Front Matter

Front Matter Page

European II Department

Authorized for distribution by Julian Berengaut and Leif Hansen

Contents

  • Summary

  • I. Introduction

  • II. The Existing Literature

  • III. The Model

    • A. Concepts and Notations

    • B. Job Creation and Job Destruction in the Private Sector

    • C. Job Destruction in the Public Sector

    • D. Aggregate Dynamics

  • IV. Labor Market Institutions and Transition

    • A. Unemployed income

    • B. Minimum Wage

    • C. Firing Tax

  • V. A Brief Look at the Empirical Evidence

    • A. Labor Market Institutions

  • VI. Conclusions

  • Tables

  • 1. Baseline Parameter Values

  • 2. Simulation Statistics

  • 3. Output and Unemployment over the Transition: 1989–96

  • 4. Private Sector Share in Employment in Transition Economies: 1989−95

  • 5. Real Wage Indices over the Transition: 1989–96

  • 6. Minimum Wage over the Transition: 1989–95

  • 7. Generosity of the Unemployment Insurance System in 1994

  • 8. Firing Cost in Selected Transition Economies

  • Figures

  • 1. Unemployment Dynamics with no Heterogeneity in the Public Sector

  • 2. Transition of Unemployment for Different Benefit Level

  • 3. Transition of Real Wages 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 Sector’s Jobs with No Firing Costs

  • Appendix: Some Comparative Static Results

  • References

Summary

This paper examines the interactions between labor market institutions and the dynamics of unemployment and real wages in transition economies. In a dynamic matching model in which the state sector endogenously sheds labor and private job creation takes time, the paper shows that labor market institutions, such as the unemployment insurance system and the minimum wage, are important determinants of labor market dynamics.

Three results arise from the analysis. First, higher unemployment benefits increase unemployment in the steady state and, during the transition, they reduce the fall in real wages and they increase the speed of transition. Second, higher minimum wages can theoretically speed up the transition process without affecting steady state unemployment. Third, firing costs in the public sector slow down the increase in unemployment in the early stage of the transition and slow down the fall in real wages.

The paper briefly reviews the labor market experience of several Central and Eastern European economies and two CIS economies, Russia and Ukraine, and argues that difference in labor market institutions across countries can cast some light on the difference in labor market dynamics. The Central and Eastern European economies, with the exception of the Czech republic, have experienced a dramatic rise in unemployment and substantial fall in real wages. Conversely, CIS countries have experienced a moderate increase in unemployment and a substantial decline in real wages. Consistently with the predictions of the model, the minimum wage appears to be much higher in Central and Eastern European economies than in Russia and Ukraine, while the unemployment insurance system appears much more generous.

Labor Market Institutions and Unemployment Dynamics in Transition Economies
Author: Mr. Pietro Garibaldi and Ms. Zuzana Brixiova