, Springer, Springer, vol. 34(4), pages 319-349, September.
    3. Gorana Krstic & Peter Sanfey, 2007. "Mobility, poverty and well-being among the informally employed in Bosnia and Herzegovina," Working Papers, European Bank for Reconstruction and Development, Office of the Chief Economist 101, European Bank for Reconstruction and Development, Office of the Chief Economist.
    4. World Bank, 2004. "Serbia and Montenegro : An Agenda for Economic Growth and Employment," World Bank Other Operational Studies 14487, The World Bank.
    5. World Bank, 2005. "Ukraine Jobs study : Fostering Productivity and Job Creation, Volume 2, Technical Chapters," World Bank Other Operational Studies 8464, The World Bank.
    6. World Bank, 2005. "The Quest for Equitable Growth in the Slovak Republic : A World Bank Living Standards Assessment," World Bank Other Operational Studies 8312, The World Bank.
    7. Rutkowski, Jan, 2006. "Labor market developments during economic transition," Policy Research Working Paper Series 3894, The World Bank.


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