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Transition with Labour Supply

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  • Boeri, Tito

    () (Bocconi University)

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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  • Boeri, Tito, 2001. "Transition with Labour Supply," IZA Discussion Papers 257, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp257
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    References listed on IDEAS

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    Cited by:

    1. Balla, Katalin & Köllo, János & Simonovits, András, 2008. "Transition with heterogeneous labor," Structural Change and Economic Dynamics, Elsevier, vol. 19(3), pages 203-220, September.
    2. Köllő, János & Simonovits, András & Balla, Katalin, 2006. "Transzformációs sokk heterogén munkaerőpiacon
      [Transformation shock on a heterogeneous labour market]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(6), pages 485-508.
    3. Jurajda, Stepán & Terrell, Katherine, 2008. "Job Reallocation in Two Cases of Massive Adjustment in Eastern Europe," World Development, Elsevier, vol. 36(11), pages 2144-2169, November.
    4. Kupets, Olga, 2006. "Determinants of unemployment duration in Ukraine," Journal of Comparative Economics, Elsevier, vol. 34(2), pages 228-247, June.
    5. Mihails Hazans, 2007. "Looking for the workforce: the elderly, discouraged workers, minorities, and students in the Baltic labour markets," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 34(4), pages 319-349, September.
    6. Lizal, Lubomir & Kocenda, Evzen, 2001. "State of corruption in transition: case of the Czech Republic," Emerging Markets Review, Elsevier, vol. 2(2), pages 138-160, June.
    7. Jekaterina Dmitrijeva & Mihails Hazans, 2007. "A Stock-Flow Matching Approach to Evaluation of Public Training Programme in a High Unemployment Environment," LABOUR, CEIS, vol. 21(3), pages 503-540, September.
    8. 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.
    9. 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, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
    10. Ekaterina Kalugina & Boris Najman, 2003. "Travail et pauvreté en Russie : évaluations objectives et perceptions subjectives," Économie et Statistique, Programme National Persée, vol. 367(1), pages 83-100.
    11. 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.
    12. Vlad Ivanenko, 2001. "Effective Tax Rates in Transition," William Davidson Institute Working Papers Series 378, William Davidson Institute at the University of Michigan.
    13. Volkhart Vincentz & Michael Knogler, 2003. "Szenarien der mittelfristigen Konvergenz der EU-Beitrittsländer Polen, Slowakische Republik und Ungarn," Working Papers 244, Leibniz Institut für Ost- und Südosteuropaforschung (Institute for East and Southeast European Studies).
    14. 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).
    15. Jekaterina Dmitrijeva, 2008. "Matching and Labour Market Efficiency across Space and through EU accession: Evidence from Latvia, Estonia and Slovenia," Documents de recherche 08-05, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
    16. 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.
    17. Foster, Neil & Stehrer, Robert, 2007. "Modeling transformation in CEECs using smooth transitions," Journal of Comparative Economics, Elsevier, vol. 35(1), pages 57-86, March.
    18. 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.
    19. 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.
    20. 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.
    21. 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 - Economics Institute, Prague.
    22. Schäfer, Holger, 2004. "Arbeitsmärkte in Mittel- und Osteuropa," IW-Trends – Vierteljahresschrift zur empirischen Wirtschaftsforschung, Institut der deutschen Wirtschaft Köln (IW) / Cologne Institute for Economic Research, vol. 31(1), pages 39-44.
    23. 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.
    24. Michael Knogler, 2002. "Arbeitsmarktpolitische Herausforderungen in den Ländern der EU-Beitrittskandidaten," Working Papers 235, Leibniz Institut für Ost- und Südosteuropaforschung (Institute for East and Southeast European Studies).

    More about this item

    Keywords

    non-employment benefits; matching; Transition;

    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, Vacancies, and Immigrant Workers
    • P2 - Economic Systems - - Socialist Systems and Transition Economies

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