Institutions, policies, and labor market outcomes

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Worker displacement in transition economies and in China

Knowing which workers are displaced in restructuring episodes helps governments devise the right equity- and efficiency-enhancing policies

10.15185/izawol.20 20 Lehmann, H

by Hartmut Lehmann

Continuous enterprise restructuring is needed for the transition and emerging market economies to become and remain competitive. However, the beneficial effects of restructuring in the medium run are accompanied by large worker displacement. The costs of displacement can be large and long-lasting for some workers and for the economy. To devise the right policy interventions, governments need to fully understand which workers are displaced and what costs they bear.

Informal employment in emerging and transition economies

Reducing informality requires better enforcement, more reasonable regulation, and economic growth

10.15185/izawol.59 59 Slonimczyk, F

by Fabián Slonimczyk

In developing and transition economies as much as half the labor force works in the informal sector (or “shadow economy”). Informal firms congest infrastructure and other public services but do not contribute the taxes needed to finance them. Informal workers are unprotected against such negative shocks as ill-health, but for certain groups there can be scarce opportunities to enter the formal sector. Reducing informality requires better enforcement, more reasonable regulation, and economic growth.

Formalization of jobs and firms in emerging market economies through registration reform

Reforming registration might not be enough to persuade informal firms and workers to formalize—enforcement and other reforms may also be needed

10.15185/izawol.67 67 Khamis, M

by Melanie Khamis

Informal firms make up a major share of the economy in most developing countries. Expanding formalization could increase government tax revenues, boost firm profits and national income, and increase employee well-being by improving access to social security and health and workers’ benefits. Reforms to encourage firms to register include simplifying procedures, reducing the cost and time to register, and making more information available on registration procedures. Reforms might not result in higher registration and formalization. In some cases, better enforcement and wider development policies might be needed as well.

Employment protection legislation in transition and emerging markets

Although market failures mean employment protection is necessary, excessive protection can be counterproductive

10.15185/izawol.63 63 Muravyev, A

by Alexander Muravyev

Employment protection legislation aims to shield employees against unfair dismissal and earning reductions at the time of job loss. Theory suggests that employment protection stabilizes employment over cyclical upturns and downturns without necessarily increasing general unemployment. However, recent evidence from transition and emerging economies shows that employment protection legislation tends to raise unemployment among disadvantaged groups, particularly youth, and may increase informal work. Employment protection policies thus require careful consideration of their unintended effects.

International trade regulation and job creation

Trade policy is not an employment policy and should not be expected to have major effects on overall employment

10.15185/izawol.75 75 Winters, L

by L. Alan Winters

Trade regulation can create jobs in the sectors it protects or promotes, but almost always at the expense of destroying a roughly equivalent number elsewhere in the economy. At a product-specific or micro level and in the short term, controlling trade could reduce the offending imports and save jobs, but for the economy as a whole and in the long term, this position has neither theoretical support nor empirical evidence in its favor. Given that protection may have other—usually adverse—effects, understanding the difficulties in using it to manage employment is important for economic policy.

Flat-rate tax systems and their effect on labor markets

Despite their theoretical benefits, flat taxes have been tried only in a few formerly socialist countries

10.15185/izawol.61 61 Peichl, A

by Andreas Peichl

The potential economic outcomes resulting from a flat rate of income tax have been the subject of an ongoing academic and political debate. Many observers have suggested that the introduction of a flat tax would be beneficial for a country’s economy, having a positive influence on the labor market and the gross domestic product by enhancing incentives to work, save, invest, and take risks. A flat tax also significantly simplifies income taxation which increases tax compliance and reduces tax planning, avoidance, and evasion. However, despite flat taxes being on the political agenda in many countries, in practice their implementation has mostly been restricted to the transition economy countries of Eastern Europe. There is no one single flat tax system in place in these countries though; one rate does not fit all.

Impact of privatization on employment and earnings

Workers and policymakers may fear that privatization leads to job losses and wage cuts, but what’s the empirical evidence?

10.15185/izawol.93 93 Earle, J

by John S. Earle

Conventional wisdom and prevailing economic theory hold that the new owners of a privatized firm will cut jobs and wages. But this ignores the possibility that new owners will expand the firm’s scale, with potentially positive effects on employment, wages, and productivity. Evidence generally shows these forces to be offsetting, usually resulting in small employment and earnings effects and sometimes in large, positive effects on productivity and scale. Foreign ownership usually has positive effects, and the effects of domestic privatization tend to be larger in countries with a more competitive business environment.

Latent entrepreneurship in transition economies

Some entrepreneurs and would-be entrepreneurs face financial and bureaucratic barriers to starting a business

10.15185/izawol.155 155 Atasoy, H

by Hilal Atasoy

Because entrepreneurial activity can stimulate job creation and long-term economic growth, promoting entrepreneurship is an important goal. However, many financial, bureaucratic, and social barriers can short-circuit the process of actually starting a business, especially in transition economies that lack established institutional systems and markets. The main obstacles are underdeveloped financial markets, perceptions of administrative complexity, political and economic instability, and lack of trust in institutions. Gender disparities in the labor market are also reflected in less entrepreneurial activity among women than men.

