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The unemployment-growth relationship in transition countries

  • Hubert Gabrisch
  • Herbert Buscher

Does the disappointingly high unemployment in Central and East European countries reflect non-completed adjustment to institutional shocks from transition to a market economy, or is it the result of high labour market rigidities, or rather a syndrome of too weak aggregate demand and output? In the case of transitional causes, unemployment is expected to decline over time. Otherwise, it would pose a challenge to the European Union, particular in case of accession countries, for it jeopardizes the ambitious integration plans of, and may trigger excessive migration to the Union. In order to find out which hypothesis holds 15 years after transition has started, we analyze the unemploymentgrowth dynamics in the eight new member countries from Central-Eastern Europe. The study is based on country and panel regressions with instrument variables (TSLS). The results suggest to declare the transition of labour markets as completed; unemployment responds to output and not to a changing institutional environment for job creation. The regression coefficients report a high trend rate of productivity and a high unemployment intensity of output growth since 1998. The conclusion is that labour market rigidities do not to play an important role in explaining high unemployment rates. Rather, GDP growth is dominated by productivity progress, while the employment relevant component of aggregate demand is too low to reduce substantially the high level of unemployment.

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Paper provided by Halle Institute for Economic Research in its series IWH Discussion Papers with number 5.

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Date of creation: Nov 2005
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Handle: RePEc:iwh:dispap:5-05
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  1. Pietro Garibaldi & Zuzana Brixiova, 1997. "Labor Market Institutions and Unemployment Dynamics in Transition Economies," IMF Working Papers 97/137, International Monetary Fund.
  2. Castanheira, Micael & Roland, Gerard, 2000. "The Optimal Speed of Transition: A General Equilibrium Analysis," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 219-39, February.
  3. Kornai, J., 1993. "Transformational Recession; A General Phenomenon Examined Through the Example of Hangary's Development," Harvard Institute of Economic Research Working Papers 1648, Harvard - Institute of Economic Research.
  4. Izyumov, Alexei & Vahaly, John, 2002. " The Unemployment-Output Tradeoff in Transition Economies: Does Okun's Law Apply?," Economic Change and Restructuring, Springer, vol. 35(4), pages 317-31.
  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. John Haltiwanger & Hartmut Lehmann & Katherine Terrell, 2003. "Job Creation and Job Destruction in Transition Countries," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 11(2), pages 205-219, June.
  7. Aghion, P. & Blanchard, O.J., 1993. "On the Speed of Transition in Central Europe," Working papers 93-8, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. J. Konings & H. Lehmann & M.E. Schaffer, 1996. "Job Creation and Job Destruction in a Transition Economy: Ownership, Firm Size," CERT Discussion Papers 9611, Centre for Economic Reform and Transformation, Heriot Watt University.
  9. Camarero, Mariam & Carrion-i-Silvestre, Josep Lluis & Tamarit, Cecilio, 2005. "Unemployment dynamics and NAIRU estimates for accession countries: A univariate approach," Journal of Comparative Economics, Elsevier, vol. 33(3), pages 584-603, September.
  10. Michael Landesmann & Hermine Vidovic & Terry Ward, 2004. "Economic Restructuring and Labour Market Developments in the New EU Member States," wiiw Research Reports 312, The Vienna Institute for International Economic Studies, wiiw.
  11. Hazans, Mihails, 2003. "Determinants of inter-regional migration in the Baltic countries," ZEI Working Papers B 17-2003, ZEI - Center for European Integration Studies, University of Bonn.
  12. Stephen Nickell, 1997. "Unemployment and Labor Market Rigidities: Europe versus North America," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 55-74, Summer.
  13. Robert Solow, 2000. "Unemployment in the United States and in Europe - A Contrast and the Reasons," CESifo Working Paper Series 231, CESifo Group Munich.
  14. Peter Montiel & Eduardo Borensztein, 1991. "Savings, Investment, and Growth in Eastern Europe," IMF Working Papers 91/61, International Monetary Fund.
  15. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
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