Labor markets in transition in Central and Eastern Europe, 1989-1995

Abstract

Persistent unemployment has emerged as one of the most critical outcomes of transition from socialism in Central and Eastern Europe. High unemployment rates, including a growing proportion of long-term unemployed, represent a serious challenge to social welfare systems and policymakers. This paper analyzes labor market developments in nine transition countries of the region -Bulgaria, Croatia, the Czech Republic, FYR Macedonia, Hungary, Poland, Romania, Slovakia, and Slovenia- focusing on the dynamics of labor force behavior, employment and unemployment. Macroeconomic reforms and the output collapse initiated dramatic changes in labor markets. Following decades of stability and near-zero level unemployment, demand for labor plummeted. Labor force size contracted, and public sector employment fell substantially. Between 1989 and 1993, open unemployment grew rapidly as state-owned enterprises adjusted the size of the labor force to a hard budget ceiling and increased competition. Six years into the transition, unemployment levels remain high in most countries, excepting the Czech Republic. Long-term unemployment, growing steadily, comprises a high share of total unemployment, and is increasingly correlated with deep poverty. Labor markets have become key determinants of the winners and the losers in the transition process. Job losses, leading to unemployment or labor force withdrawals, have not only meant loss of wages, but also a range of other benefits previously associated with employment. Reshaping of family benefits has lagged behind labor market adjustments, and their reform requires urgent attention in many countries. Despite painful adjustments, labor markets have served as dynamic complements to economic restructuring and liberalization. Private sector employment has increased significantly, with privatization and the growth of new private enterprises, and employment structures have adjusted to accommodate changes in the demand for labor. Sectors previously cornerstones of the socialist economy have declined, while service sector employment has expanded. However, it remains unclear how far labor market adjustment can or will go, especially regarding inter-regional mobility. As poverty in the region grows, and is increasingly correlated with long-term unemployment, factors which facilitate the flexibility and adaptability of labor markets, including labor mobility, education and opportunities for self-employment grow increasingly critical.