Alcoholism and mortality in Eastern Europe

Excessive drinking is the main cause of high male mortality rates, but the problem can be addressed

10.15185/izawol.168 168 Yakovlev, E

by Evgeny Yakovlev

Eastern European countries, particularly former Soviet Union economies, traditionally have the highest rates of alcohol consumption in the world. Consequently, they also have some of the highest male mortality rates in the world. Regulation can be effective in significantly decreasing excessive drinking and its related negative effects, such as low labor productivity and high rates of mortality. Understanding the consequences of specific regulatory measures and what tools should be used to combat excessive alcohol consumption is essential for designing effective policies.

Pensions, informality, and the emerging middle class

Getting the incentives right for firms and workers should be the priority in the labor formalization agenda

10.15185/izawol.169 169 Melguizo, A

by Angel Melguizo

A large share of the population in emerging market economies has no pension coverage, exposing them to the economic risks arising from socio-economic and individual shocks. This problem, which arises from having large informal (unregulated) sectors, affects not only poor workers, but as many as half the newly or nearly middle class in some emerging market economies. With very little social protection coverage today, these workers will also be vulnerable in the future unless tax, labor, and social policies change to encourage formalization. While formalization would require substantial resources in the short-term, it seems financially sustainable.

New firms entry, labor reallocation, and institutions in transition economies

In transition economies, better property rights protection and rule of law enforcement can boost job creation and growth

10.15185/izawol.180 180 Bruno, R

by Randolph L. Bruno

In the transition from central planning to a market economy in the 1990s, governments focused on privatizing or closing state enterprises, reforming labor markets, compensating laid-off workers, and fostering job creation through new private firms. After privatization, the focus shifted to creating a level playing field in the product market by protecting property rights, enforcing the rule of law, and implementing transparent start-up regulations. A fair, competitive environment with transparent rules supports long-term economic growth and employment creation through the reallocation of jobs in favor of new private firms.

Measuring disincentives to formal work

Does formal work pay? Synthetic measurements of taxes and benefits can help identify incentives and disincentives to formal work

10.15185/izawol.213 213 Weber, M

by Michael Weber

Evidence from transition economies shows that formal work may not pay, particularly for low-wage earners. Synthetic measurements of work disincentives, such as the formalization tax rate or the marginal effective tax rate, confirm a significant positive correlation between these measurements and the probability of informal work. These measures are especially informative for impacts at lower wage levels, where informality is highest. Policymakers who want to increase formal work can use these measurements to determine optimal labor taxation rates for low-wage earners and reform benefit design.

Wage coordination in new and old EU member states

Stronger wage coordination and higher union density are associated with lower unemployment and higher inflation

10.15185/izawol.222 222 Rovelli, R

by Riccardo Rovelli

Aside from employment protection laws, which have been converging, other labor market institutions in new and old EU member states, such as wage bargaining coordination and labor union density, still differ considerably. These labor market institutions also differ among the new EU member states, with the Baltic countries being much more liberal than the others. Research that pools data on old and new EU member states shows that wage coordination mechanisms can improve a country’s macroeconomic performance. Stronger wage coordination and higher union density reduce the response of inflation to the business cycle.

Institutions and the support for market reforms

A combination of individual self-interest and good institutions determines the level of public support for market reforms

10.15185/izawol.258 258 Denisova, I

by Irina Denisova

Economic self-interest and social considerations are the key determinants of public support for market reforms in transition countries. However, political strategies that rely mainly on public support for pushing through economic reforms have limited relevance if the prevailing institutional environment is weak or corrupt. Poor governance and under-developed democracy significantly reduce the level of support. A good institutional framework allows the potential gains from reforms to be realized in a beneficial way, while corruption and poor governance deny the prospect of gains for individuals and for society.

Do economic reforms hurt or help the informal labor market?

The evidence is mixed on whether and how economic reforms benefit informal labor

10.15185/izawol.263 263 Kar, S

by Saibal Kar

The evidence is mixed on whether informal labor in developing countries benefits from trade and labor market reforms. Reforms lead to higher wages and improved employment conditions in the informal sector in some cases, and to the opposite effect in others. At a cross-country level, lifting trade protection boosts informal-sector employment. The direction and size of the impacts on informal-sector employment and wages are determined by capital mobility and the interactions between trade and labor market reforms and public policies, such as monitoring the formal sector. To guarantee best practice policymakers need to take these interdependencies into account.

Access to public transport and labor informality

Poor public transport can reduce employment in the formal sector

10.15185/izawol.274 274 Moreno-Monroy, A

by Ana I. Moreno-Monroy

Public transport infrastructure has not kept up with the demands of growing populations in cities in developing countries. Infrastructure provision has historically been biased against less affluent areas, so access to formal jobs is often difficult and costly for a large part of the lower-income population. As a result, low-income workers may be discouraged from commuting to formal jobs, lack information on job opportunities, and face discrimination. Through these channels, constrained accessibility can result in higher rates of job informality. Reducing informality can be a target for well-designed transport policies.

