II Labor Market Developments in Transition: The Stylized Facts
Author: Mr. Philippe Egoume Bossogo, Mr. Jerald A Schiff, Ms. Miho Ihara, Mr. Tetsuya Konuki, and Ms. Kornelia Krajnyak
Language:
English
Keywords:
OP; economy; labor market performance; percentage share; replacement ratio; labor market experience; employment protection legislation index; early retirement; Unemployment rate; Labor markets; Aging
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Abstract

Transition economies all experienced an initial sharp contraction in output. According to official data, output declined sharply over the period 1988–93, and pretransition levels of GDP were typically not achieved again for many years. In some cases, they had still not been reached by 2002 (Table 2.1). The size of the initial shock varied significantly across countries depending, in part, on the extent of pretransition linkages with the Soviet Union. There were, in addition, dramatic structural changes in these economies, reflected in part by the rapid growth of the share in output accounted for by the private sector and, within that, the services sector.

Transition economies all experienced an initial sharp contraction in output. According to official data, output declined sharply over the period 1988–93, and pretransition levels of GDP were typically not achieved again for many years. In some cases, they had still not been reached by 2002 (Table 2.1). The size of the initial shock varied significantly across countries depending, in part, on the extent of pretransition linkages with the Soviet Union. There were, in addition, dramatic structural changes in these economies, reflected in part by the rapid growth of the share in output accounted for by the private sector and, within that, the services sector.

Table 2.1.

Selected Macroeconomic Indicators

(In percent of GDP, unless otherwise indicated)

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Source: IMF, World Economic Outlook (WEO).

IMF staff projections.

These two factors, a deep recession and fundamental structural changes, had profound effects on the labor market. Many pretransition characteristics of these economies’ labor markets—high participation rates, the lack of open unemployment, long tenures, and little wage differentiation—changed completely. Over the past decade, most of these countries experienced low participation rates, high unemployment, more mobility across jobs, and a substantial widening of wage differentials.

The speed of transition varied widely among these countries, with faster reformers generally experiencing more rapid recovery. As can be seen in the European Bank for Reconstruction and Development (EBRD) summary indicators of progress in transition (Table 2.2), Poland, Hungary, the Czech Republic, and Estonia were more successful early on in achieving a high private sector share in GDP, privatization, and enterprise reform. These countries recovered from the shock of transition more rapidly as well. In contrast, Bulgaria and Croatia lagged, while Slovenia—which started the process at a significantly higher level of income—followed a more gradualist transition path.

Table 2.2.

EBRD Transition Indicators

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Source: European Bank for Reconstruction and Development (EBRD).

The path and speed of reforms appear to have played a key role in explaining differences in labor market developments. However, the relationship between the pace of transition and labor market developments is a complex one. In Hungary—a relatively successful model of transition—the unemployment rate peaked in 1992 because job creation in growing sectors was initially too slow to offset job losses in restructuring sectors, but it has since declined gradually to single digits. However, the participation rate and employment are still lower than at the outset of transition. The Czech Republic has also seen lower levels of unemployment, although on a generally rising trend. In slower reformers among CEE countries, such as Bulgaria, Croatia, and the Slovak Republic, unemployment rates remained stubbornly high after initial sharp contractions in output and employment. However, at the extreme, in the countries of the Commonwealth of Independent States (CIS)(not part of our sample), which lagged badly in the reform process, employment remained stable during the early 1990s even while output collapsed.

Labor Market Participation

Participation and participation rates have typically fallen from initially high levels and are now generally below EU–15 levels (Figure 2.1).2 Countries with the largest increases in unemployment rates tended to experience the largest declines in participation rates. The decline in participation, which cushioned the impact of the crisis on unemployment, was achieved via a number of avenues, including exit from the market by discouraged job seekers; early retirement; entrance onto disability rolls; participation in subsistence farming and other informal activities; and increased participation in higher education. Emigration also played a role in labor supply developments. In Bulgaria, for example, the total population has declined by 7 percent since 1990, while the labor force has contracted by nearly 20 percent as the participation rate for the working-age population dropped sharply. The large decline in participation rates is due, to some extent, to the fact that these rates were unusually high in centrally planned economies. However, participation rates (as a share of working-age population) now fall between 50 and 60 percent for the countries in this study, on the low side relative to the EU–15 countries.

