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Mr. Pietro Garibaldi and Ms. Zuzana Brixiova
This paper studies interactions between labor market institutions and unemployment dynamics in transition economies. It presents a dynamic matching model in which state sector firms endogenously shed labor and private job creation takes time. Two main conclusions arises. First, higher unemployment benefits increase steady-state unemployment, and, during the transition, they reduce the fall in real wages and speed up closure of state enterprises. Second, higher minimum wages can theoretically speed up the elimination of state sector jobs without affecting steady-state unemployment. These results are broadly consistent with existing evidence on the dynamics of unemployment and real wages in transition economies.
Mr. Pietro Garibaldi and Ms. Zuzana Brixiova

matching model, in the spirit of Pissarides (1990) . We then use the model to examine how the generosity of the unemployment insurance system, the level of the minimum wage, and the degrees of job security provisions affect job destruction in the state sector and the reallocation of jobs into the private sector. Three main findings arise from the analysis. First, higher unemployment benefits reduce the surplus from a job, increase steady state unemployment and, during the transition, reduce the fall in real wages and speed up the closure of state sector jobs. Second

Mr. Pietro Garibaldi and Ms. Zuzana Brixiova

shocks that reduce the present discounted value of state sector jobs. We show that job-worker pairs select a reservation productivity level below which the job is immediately destroyed. Since wages and productivity are intrinsically linked, negative shocks are conducive to lower wages, and. in equilibrium, a higher reservation productivity implies a higher average wage. Finally, as the reallocation of jobs from the state to the private sector is completed, the economy converges to a traditional matching model, in the spirit of Pissarides (1990) . Since the

Mr. Pietro Garibaldi and Ms. Zuzana Brixiova

for Different Benefit Level 4. Private and State Sector Jobs with High Benefits 5. Private and State Sector Jobs with Low Benefits 6. Transition of Unemployment for Different Minimum Wages 7. Transition of Real Wages for Different Minimum Wages 8. Private and State Sector’s Jobs No Minimum Wage 9. Private and State Sector’s Jobs with High Minimum Wage 10. Transition of Unemployment for Different Firing Costs 11. Transition of Real Wages for Different Firing Costs 12. Private and State Sector’s Jobs with High Firing Costs 13. Private and State

Ms. Zuzana Brixiova

) + J · v ( 11 ) where J ˙ i , is again the change of the value J t over time. Equation (9) states that the rate of return on the state sector job equals the operating profits minus the expected loss from exogenous destruction and from the workers moving to the private sector plus change in the value of the state sector job over time. Equation (10) states that the return to the private sector firm equals the profit minus loss from destruction plus change in the value of a private sector job over time. Equation

International Monetary Fund. Research Dept.
This paper analyzes contagion and volatility with imperfect credit markets. The paper interprets contagion effects as an increase in the volatility of shocks impinging on the economy. The implications of this approach are analyzed in a model in which domestic banks borrow at a premium on world capital markets, and domestic producers borrow at a premium from domestic banks. Financial spreads depend on a markup that compensates lenders, in particular, for the expected cost of contract enforcement. Higher volatility increases financial spreads and the producers’ cost of capital.
Ms. Zuzana Brixiova
This paper examines how the on-the-job search of workers in the state sector who are seeking jobs in the private sector affects private sector employment, the unemployment level, and the unemployment duration in the transition economies of Central and Eastern Europe. The main finding is that on-the-job searching can account for the coexistence of a quickly growing private sector and a high unemployment level of long duration. The paper also addresses the issue of the optimal (output maximizing) rate of state sector closure and finds that the rate is slower when workers are simultaneously job hunting than when they are not.