I. Some Comparative Static Results
Aghion, Phillipe and Olivier Blanchard, 1994, “On the Speed of Transition in Central Europe”, S. Fischer and J. Rotemberg (eds.) in NBER Macroeconomic Annual 1994, (Cambridge, Massachusetts: MIT Press), pp 283–320.
Atkenson, Andrew and Patrick Kehoe, 1996, “Social Insurance and Transition,” International Economic Review, Vol. 37 (2), pp 377–402.
Boeri, Tito, 1995, “Unemployment Dynamics and Labour Market Policies”, in Commander and Coricelli (eds) Unemployment and Restructuring in Eastern Europe and Russia, (Washington: World Bank).
Boeri, Tito and Michael Burda, 1996, “Active Labor Market Policies, Job Matching and the Czech Miracle” European Economic Review, Vol. 40, pp 805—817.
Burda, Michael, 1992, “A Note on Firing Costs and Severance Payments in Equilibrium Unemployment,” Scandinavian Journal of Economics, Vol. 94, pp 479–489.
Burda, Michael, 1993, “Unemployment, Labor Markets and Structural Change in Eastern Europe,” Economic Policy, Vol. 16, pp 102–137.
Brixiova, Zuzana and Nobuhiro Kiyotaki, 1997, “Private Sector Development in Transition Economies,” Carnegie Rochester Conference Series on Public Policy, Vol. 46, forthcoming.
Commander, Simon and Andrei Tolstopiatenko, 1996, “Unemployment Restructuring and the Pace of Transition,” mimeo (Washington: World Bank).
Mortensen, Dale T., and Christopher A. Pissarides, 1994, “Job Creation and Job Destruction in The Theory of Unemployment,” Review of Economic Studies, Vol 61, pp 397–415.
Mortensen and Millard, 1996, “The Unemployment and Welfare Effects of Labour Market Policy: a Comparison of the United States and the United Kingdom,“ in Snower and de la Dehesa (eds), Unemployment Policy, (Cambridge: Cambridge University Press).
Standing, Guy and Daniel Vaughan-Whitehead, 1995, “Minimum Wages in Central and Eastern Europe: from Protection to Destitution,” (Central European University Press).
We wish to thank Jorge Márquez-Ruarte, Tom Wolf, Mark Schankerman, and other participants at seminars held at the IMF and the EBRD. We also thank Alex Keenan for providing us with the wage data for CIS countries, and Mark DeBroek and Julian Berengaut for useful conversations. Elaine Buckberg and Atish Rex Ghosh helped us in collecting information on Russia and Ukraine. The views expressed in the paper are those of the authors and do not necessarily represent those of the International Monetary Fund. Correspondence to: Pietro Garibaldi, European II Department, 20431 Washington D.C.
Blanchard and Kremer (1997) claim that under central planning economic relationships were based on specific, one-to-one relationships that opened room for bargaining. However, the coercive power of the central planner warranted an outcome to the bargaining process. During the transition the coercive power of the central planner disappear and the relationships became have to be solved by decentralized bargaining between suppliers and buyers. The paper show that when the bargaining inefficiently breaks down (due to the incomplete contracts or asymmetric information), output will immediately fall.
Brixiova and Kiyotaki (1997) propose a model entirely focused on private sector development in a transition economy.
The matching function exhibits constant returns to scale in unemployment and vacancies. For transition economies, Burda (1993) and Burda and Boeri (1996) offer empirical estimates of the matching function.
Empirically, there is evidence of substantial growth in private sector employment in transition economies, but it is very difficult to assess to what extent the process is driven by job formation in the emergent private sector or by privatization of the state sector.
It can be immediately seen from (11) that the only path of θ that satisfies (11) and converges to the steady involves a constant θ along the transition path. The proof of the existence and the uniqueness of the steady state equilibrium as well as the solution of the transition paths of θ and Wp are derived in the appendix.
For simplicity we assume that conditions on parameters are such that unemployment monotonically increases to its steady state value.
Since, by assumption, the minimum wage is not binding in the private sector, the value of being unemployed, U, does not change and is described by (7).
The selection of countries in Table 3 was driven by the availability of comparable information on labor market institution in ILO (1996). Official unemployment in other CIS countries show similar results, but is difficult to find consistent time series on ILO unemployment estimates.
Standing refers also to the fact that the fall in employment has been higher than the increase in unemployment. Since he reports also of a dramatic fall in the labor force, we do not believe that the fall in employment is, by itself, evidence of the rise in hidden unemployment.
The level of the average benefit, in Table 7 is calculated on the basis of the existing legislation, as is described in ILO (1996) and in Table 7. While CEE economies tend to link benefits to the average wage in the country or to the minimum wage, Russia and Ukraine calculate the benefits in a different way. Russia links the benefit to the wage in the previous year and this practice, in periods of high inflation, substantially reduces the replacement ratio with respect to the existing average wage. Ukraine links the benefit to the salary of the previous job, providing no automatic indexation for periods of high inflation. Thus the very low coverage with respect to the average wage in 1994.