Figure 2.1.
Figure 2.1.

Labor Participation Rates

(In percent of working-age population)

Source: Labor Force Survey (LFS) data.

Employment Developments

Employment declined sharply in the initial years of transition as job shedding in government and state-owned enterprises more than offset job creation in the nascent private sector. This decline largely reflects the initial economic contraction that took place (Figure 2.2). The relationship between employment and output levels, however, is quite different across countries, perhaps owing to differences in the degree of hidden unemployment before transition as well as the restrictiveness of labor markets at the onset of the economic contraction. For example, in Bulgaria, where macroeconomic developments were particularly adverse and the labor code relatively flexible, employment declined by nearly a third over the period 1988–93. Employment in Hungary—where the contraction was less severe—declined by 27 percent over the same period. Employment declines in Slovenia, the Czech Republic, and the Slovak Republic were significantly smaller, while Croatia’s employment appears to have increased slightly, despite a very sharp contraction in GDP.

Figure 2.2.
Figure 2.2.
Figure 2.2.

Real GDP and Employment

Sources: IMF, World Economic Outlook (WEO); and LFS data.

In most countries, growth resumed after several years but was initially powered by gains in productivity while employment continued to fall. As transition progressed, and productivity gains associated with job shedding were exhausted, employment in some countries rose slightly. However, employment in the Baltic countries continued to decline or stagnated during the late 1990s and early 2000s despite rapid economic growth. Furthermore, in some cases—for example, in Bulgaria, the Czech Republic, and Poland—second rounds of restructuring led to new job cuts while in others recessions constrained labor demand. By 2002, overall employment levels remained well below pretransition levels.

The transition period has been characterized by large shifts in labor between the public and private sectors. Private sector employment has grown rapidly, both in absolute terms and as a share of total employment. This reflects both the privatization of state-owned enterprises as well as the growth in the new private sector. By 2002, the private sector generally accounted for between 50 and 80 percent of total employment (Figure 2.3). It is noteworthy that the share of employment in the public sector remains higher in a number of the slower-reforming economies with higher unemployment rates, in particular Bulgaria, Croatia, and the Slovak Republic. This may reflect in part the role of government or state owned enterprises as the employer of last resort in the context of less rapid private sector job creation, although the direction of causality is not obvious. This suggests the possibility of additional pressures on unemployment rates in some of these countries as further restructuring or fiscal consolidation takes place.

Figure 2.3.
Figure 2.3.

Private Sector Share in Employment

(In percent of total employment)

Source: LFS data.

Transition has also seen significant movement of labor across sectors of the economy. Without exception, the share of total employment in services grew, and in virtually all cases exceeded 50 percent by 2001, while employment in industry fell as a share of total employment, and in some cases fell sharply in absolute terms (Figure 2.4). In this respect, labor markets appear to have been characterized by a significant degree of flexibility. Countries varied substantially, however, in their experience, in particular in the extent to which agricultural employment declined. Among the more rapid reformers—including the Czech Republic, Estonia, Hungary, and Poland—employment in agriculture, where productivity was relatively low, declined as a share of total employment. In other cases—Bulgaria and Croatia—agricultural employment grew in importance. This may reflect that agricultural workers were not mobile to other sectors or regions and/or that individuals have returned to rural areas where, if jobs are not available, at least subsistence farming is.

Figure 2.4.
Figure 2.4.

Employment by Sector

(In percent of total employment)

Sources: International Labor Organization (ILO); and World Bank, World Development Indicators.

Sharp declines in employment and intersectoral shifts by labor enabled most countries to maintain levels of labor productivity early in transition, after an initial sharp drop (Figure 2.5).3 More successful transition economies were subsequently able to raise productivity well above pretransition levels. In some countries, however, labor productivity remains lower (Croatia) or only slightly higher than pretransition levels, suggesting that additional restructuring and further spurts of unemployment are possible.

Figure 2.5.
Figure 2.5.
Figure 2.5.

Productivity by Sector

(In thousands of constant 1995 U.S. dollars)

Sources: World Bank, World Development Indicators; ILO, Laborsta; and IMF, WEO.

