The optimal speed of transition revisited

Abstract

This paper develops a theoretical model of job reallocation in post-communist transition countries. The framework is consistent with the micro-empirical evidence showing that: 1) job destruction is present in the new private sector even if this one is the key job creator and 2) most of the job reallocation from state to private employment is direct. In a departure from prior Optimal Speed of Transition (OST) conclusions, the model shows that the preferences of state workers are fundamental for the issue of transition. The diverging evolutions of unemployment and growth in the central and eastern European countries (a quick economic revival and high unemployment) and the former Soviet Union (low levels of unemployment with either a dynamic private sector development or a failure of the transition process) are related to restructuring policies of public firms. Where state-owned enterprises (SOEs) proceeded with massive layoffs, transition was achieved eventually with a cost of high unemployment in the medium term. When on the contrary employment was kept high, transition was more likely to derail even if unemployment evolved very slowly.