Employment and wage behaviour of industrial enterprises in transition economies: The cases of Poland and Czechoslovakia1

In this paper we use two very large panel datasets from Poland, 1988‐90 and Czechoslovakia, 1990‐1992 to explore the dynamics of employment and wage determination at the enterprise level in the early years of transition. The study is intended to assist in building a coherent picture of microeconomic adjustment in transition, a field which was not sufficiently explored in the early years of reform. We find that Polish firms were already to some extent responsive to market conditions pre‐reform, notably to demand in determining employment. Czechoslovak firms, however, were largely unresponsive to such pressures in 1989‐90. The elasticities rose significantly in both countries in the early years of reform, especially in Czechoslovakia which quickly attained initial Polish patterns of adjustment. Firms became much more responsive to sales and cost pressures in adjusting employment and to their own productivity in setting pay. Ownership effects in these early years were, however, much more modest, with state‐owned firms adjusting employment more than their private counterparts, perhaps because over‐manning was more serious in that sector.