Unemployment

Despite the decline in participation rates, unemployment rates typically increased sharply in the initial years of transition and have tended to remain quite high. In Bulgaria, Croatia, Poland, the Slovak Republic, and the Baltic countries unemployment rates remain in double digits (Figure 2.6). Only the Czech Republic, Hungary, and Slovenia have managed to bring or keep their unemployment rates below 10 percent. After stabilizing in the mid-1990s, unemployment in several countries surged again after 1998, reflecting second rounds of restructuring and cyclical slumps. As a result, in 2000–01, several countries reached their highest unemployment rates since the start of transition.

Figure 2.6.
Figure 2.6.

Unemployment Rates

(In percent)

Sources: IMF, WEO; and LFS data.

Long-term unemployment has been a major problem in transition economies. Of the unemployed, the share who have been out of work for more than one year generally falls between 40 and 60 percent for the transition economies in 2001–02 (Figure 2.7). This is roughly in line with the EU–15 countries (Grogan and Moers, 2001) but far higher than the United States or a number of other OECD countries. This share has generally increased, in some cases—for example, Hungary and the Czech Republic—significantly. High long-term unemployment has potentially important policy implications, including because this group may find their job skills eroding—increasing the longrun equilibrium unemployment rate—and because they may become ineligible for unemployment insurance and fall into poverty.

Figure 2.7.
Figure 2.7.

Long-Term Unemployment

(In percent of total unemployment)

Source: LFS data.

The pool of unemployed has been stagnant. Contrary to expectations that unemployment would serve as the most important transitory state in the reallocation of workers across sectors or jobs, the reallocation has tended to happen via job-to-job moves. However, these characteristics of the labor reallocation process do not seem to be out of line with EU–15 countries. Grogan and Moers (2001) show similar frequencies of job-to-job and unemployment-to-unemployment movement in CEE and EU–15 countries.

Among the key facts gleaned from country LFS data are (Tables 2.3–2.11):

  • Unemployment among young and low-skilled workers is significantly higher than overall unemployment. The unemployment rate for young labor force participants (aged 15–24) exceeds 15 percent in all cases and 40 percent in several countries. Anecdotal evidence suggests that in a labor market with large numbers of unemployed, employers can afford to focus their hiring on individuals with prior work experience. In addition, the very young (aged 15–19) are generally low-skilled, which limits their job possibilities. The experience of the these transition economies is not out of line with that of Western Europe, where unemployment rates in excess of 20 percent are not uncommon.4 However, these unemployment rates are considerably higher than for youths in the United States or United Kingdom, where rates are generally in the range of 10-12 percent.

  • Older workers tend to experience rates of unemployment below the national rate, perhaps reflecting the alternative of early retirement, including via disability.

  • There is a heavy concentration of unemployment among lower-skilled workers. While definitions vary across countries, unemployment rates among those in the lowest category of educational attainment (generally primary school or less) are as high as 44 percent in Bulgaria and the Slovak Republic. The outlier is Slovenia, where the unemployment rate for those with basic education or lower is just over 9 percent. Slovenia’s more gradual approach to transition may have left intact a larger number of industrial sector jobs for which lower-skilled workers are qualified. In fact, Slovenia has maintained a larger share of employment in industry than all but one country in the sample. For those individuals with higher education, unemployment rates vary between 2 and 8 percent, rates not significantly different from the EU–15 countries.

  • There is evidence that minority groups have been especially hard-hit. In the Baltics, for example, the unemployment rate among nonnationals—primarily Russian speakers—has run more than double that of nationals, and unemployment rates among the Roma in Hungary, Bulgaria, and the Slovak Republic are also extremely high.

Table 2.3.

Bulgaria: Labor Force Survey Results1

(Period average-unless otherwise indicated)

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Source: National Statistical Institute of Bulgaria.

Survey was conducted two-three times per year up to 1999 and four times from 2000 onward.

Aged 15 and above.

Percentage share in total employed.

All nonpublic sector.

Aged 15–24.

Percentage share in total unemployed.

One year and over.

International Standard Classification of Education (ISCED) 1.

ISCED 3.

From 2001 data refer to unemployed who lost job within past eight years.

ISCED 2; and lower secondary or lower for 1993–94.

Percentage share in total inactive population.