Workers in Transition

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The outlook is bright for transition economies that are fully embracing market-based reform, including appropriate, coherently applied labor policies. In other transition economies, a mix of paternalism and populism could produce partial, timid reform that makes them increasingly unproductive and corrupt. Workers will suffer tremendously in countries without credible, consistent policies, as private capital will not invest there. After Central and Eastern European and Central Asian economies abandoned central planning, nearly 195 million workers had to adjust to new rules of work and life. Most transition economies have not yet fully committed themselves to the rules of the marketplace. A few that have are already enjoying growth in wages and employment; in other countries, labor income growth is still to come. Not all workers have a bad memory of life under central planning. Some earned huge rents, and most enjoyed job security. But the initial good performance of centrally planned economies led to stagnation in wages, productivity, and intersectoral employment shifts, and ultimately the crash. The crash coincided with the start of market-oriented reform - but most countries suffered not from the reforms themselves but from shocks from trade losses and energy price increases as the Council for Mutual Economic Assistance collapsed (CMEA). Since the CMEA`s collapse, the people of countries such as Estonia and Slovenia have generally accepted rapid reform as the only way to increase wages and incomes. Reform has not been so well accepted in countries that were forced to enter the transition. Transition brought increasing differentiation in wages, incomes, and employment status. But there is a positive relationship between stabilization, structural reform, and private sector development on the one hand, and labor incomes on the other. The balance between the benefits of such a path (dynamic growth of private employment and wages) and the drawbacks (labor force withdrawal, increasing unemployment, income differentiation, and poverty) improves every year in the leading reform countries. Continued stagnation in the countries resisting reform could result in persistently low labor income. But there could also be a positive demonstration effect from macroeconomic stabilization followed by privatization and coherent structural reform, including new types of labor contracts that enhance worker mobility across jobs, occupations, and regions. Such contracts must be supported by help to the most vulnerable as well as active labor market policies designed to increase the effective labor supply, to maintain labor force participation, and to effectively match jobs and workers. The OECD experience with active labor market policies has not been entirely encouraging but in the transition economies such policies - if well designed - could help build social acceptance of reform and smooth the labor force's adjustment to new demands. This paper - a product of the Office of the Vice President, Development Economics - was prepared as a background paper for World Development Report 1995 on labor.