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.
Transition and emerging economies
The transformation of economic systems from plan to market in transition and emerging economies has significant consequences not only for labor markets in those countries. Their lessons can also guide the development of institutions and labor reform policies in other countries.
Artjoms Ivlevs University of the West of England, UK, and IZA, Germany
John Earle George Mason University, USA, and IZA, Germany
John T. Giles World Bank, USA, and IZA, Germany
Alexander Muravyev Higher School of Economics, National Research University, Russian Federation, and IZA, Germany
Rodrigo R. Soares São Paulo School of Economics, Brazil, and IZA, Germany
Since 1989 fertility and family formation have declined sharply in Central and Eastern Europe and the former Soviet Union. Fertility rates are converging on—and sometimes falling below—rates in Western Europe, most of which are below replacement levels. Concerned about a shrinking and aging population and strains on pension systems, governments are using incentives to encourage people to have more children. These policies seem only modestly effective in countering the impacts of widespread social changes, including new work opportunities for women and stronger incentives to invest in education.
by Marek Góra
For decades, pension systems were based on the rising revenue generated by an expanding population (demographic dividend). As changes in fertility and longevity created new population structures, however, the dividend disappeared, but pension systems failed to adapt. They are kept solvent by increasing redistributions from the shrinking working-age population to retirees. A simple and transparent structure and individualization of pension system participation are the key preconditions for an intergenerationally just old-age security system.
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.
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.
The recent EU enlargements into Central and Eastern Europe and increased labor mobility within the Union provide a unique opportunity to evaluate the labor market effects of emigration. Outmigration has contributed to higher wages for stayers, as well as to lower unemployment in the source country. However, emigration has also exacerbated skills shortages in some sectors, as well as mismatches between skills and jobs.
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.
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.
by Sher Verick
While women’s labor force participation tends to increase with economic development, the relationship is not straightforward or consistent at the country level. There is considerably more variation across developing countries in labor force participation by women than by men. This variation is driven by a wide variety of economic and social factors, which include economic growth, education, and social norms. Looking more broadly at improving women’s access to quality employment, a critical policy area is enhancing women’s educational attainment beyond secondary schooling.
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.
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.
by Xi Chen
People who are unable to maintain the same standard of living as others around them experience a sense of relative deprivation that has been shown to reduce feelings of well-being. Relative deprivation reflects conditions of worsening relative poverty despite striking reductions in absolute poverty. The effects of relative deprivation explain why average happiness has been stagnant over time despite sharp rises in income. Consumption taxes on status-seeking spending, along with official and traditional sanctions on excess consumption and redistributive policies may lessen the negative impact of relative deprivation on well-being.
About a billion people worldwide live and work outside their country of birth or outside their region of birth within their own country. Labor migration is conventionally viewed as economically benefiting the family members who are left behind through remittances. However, splitting up families in this way may also have multiple adverse effects on education, health, labor supply response, and social status for family members who do not migrate. Identifying the causal impact of migration on those who are left behind remains a challenging empirical question with inconclusive evidence.
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.
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.
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.
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.
Knowing whether corruption leads to higher emigration rates—and among which groups—is important because most labor emigration is from developing to developed countries. If corruption leads highly-skilled and highly-educated workers to leave developing countries, it can result in a shortage of skilled labor and slower economic growth. In turn, this leads to higher unemployment, lowering the returns to human capital and encouraging further emigration. Corruption also shifts public spending from health and education to sectors with less transparency in spending, disadvantaging lower-skilled workers and encouraging them to emigrate.
Most comparative research suggests that immigrants from post-socialist countries earn less than natives, work in jobs for which they are overqualified, and may experience unhappiness compared with natives, other immigrants, and non-migrants. In contrast, one study presents causal evidence which shows that moving from transition economies to live in the West increases the incomes, life satisfaction, and freedom perceptions of those who move. Credibly assessing whether leaving transition economies improves movers’ quality of life remains a challenging empirical question.
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.
by Olga Kupets
Large imbalances between the supply and demand for skills in transition economies are driven by rapid economic restructuring, misalignment of the education system with labor market needs, and underdeveloped adult education and training systems. The costs of mismatches can be large and long-lasting for workers, firms, and economies, with long periods of overeducation implying a loss of human capital for individuals and ineffective use of resources for the economy. To make informed decisions, policymakers need to understand how different types of workers and firms are affected by overeducation and skill shortages.
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.
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.
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.
Increasing women’s labor force participation is important to sustainable economic development, especially in economies with highly educated women and an aging population. Women’s participation varies across transition countries, driven by such economic and social factors as traditional views of gender roles and limited government support for caregivers. Still, in all countries there is clear scope for policies aimed at increasing women’s participation. In particular, in countries where women’s educational attainment is already high, policies to support a better work−life balance and female entrepreneurship look particularly promising.
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.
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.
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.
Compared to developing economies, European transition economies had high levels of human capital when their transitions began, but a lack of resources and policies to protect poor families hampered children’s access to education, especially for non-compulsory school grades. Different phenomena associated with transition also negatively affected children’s education: e.g. parental absence due to migration, health problems, and alcohol abuse. These findings call for a greater policy focus on education and for monitoring of the schooling progress of children in special family circumstances.
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.
by Anna Lovász
In 2002, the EU set targets for expanding childcare coverage, but most of the post-socialist countries are behind schedule. While childcare expansion places a heavy financial burden on governments, low participation in the labor force by mothers, especially those with children under the age of three, implies a high potential impact. However, the effectiveness of childcare expansion may be limited by some common characteristics of these countries: family policies that do not support women’s labor market re-entry, few flexible work opportunities, and cultural norms about family and gender roles shaped by the institutional and economic legacy of socialism.
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.
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.
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.
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.
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.