Cash wage payments in transition economies: Consequences of envelope wages

Reducing under-reporting of salaries requires institutional changes

10.15185/izawol.280 280 Horodnic, I

by Ioana Alexandra Horodnic

In transition economies, a significant number of companies reduce their tax and social contributions by paying their staff an official salary, described in a registered formal employment agreement, and an extra, undeclared “envelope wage,” via a verbal unwritten agreement. The consequences include a loss of government income and a lack of fair play for lawful companies. For employees, accepting under-reported wages reduces their access to credit and their social protections. Addressing this issue will help increase the quality of working conditions, strengthen trade unions, and reduce unfair competition.

The mortality crisis in transition economies

Social disruption, acute psychosocial stress, and excessive alcohol consumption raise mortality rates during transition to a market economy

10.15185/izawol.298 298 Cornia, G

by Giovanni Andrea Cornia

Large and sudden economic and political changes, even if potentially positive, often entail enormous social and health costs. Such transitory costs are generally underestimated or neglected by incumbent governments. The mortality crisis experienced by the former communist countries of Europe—which caused ten million excess deaths from 1990 to 2000—is a good example of how the transition from a low to a high socio-economic level can generate huge social costs if it is not actively, effectively, and equitably managed from a public policy perspective.

The effects of privatization on exports and jobs

Can the privatization of state-owned enterprises generate a virtuous cycle between exports and employment?

10.15185/izawol.309 309 Todo, Y

by Yasuyuki Todo

The privatization of state-owned enterprises (SOE) in transition economies has often been found to improve employment and productivity of privatized SOEs, despite policymakers’ fears regarding possible job cuts. This positive effect can be enhanced if privatization also promotes firms’ exports. A recent firm-level analysis of China reveals that privatization has indeed a positive effect on export propensity, employment, and productivity in both the short and long term. The effect mostly stems from changes in firms’ attitudes about profits and risks due to competitive pressure.

Should agricultural employment in transition economies be encouraged?

Encouraging agricultural employment might reduce rural–urban migration and reduce hidden rural unemployment

10.15185/izawol.328 328 Lerman, Z

by Zvi Lerman

The increase in agricultural employment in Central Asia and Trans-Caucasus over the last two decades has had a detrimental effect on agricultural labor productivity and rural family incomes. Transition countries in the former USSR cannot, however, encourage exits from agriculture (as, for instance, in east Germany or the Czech Republic) due to the risk of mass rural–urban migration, which may exacerbate growing urban unemployment. With large rural populations, state budgets would be unable to deal with a new wave of unemployed in urban areas.

Foreign direct investment and employment in transition economies

Has FDI into transition countries had the expected economic effects?

10.15185/izawol.330 330 Estrin, S

by Saul Estrin

Foreign direct investment (FDI) has been argued to improve company performance and stimulate growth and employment. Transition economies of Central and Eastern Europe (CEE) faced a desperate need to join the global economy, to improve their competitiveness and to create jobs through FDI. So, did the FDI come, and did it deliver what was expected? FDI levels were high for CEE, and for some resource-rich transition countries (e.g. Russia and some of Central Asia), but primarily delivered significant benefits (e.g. employment) for the former. FDI arrived much later to other transition countries (e.g. the former Soviet republics and the Balkans) and had much less impact.

Do institutions matter for entrepreneurial development?

In post-Soviet countries, well-functioning institutions are needed to foster productive entrepreneurial development and growth

10.15185/izawol.334 334 Aidis, R

by Ruta Aidis

Supportive institutional environments help build the foundations for innovative and productive entrepreneurship. A few post-Soviet countries have benefitted from international integration through EU membership, which enabled the development of democracy and free market principles. However, many post-Soviet economies continue to face high levels of corruption, complex business regulations, weak rule of law and uncertain property rights. For them, international integration can provide the needed support to push through unpopular yet necessary stages of the reform process.

Does religiosity explain economic outcomes?

Understanding religiosity is crucial to informed policy making

10.15185/izawol.335 335 Popova, O

by Olga Popova

Most religions in transition economies were marginalized by their former communist regimes. Today, some of these countries are experiencing a revival of religiosity, while others are prone to secularization. Religious norms affect individual decision making with respect to human capital investment, economic reforms, marital stability, employment, and other contexts. This implies that the interests of both religious and non-religious communities may differ and must be taken into account when designing and implementing economic policies, which is a challenge for policymakers.

Upgrading technology in Central and Eastern European economies

Existing policies in Eastern Europe will not sufficiently promote technological innovation

10.15185/izawol.338 338 Radosevic, S

by Slavo Radosevic

The future growth of Central and Eastern Europe (CEE) depends on upgrading technology, exporting and coupling domestic technology efforts while improving their position in global value chains. Current policies in the region are not geared to these tasks, despite the availability of huge financial opportunities in the form of EU structural funds. Existing policies are overly focused on research and development (R&D) and neglect sources of productivity growth, such as management practices, skills, quality, and engineering. The challenge is how to design industrial and innovation policies so that they promote modernization and drive structural change.