Real wage flexibility in the enlarged EU: evidence from a structural VAR

Abstract

The challenge for labour market policy in the new member states and other transition economies of Eastern Europe has been to redress the sharp drops in employment and rises in unemployment in a way that fosters the creation of productive jobs. This paper first documents the magnitude and productivity of job and worker reallocation. It then investigates the effects of privatisation, product and labour market liberalisation, and obstacles to growth in the new private sector on reallocation and its productivity in Hungary, Romania, Russia, and Ukraine. We find that market reform has resulted in a large increase in the pace of job reallocation, particularly that occurring between sectors and via firm turnover. Unlike under central planning, the job reallocation during the transition has contributed significantly to aggregate productivity growth. Privatisation has not only stimulated intrasectoral job reallocation, but the reallocation is more productive than that among remaining state firms. The estimated effect of privatisation on firm productivity is usually positive, but it varies considerably across countries. The productivity gains from privatisation have generally not come at the expense of workers, but are associated rather with increased wages and employment.